On Wednesday, March 4, the Securities and Exchange Commission (the “SEC”) announced that it has voted to propose a set of amendments that would modify certain requirements for various exempt offerings regulations. The SEC believes that these amendments would “harmonize, simplify and improve” the current regulatory scheme for exempt offerings.

In its announcement the SEC states that the scope of exempt offerings has evolved over time resulting into an offering framework that is complex and made up of differing requirements and conditions for exemption, which may be confusing and difficult for issuers to navigate. As such, in June 2019, the SEC issued a concept release and requested public comment on ways to simplify the exempt offering framework and to make it more cohesive. The proposed amendments take the public’s comments into account, with the ultimate goal of making the capital raising process more effective and efficient to meet evolving market needs alongside preserving investor protections. The following is a summary of the various proposed amendments to the relevant exemption regulations.

Regulation A:

• Proposal to raise the maximum offering amount for Tier 2 from $50 million to $75 million; and
• Proposal to raise the maximum offering amount for Tier 2 secondary sales from $15 million to $22.5 million.

Regulation Crowdfunding:

• Proposal to raise the offering limit from $1.07 million to $5 million;
• Proposal to amend investment limits for investors in Crowdfunding offerings by:
  • Eliminating investment limits for accredited investors;
  • Revising the calculation method for non-accredited investors in a way that would allow them to rely on the greater of their annual income or net worth when determining investment limitations;
• Proposal that would allow issuers to “test the water” prior to filing an offering document with the SEC; and
• Proposal to permit the use of certain special purpose vehicles to facilitate investing in issuers that rely on the Regulation Crowdfunding exemption.

Rule 504 of Regulation D:

• Proposal to raise the maximum offering amount from $5 million to $10 million.

Additionally, the SEC made proposals expanding permitted communication with investors. These proposals included (i) a new rule that would permit an issuer to generally solicit materials to “test the waters” for an exempt offering before choosing a specific exemption and (ii) a proposal that would provide that certain “demo day” communications would not be considered general solicitation or general advertising.

The SEC also made a proposal for the implementation of a general guiding principle that will attempt to integrate the various exemptions by looking at the facts and circumstances of an offering and focusing on whether each offering by an issuer either meets an exemption or complies with registration requirements.

Other amendments that attempt to integrate requirements across exemptions include (i) the harmonizing the bad actor disqualification provisions across Regulation D, Regulation A and Regulation Crowdfunding and (ii) a change so financial information that must be provided to non-accredited investors under 506(b) would align with the same requirements in Regulation A.

The SEC also proposed four non-exclusive safe harbors for integration. The proposals are as follows:

Safe Harbor 1

• 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, would not be integrated with another offering;
  • provided that, for an exempt offering for which general solicitation is not permitted, the purchasers either were not solicited through the use of general solicitation, or established a substantive relationship with the issuer prior to the commencement of the offering for which general solicitation is not permitted.

Safe Harbor 2

• Offers and sales made in compliance with Rule 701, pursuant to an employee benefit plan, or in compliance with Regulation S would not be integrated with other offerings.

Safe Harbor 3

• An offering for which a Securities Act registration statement has been filed would not be integrated with another offering if made subsequent to: (i) a terminated or completed offering for which general solicitation is not permitted; (ii) a terminated or completed offering for which general solicitation is permitted and made only to qualified institutional buyers and institutional accredited investors; or (iii) an offering that terminated or completed more than 30 calendar days prior to the commencement of the registered offering.

Safe Harbor 4

• Offers and sales made in reliance on an exemption for which general solicitation is permitted would not be integrated with another offering if made subsequent to any prior terminated or completed offering.

Following the publication of this proposal in the Federal Register, the comment period will remain open for 60 days.