On November 2, 2020, the Securities and Exchange Commission (“SEC”) announced that it had voted to approve amendments to the SEC’s exempt offering framework. The approved final rule (which is available here) is a culmination of the SEC’s recent efforts to harmonize, simplify, and improve what the SEC describes in the release as a “multilayer and overly complex exempt offering framework.” We have discussed the SEC’s 2019 concept release (June 2019) and certain aspects of the SEC’s proposed rule on amending its exempt offering framework (June 2020) in prior Client Alerts.
As described in the announcing release, the final amendments generally:
- establish more clearly, in one broadly applicable rule, the ability of issuers to move from one exemption to another (i.e., the integration framework);
- increase the offering limits for Regulation A, Regulation Crowdfunding, and Rule 504 offerings, and revise certain individual investment limits;
- set clear and consistent rules governing certain offering communications, including permitting certain “test-the-waters” and “demo day” activities; and
- harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions.
We touch on several of the more significant topics of the final rule below.
New Comprehensive Integration Framework – Rule 152
In new Rule 152(a), which replaces the previous five-factor test, the amendments establish a new integration framework that provides a general principle that looks to the particular facts and circumstances of two or more offerings, and focuses the analysis on whether the issuer can establish that each offering either complies with the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), or that an exemption from registration is available for the particular offering.
For an issuer considering the application of this general principle to an exempt offering prohibiting general solicitation and one or more other offerings, new Rule 152(a)(1) requires that the issuer must have a reasonable belief, based on the facts and circumstances, with respect to each purchaser in the exempt offering prohibiting general solicitation, that the issuer (or any person acting on the issuer’s behalf) either:
- did not solicit such purchaser through the use of general solicitation; or
- established a substantive relationship with such purchaser prior to the commencement of the exempt offering prohibiting general solicitation.
Importantly, the amendments also establish four non-exclusive safe harbors from integration. If any one of the following safe harbors are met, no integration analysis under the general principle of integration is required:
- any offering made more than 30 calendar days before the commencement of any other offering, or more than 30 calendar days after the termination or completion of any other offering, will not be integrated with such other offering(s), provided that:
- in the case where an exempt offering for which general solicitation is prohibited follows by 30 calendar days or more an offering that allows general solicitation, the issuer has a reasonable belief, based on the facts and circumstances, with respect to each purchaser in the exempt offering prohibiting general solicitation, that the issuer (or any person acting on the issuer’s behalf) either did not solicit such purchaser through the use of general solicitation or established a substantive relationship with such purchaser prior to the commencement of the exempt offering prohibiting general solicitation;
- offers and sales made in compliance with Rule 701, pursuant to an employee benefit plan, or in compliance with Regulation S will not be integrated with other offerings;
- an offering for which a Securities Act registration statement has been filed will not be integrated if it is made subsequent to:
- a terminated or completed offering for which general solicitation is not permitted,
- a terminated or completed offering for which general solicitation is permitted that was made only to qualified institutional buyers and institutional accredited investors, or
- an offering for which general solicitation is permitted that terminated or was completed more than 30 calendar days prior to the commencement of the registered offering; and
- offers and sales made in reliance on an exemption for which general solicitation is permitted will not be integrated if made subsequent to any terminated or completed offering.
Offering and Investment Limits
Under the final rule, the SEC has amended current offering and investment limits for certain exemptions from registration:
- Tier 2 of Regulation A – the 12-month offering limit has been increased from $50 million to $75 million; additionally, the 12-month offering limit for sales by existing affiliate security holders has been increased from $15 million to $22.5 million;
- Regulation Crowdfunding – the 12-month offering limit has been increased from $1.07 million to $5 million; and
- Rule 504 of Regulation D – the 12-month offering limit has been increased from $5 million to $10 million.
The amendments also removed or increased the investment limits for investors in Regulation Crowdfunding offerings. Specifically, for accredited investors, investment limits will no longer apply to such investors. For non-accredited investors, an investor will now be permitted to calculate such investor’s investment limit during any 12-month period in crowdfunding offerings based on the greater of, rather than the lesser of, the investor’s annual income or net worth.
Other Improvements to Specific Exemptions
The final rule, as was originally proposed, also amended certain items in Rule 506 of Regulation D. First, the amendments change the financial information that must be provided to non-accredited investors in Rule 506(b) private placements to align with the financial information that issuers must provide to investors in Regulation A offerings. The amendments also add a new item to the non-exclusive list in Rule 506(c) that allows an issuer to establish an investor that the issuer previously took reasonable steps to verify as an accredited investor remains an accredited investor as of the time of a subsequent sale if the investor provides a written representation that the investor continues to qualify as an accredited investor and the issuer is not aware of information to the contrary. In a change from the proposed rule, however, such a method is only permissible for a period of five years from the date the person was previously verified as an accredited investor.
“Test-the-Waters” and “Demo Day” Communications
As summarized in the SEC’s announcement release, the final rule also amends the SEC’s offering communication rules by:
- permitting an issuer to use generic solicitation of interest materials to “test-the-waters” for an exempt offer of securities prior to determining which exemption it will use for the sale of the securities;
- permitting Regulation Crowdfunding issuers to “test-the-waters” prior to filing an offering document with the SEC in a manner similar to current Regulation A; and
- providing that certain “demo day” communications will not be deemed general solicitation or general advertising (see new Rule 148 in the final rule for specifics on limitations with respect to such permissible communications).
There is a lot to unpack in the final rule, which touches on many facets of the exempt offering framework. We applaud the SEC’s continued efforts to simplify and harmonize its exempt offering framework and would expect market practices to continue to adjust over the next 12-months in response to many of the changes. If you have any questions related to the topics covered in this alert, we encourage you to reach out to your primary contact at Wyrick Robbins to see how such amendments might affect your specific factual situation. The amendments will be effective 60 days after publication in the federal register.
Stuart M. Rigot is a member of the Capital Markets, Banking & Financial Institutions, and Mergers & Acquisitions practice groups of Wyrick Robbins. He regularly represents public and private companies in strategic combinations and financing transactions, with a particular emphasis on the financial services industry. Wyrick Robbins publishes Client Alerts periodically as a service to clients and friends. The purpose of this Client Alert is to provide general information, and it is not intended to provide, and should not be relied upon as, legal advice.