SEC Exempt Offering Framework Upgrade, Part 1

It’s common knowledge that growing small businesses and startups do not always have the crucial resources at their disposal to participate in the traditional securities registration process. Therefore, they tend to choose from among several registration exemptions offered by the Securities and Exchange Commission (SEC). On November 2, 2020, the SEC adopted amendments that simplify existing laws, enhance their consistency, and fill in gaps. The amendments take effect 60 days after their date of publication in the Federal Register.

Let’s take a look at a few of the highlights: changes to Regulation A, changes to Regulation Crowdfunding, and non-exclusive safe harbors from integration.

Regulation A Amendments

Although Regulation A offerings are exempt from SEC registration, they still have some documentation requirements and restrictions of their own. The recent amendments to Regulation A raised the maximum Tier 2 offering amount from $50 million USD to $75 million USD. The offering limit for secondary sales under Tier 2 increased to $22.5 million USD from the previous $15 million USD threshold. Tier 1, however, remains unchanged in the final rules. Also, the amendments simplified some of the other Regulation A offering requirements and made the rules more consistent with those for registered offerings.

Amendments to Regulation Crowdfunding 

Regulation Crowdfunding allows issuers to use crowdfunding to buy and sell securities online, through a third-party funding portal or a broker-dealer. The November 2, 2020, amendments raised the offering limit from $1.07 million USD to $5 million USD. Once the amendments take effect, investors meeting certain income, net worth, or “financial sophistication” tests, also known as  accredited investors, will have no investment limits in Regulation Crowdfunding offerings. Additionally, non-accredited investors will be able to use either their income or their net worth to calculate their investment limits, whichever is greater. 

Due to the COVID-19 pandemic, the SEC recently adopted temporary Regulation Crowdfunding relief. Some of the provisions in the temporary rules loosened financial statement review requirements for certain issuers offering $250,000 USD or less of securities in 12 months. The November 2, 2020 amendments will now extend these provisions to Regulation Crowdfunding offerings made between May 4, 2020, and August 28, 2022. 

Non-Exclusive Safe Harbors from Integration 

SEC rules may sometimes require issuers to integrate multiple securities transactions into a single offering. The November 2, 2020, amendments created non-exclusive safe harbors from integration. Safe Harbor 1 is for an offering made 30 calendar days before another or an offering made 30 calendar days after a completed offering. Other guidelines for this safe harbor depend on the exemption used. For instance, if using an exemption prohibiting general solicitation, the investor needs a prior “substantive relationship” with the issuer, like a family or business relationship or friendship.

Safe Harbor 2 requires issuers to either use a registration exemption in Rule 701, in accordance with an employee benefit plan or comply with Regulation S. Regulation S handles certain unregistered international offerings.

Next, if a company files a Securities Act registration statement, it may be able to use Safe Harbor 3. Any offer made more than 30 calendar days after a terminated, or completed offering qualifies for this safe harbor as well. Furthermore, after a completed or terminated offering that forbids general solicitation, a new offering may begin that utilizes the safe harbor. If general solicitation is allowed instead, then only institutional accredited investors and qualified institutional buyers may purchase.

After any terminated or completed offering, an issuer may use Safe Harbor 4, provided they also utilize an exemption like 506(c), which allows general solicitation.

Want More Registration Exemption News and Updates? 

Today, we’ve highlighted some of the biggest legislation changes affecting private placement issuers since the Jumpstart Our Business Startups Act. In part two of this series, we’ll touch on other important changes, some of which will affect your communications with investors. It’s all here on the VerifyInvestor.com blog.