Exempt Offerings – SEC Proposes Major Reform

On March 4, 2020, the SEC issued a proposing release (the Proposing Release) to amend the exempt offering framework to address complexities that may impede access to capital for issuers and access to investment opportunities for investors. Under the current framework, there are 10 exemptions (safe harbors) with different requirements. The SEC’s Proposing Release would reduce “friction points” in the offering frameworks to help market participants navigate the exempt offering process. The SEC’s press release describing the Proposing Release noted that there will be a 60-day public comment period for the proposed rules following publication in the Federal Register.

Offering and Investment Limits

The SEC proposed changes in the following areas: (1) Offering and Investment Limits; (2) “Test-the-Waters” and “Demo Day” Communications; (3) Regulation A and Regulation Crowdfunding Eligibility; (4) Integration Framework; and (5) Other Improvements to Specific Exemptions.

“Test-the-Waters” and “Demo Day” Communications
Under the Proposing Release, the SEC also proposed amendments relating to offering communications, including:

• 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;
• permitting Regulation Crowdfunding issuers to “test-the-waters” prior to filing an offering document with the Commission in a manner similar to current Regulation A; and
• providing that certain “demo day” communications would not be deemed general solicitation or general advertising.^[2]

Regulation A and Regulation Crowdfunding Eligibility
The SEC proposed changes to the eligible issuers and securities under Regulation A and Regulation Crowdfunding as follows:

Integration Framework
The current Securities Act integration framework for registered and exempt offerings consists of a mixture of rules and SEC guidance for determining whether multiple securities transactions should be considered part of the same offering.^[3] The new proposals would provide a general principle of integration that focuses on the facts and circumstances of the offering in question and whether the issuer can establish that each offering either complies with the registration requirements of the Securities Act or that an exemption is available. In addition, the SEC has proposed four non-exclusive safe harbors from integration:

Other Improvements to Specific Exemptions
Finally, the SEC’s proposed amendments would:

• 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;
• add a new item to the non-exclusive list of verification methods in Rule 506(c) that would allow an issuer to establish that an investor for which 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 to that effect;
• simplify certain requirements for Regulation A offerings and establish greater consistency between Regulation A and registered offerings; and
• harmonize the bad actor disqualification provisions in Regulation D, Regulation A, and Regulation Crowdfunding.

Conclusion
The Proposing Release represents a fundamental change in the SEC’s regulation of exempt offerings. The integration proposals, including the new proposed safe harbors, could provide issuers with significantly more flexibility in pursuing multiple offering alternatives, both exempt and registered. We will continue to provide updates on the Proposing Release throughout the comment period.

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^[1] Currently, Rule 504 of Regulation D provides an exemption from the registration requirements for some companies when they offer and sell up to $5MM of their securities in any 12-month period. Except in limited circumstances, purchasers of securities offered pursuant to Rule 504 receive “restricted” securities, which means that they are not permitted to sell them for a least six months or a year without registering them. Companies using Rule 504 do not have to register their offering with the SEC, but they are required to file Form D with the SEC after they first sell their securities, which includes information on the company’s promoters, officers, and directors as well as limited information about the company and the offering.

^[2] A “demo day” refers to events that are typically organized by a group or entity (such as universities, angel investors, accelerators, or incubators) that invites issuers to present their businesses to potential investors with the aim of securing investment.

^[3] “Integration” refers to a concept developed by the SEC to address concerns that issuers were using multiple offerings to avoid registering under the Securities Act. In the past, issuers would separate a single, non-exempt offering into multiple offerings which would arguably be exempt from registration requirements. In response, the SEC created additional rules and guidance to determine whether multiple offerings that claim to be exempt should be treated as one offering for registration purposes or whether an exempt offering should be registered. If multiple offerings are “integrated,” the SEC will treat it as a single offering when determining if the offering should be exempted from registration requirements.