On November 2, the Securities and Exchange Commission (SEC) approved amendments, originally proposed in the SEC’s June 2019 concept release and March 2020 proposing release, to its “patchwork” exempt offering framework. The amendments represent important changes for private and public companies that rely on private offerings as part of their strategies to raise capital. Largely, these changes reflect the reality of current capital markets as the amount of capital raised in exempt offerings in the United States greatly exceeds the amount raised in registered offerings. In the March 2020 proposing release, the SEC noted that exempt offerings accounted for more than double the new capital raised by registered offerings in 2019, with exempt offerings accounting for $2.7 trillion compared to $1.2 trillion in registered offerings.
Emerging companies increasingly rely on exempt offerings as the most viable source of capital to fund growth in lieu of IPOs, and as a result exempt offerings have become an integral part of capital markets. The adopted amendments attempt to streamline and eliminate complexity within the exempt offering regulatory framework, which has been pieced together over years of tweaks through the adoption of various safeharbors.
Highlights of the amendments include:
- Establishing 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, or that an exemption from registration is available for the particular offering.
- Increasing the offering limits for Regulation A (to $75 million), Regulation Crowdfunding (to $5 million), and Rule 504 offerings (to $10 million), and revise certain individual investment limits.
- Relaxing pre-offering communications by permitting certain “test-the-waters” and “demo day” activities.
Additional analysis of these and other meaningful changes is outlined below.
New Integration Framework
The amendments established a new, simplified approach to the SEC’s integration framework, or the concept that offerings of securities that occur simultaneously or in close time proximity should be analyzed and assessed to determine whether the offerings were separate, independent offerings or were in fact one integrated offering for purposes of regulatory compliance. The new, simplified approach is set forth in a new Rule 152, which replaces existing Rules 152 and 155 and consists of four non-exclusive safe harbors from integration guided by some overriding principles. The new Rule 152 will apply equally to one or more business combination and/or capital-raising transactions that occur concurrently or close in time.
The general principles governing the new integration framework set forth in the new Rule 152(a) provide that in determining whether two or more offerings should be integrated, when the safe harbors in the new Rule 152(b) do not apply, the offerings will not be integrated if, based on the particular facts and circumstances, the issuer can establish that each offering either complies with the registration requirements of the Securities Act or has an available exemption from registration.
In making this determination in the case of an exempt offering where general solicitation is prohibited, Rule 152(a)(1) provides that the issuer have a reasonable belief, based on the facts and circumstances, with respect to each purchaser in the exempt offering that prohibits general solicitation, that the issuer (or any person acting on the issuer’s behalf) falls in one of the following categories:
- They did not solicit such purchaser through the use of general solicitation (where, for example, direct contact of such purchaser by the issuer or its agents outside of the public offering effort would not constitute such a solicitation).
- They established a substantive relationship with such purchaser prior to the commencement of the exempt offering that prohibits general solicitation.
In making this determination in the case of two or more concurrent exempt offerings permitting general solicitation, Rule 152(a)(2) provides that, in addition to satisfying the requirements of the particular exemption relied on, general solicitation offering materials for one offering that includes information about the material terms of a concurrent offering under another exemption may constitute an offer of securities in such other offering, and therefore the offer must comply with all the requirements for, and restrictions on, offers under the exemption being relied on for such other offering, including any legend requirements and communications restrictions.
Integration Safe Harbors
Fortunately, new Rule 152(b) states that no integration analysis under Rule 152(a) is required, if any of the following safe harbors apply.
Safe Harbor 1, Rule
|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 such other offering; provided that for an exempt offering for which general solicitation is not permitted that follows by 30 calendar days or more an offering that allows general solicitation, the provisions of Rule 152(a)(1) apply (i.e., 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, Rule
|Offers and sales made in compliance with Rule 701, pursuant to an employee benefits plan, or in compliance with Regulation S would not be integrated with other offerings.|
Safe Harbor 3, Rule
|An offering for which a Securities Act registration statement has been filed would not be integrated if made subsequent to the following:
Safe Harbor 4, Rule
|Offers and sales made in reliance on an exemption for which general solicitation is permitted would not be integrated if made subsequent to any terminated or completed offering.|
Increasing Regulation A+ Offering Limit to $75 Million
In an important development to offerings under Regulation A (also colloquially known as Regulation A+), the SEC decided to raise the Tier 2 offering limit to $75 million from the current $50 million limit. The SEC adopting release observes that public commentary indicates that a higher offering limit may help attract a larger and potentially more seasoned pool of issuers and intermediaries or institutional investors to the Regulation A market.
We note this higher offering limit may also make Regulation A offerings more attractive to more established Exchange Act reporting companies.
“Test-the-Waters” and “Demo Day” Communications
The SEC continues to recognize the benefit to issuers when they are able to gauge interest in a securities offering prior to incurring the expense of preparing and conducting an offering. For example, in 2019 the SEC amended the rules in registered offerings to create Securities Act Rule 163B, which permits issuers and those authorized to act on their behalf to gauge market interest in a registered securities offering through discussions with QIBs and IAIs prior to, or following, the filing of a registration statement.
Moreover, Regulation A also permits issuers to test the waters with, or solicit interest in a potential offering from, the general public either before or after the filing of the offering statement.
Continuing with this theme, in this most recent batch of amendments the SEC amended the offering communications rules in the following ways:
- 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 (see new Rule 241).
- 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.
- Providing that certain “demo day” communications will not be deemed general solicitation or general advertising (see new Rule 148).
Effective Date for Final Amendments
The final amendments will become effective 60 days after publication in the Federal Register, except for certain crowdfunding provisions, which will be effective upon publication in the Federal Register.
If you have any questions regarding any of the topics covered in this blog post, please feel free to email the authors directly or, if applicable, contact your primary Bass, Berry & Sims relationship attorney.
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