SEC Exempt Offering Framework Upgrade, Part 2

In part one of this series, we discussed the SEC’s newly adopted amendments that fill in some important gaps in existing private placement laws while simplifying and improving consistency to improve transparency for issuers and investors alike. These amendments will take effect on January 2021, which is just around the corner. We reviewed changes to Regulation A and Regulation Crowdfunding, as well as non-exclusive safe harbors from integration. Now, let us examine additional key changes to Rule 504 of Regulation D, “Test-the-Waters” and “Demo Day” communications, eligibility requirements, and improvements to other SEC registration exemptions.

Rule 504 of Regulation D Changes

Issuers who wish to use general solicitation to expand their investor outreach significantly may use Rule 504 of Regulation D by filling out Form D with the SEC and allowing only accredited investors to participate in the offering. To meet an accredited investor’s requirements, an individual or married couple must fulfill certain income or net worth requirements; also, there are many different requirements for entities like family offices or institutional buyers.

Previously, Rule 504 resales after one year required registration. Now, in the event of a resale, the securities are unrestricted if the issuer satisfies some general solicitation conditions. This is extremely helpful for issuers who utilize Rule 504 regularly. One caveat, however, is to allow trading, the law would require additional actions. The amendments also extend investor protections by disqualifying bad actors from issuing Rule 504 offerings in the same way that other exemptions disqualified them. Disqualifying bad actors from participating should have been disallowed already, yet this is still a welcome change to protect investors from shady deals. Overall these changes bring Rule 504 more in line with Regulation A and Regulation Crowdfunding.

“Test-the-Waters” and “Demo Day” Communication Changes

In a previous blog post, we discussed the SEC’s previously proposed rules regarding “test-the-waters” provisions and “demo day” communications. Now, under these new final rules, issuers may solicit interest for an offering, or “test-the-waters,” before deciding which SEC registration exemption to use. This is almost like a free trial to ensure that putting effort into an exemption path is worth it and not just a colossal waste of time. Consistent with Regulation A, the law now allows Regulation Crowdfunding issuers to also “test-the-waters.” Finally, as pitching days are an important way to win over investors, the amendments ease regulations. Certain “demo day” communications won’t count as general advertising or solicitation for compliance. Overall, these changes add the benefits of cost and, most importantly, time-saving to the Regulation Crowdfunding process.

Regulation A Eligibility Requirements

Some issuers conducting a Regulation A offering have been required to file reports during the two years before filing the offering statement. Now, the new amendments also prohibit non-compliant issuers from participating. Although this adds another potential barrier to Regulation A, protecting investors’ interests is always a plus. Additionally, dismissing non-compliant issuers decreases the chance of Regulation A from having a bad reputation, which only improves the optics for compliant issuers.

Changes to Rule 506 SEC Registration Exemptions

First, let’s talk about issuers of Rule 506(c) offerings and their accredited investors. If within the last five years, an issuer has taken "reasonable steps" to verify a person's status as an accredited investor, and the investor indicates their continuing accredited investor qualification in writing, then the issuer does not need to perform repeat verification steps for a 506(c) offering. A notable exception to this is if the issuer is aware of anything that would disqualify the investor. This might be the best news of the year for frequent Rule 506(c) issuers and investors! Taking steps to ensure that your investors are accredited investors is essential, especially the first time around. If you are asking yourself, what is an accredited investor? Check out our article that includes all the new definitions from the SEC.

Now, what about non-accredited investors? Well, the SEC has decided to harmonize disclosure requirements of Regulation A and Rule 506(b). Prospective 506(b) offering investors must now have access to the same financial information required for Regulation A offerings. This increased transparency is another critical step, including all the changes we discussed in this article, towards safeguarding investors while at the same time protecting the freedom of the private investment industry to grow even more.

Issuers trust us to verify accredited investors for participation in offerings utilizing Rule 506(c) and other SEC registration exemptions. That’s why we will continue to update you on industry changes that are important to both issuers and investors.