SEC Proposed Changes to the Exempt Offering Framework
On March 4th, the SEC issued a proposal to improve the exempt offering framework (framework) used by entities to raise capital. Because so many entities raise capital through the framework under the Securities Act, the proposed changes are meant to simplify and improve pieces of the framework while still protecting the investing public.
Comments on the proposal are due 60 days after the publication of the proposals in the Federal Register.
Proposed changes
All offers and sales of securities in the U.S. are required to be registered with the SEC unless one of several exemptions applies. Many of the exemptions are based on the characteristics of the securities being offered. Some of the more common type of exemptions are offerings under Regulation A and D and Crowdfunding under the Securities Act. The current exempt framework is considered complex and difficult to understand and apply by many companies. In June 2019, the SEC issued a concept release that solicited public comment on possible ways to simplify, harmonize, and improve the exempt offering framework under the Securities Act. The proposed changes are expected to:
- Bring together the rules that allow issuers to move from one exemption to another, and ultimately to a registered offering
- Increase the offering limits for Regulation A, Regulation Crowdfunding, and Rule 504 offerings, and revise certain individual investment limits
- Set clear and consistent rules on offering communications between investors and issuers, including permitting certain “demo day” activity that comply with the requirements on general solicitation; and
- Synchronize certain disclosure and eligibility requirements and bad actor disqualification provisions to reduce differences between exemptions
In addition, the integration framework for registered and exempt offerings includes both rules and SEC guidance for determining whether multiple securities transactions should be considered part of the same offering. The proposed changes to the framework would provide general principles of integration that for all offerings not covered by a safe harbor, offers and sales would not be integrated if based on the particular facts and circumstances of the offering the issuer can establish that each offering complies with the registration requirements of the Securities Act or that an exemption applies. Certain safe harbors from integration are also proposed.
A summary of the proposals follows:
| Proposals | Regulation A | Regulation D[1] | Regulation Crowdfunding |
| Offering and Investment Limits |
Raise maximum offering amount Tier 2 from $50 million to $75 million and from $15 million to $22.5 million on secondary sales under Tier 2 | Raise maximum offering amount from $5 million to $10 million |
|
| “Test-the-Waters” and “Demo Day” Communications |
Permit issuer to use generic solicitation of interest materials to determine which exemption to apply and Change to demo day communications |
Demo day communications would not be considered general solicitation or advertising | Allow issuers to test the water, similar to Regulation A and Change to demo day communications |
| Eligibility Restrictions |
Exchange Act registrants that are delinquent in their reporting obligations are not eligible | N/A – No changes proposed | Permit the use of certain special purpose vehicles to facilitate investing and limit type of securities offered and sold[2] |
[2] Proposals for securities to be offered to be similar to those eligible to be offered under Regulation A such as equity or debt securities, securities convertible or exchangeable for equity interests or guarantees of and of those types of securities
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