The Securities and Exchange Commission (SEC) recently proposed changes to several securities exemptions available to U.S. issuers. In particular, the proposed changes to Regulation Crowdfunding (Reg CF), Rule 504 of Regulation D (Rule 504) and Regulation A+ will increase the maximum offering amount permitted under each exemption. With a majority of emerging businesses and entrepreneurs utilizing such exemptions under the Securities Act to conduct their capital raises, the proposed changes, if adopted, will provide companies with greater access to capital from private investors.
The SEC intends for the proposed amendments and changes to address complexities and inconsistencies among the exemptions available to entrepreneurs. On this issue, SEC Chairman John Clayton stated:
The complexity of the current framework is confusing for many involved in the process, particularly for those smaller companies whose limited resources spent on navigating our overly complex rules are diverted from direct investments in the companies’ growth. These proposals are intended to create a more rational framework that better allows entrepreneurs to access capital while preserving and enhancing important investor protections.
Highlights of Amendments
Regulation A:
- raise the maximum offering amount under Tier 2 of Regulation A from $50 million to $75 million; and
- raise the maximum offering amount for secondary sales under Tier 2 of Regulation A from $15 million to $22.5 million.
Regulation Crowdfunding:
- raise the offering limit in Regulation Crowdfunding from $1.07 million to $5 million;
- amend the investment limits for investors in Regulation Crowdfunding offerings by:
- not applying any investment limits to accredited investors; and
- revising the calculation method for investment limits for non-accredited investors to allow them to rely on the greater of their annual income or net worth when calculating the limit on how much they can invest.
Rule 504 of Regulation D:
- raise the maximum offering amount from $5 million to $10 million.
Overall, these changes broaden the amount of capital an issuer may access under the exemptions in response to the modernized capitalization requirements of start-ups and emerging companies.In addition, removing the investment limitation on accredited investors participating in Reg CF offerings establishes a more consistent treatment of accredited investors compared to other exemptions such as Rule 506(b) and Rule 506(c) already in place with regard to other exempt offerings and could bring about substantial interest from accredited investors to Reg CF offerings.
Prior to these amendments, many companies constrained by the offering maximum provided under Reg CF chose to conduct a 506(c) offering in concert with a Reg CF offering. Issuers who using these exemptions simultaneously could accept an unlimited amount of investment from accredited investors while accepting up to $1,070,000 from non-accredited investors under Reg CF. For issuers who wish to raise amounts between $1mm and $5mm from accredited and non-accredited investors, the proposed amendment to Reg CF may result in substantial savings to issuers who can forego a 506(c) offering and offering their securities pursuant to a single exemption.
In addition, the SEC also proposed amendments and new rules regarding pre-offering communications, including:
- a proposed new rule that would permit an issuer to use general solicitation of interest materials to “test-the-waters” for an exempt offering prior to determining which exemption it will use for the sale of the securities;
- a proposed rule amendment that would permit Regulation Crowdfunding issuers to “test-the-waters” prior to filing an offering document with the Commission in a manner similar to Regulation A; and
- a proposed new rule that would provide that certain “demo day” communications would not be deemed general solicitation or general advertising.
The proposed changes would allow for such “testing the waters” activities to take place prior to a Reg CF offering so issuers can gauge investor interest before committing precious early funding to the legal and issuance expenses required to conduct a crowdfunding offering. The “demo day” communication rule would give some practical understanding regarding certain instances of communication that could be considered general solicitation or general advertising while clarifying what types of conduct are permitted by both issuers and sponsors of “demo day” and other similarly related events. Overall, these changes look to create substantial changes to the Reg CF exemption, while allowing for investment size increases and regulatory clarity across others.
If you are considering conducting a private offering of securities or a security token offering, contact our attorneys today to discuss available offering exemptions.