March 2020 Brings New SEC Proposed Rules Benefiting Issuers and Investors

Recently proposed Securities and Exchange Commission (SEC) rules would allow issuers to vet their investors more efficiently, gauging market interest while saving time and money. Notably, as explained in the SEC’s recently proposed amendments released in March, Rule 148 would expand the “demo day” provisions, while Rule 241 would expand the “test-the-waters” accommodations.

Expanded Solicitation at “Demo Day” Events

At a "demo day" event, issuers pitch their offerings to potential investors. Typically, a group or entity organizes a “demo day” event. Examples include angel investor groups, universities, and business incubators/accelerators.

Currently, if the event organizer limits event participation to individuals or groups with a “pre-existing substantive relationship” with the organizer or issuer, then a “demo day” communication will not be considered general solicitation, even if the offering qualifies as a security. This is also true if participants come from “an informal, personal network of experienced, financially sophisticated individuals, such as angel investors.”

Rule 148 proposes to expand allowable “demo day” networking activities while regulating sponsorship to protect investors. Under the changes proposed in Rule 148, if the issuer communicates in connection with a meeting or seminar sponsored by an institution of higher education, nonprofit organization, local government, angel investor group, accelerator, or incubator, that communication would not be deemed general solicitation. That being said, the sponsor would be prohibited from doing the following:

1. Engaging in investment negotiations between the investors and issuers;

2. Charging fees, other than “reasonable administrative fees”;

3. Receiving compensation for introducing attendees to issuers;

4. Making investment recommendations or offering investment advice.

Along the same lines, the rule would prohibit sponsors from receiving any compensation normally requiring registration as a broker-dealer, or an investment adviser. Furthermore, event advertising “may not reference any specific offering of securities by the issuer.” Any information about the offering of securities would be limited to notification about the intent to offer securities, the type and amount of securities offered, and how proceeds will be utilized.

“Testing-the-Waters” Saves Time and Money

Another concept potentially being expanded is “testing-the-waters.” When utilizing “testing-the-waters,” the issuer has 30 days from the time of the first general solicitation communication to choose an SEC registration exemption and begin following the proper filing requirements. During this period, an issuer may publicly solicit to get a sense of market interest. Currently, emerging growth companies and issuers of Regulation A offerings may “test-the-waters.” Newly proposed Rule 241 seeks to extend this ability to Rule 506(b) offerings under Regulation D of the Securities Act, as well as Regulation Crowdfunding offerings, as long as issuers make their solicitation materials public. They will also need to provide the required disclaimers to their prospective investors during the “testing-the-waters” period.

Other SEC Registration Exemptions

The SEC proposed changes to Regulation Crowdfunding that would also benefit accredited investors. In fact, the newly proposed rules would not apply any investment limits to accredited investors. Other proposed changes include revised limits for non-accredited investors, as well as increased offering limits.

Issuers of Regulation A+ offerings may also solicit, and accredited or non-accredited investors may participate. The SEC’s newly proposed rules would increase the maximum Tier 2 offering amount from $50 million to $75 million.

One currently popular SEC registration exemption is Rule 506(c) of Regulation D. Issuers of Rule 506(c) offerings may engage in general solicitation and must sell only to accredited investors. Qualifying individuals and entities in this special category of investors generally must exceed specific income or net worth thresholds, and Rule 506(c) issuers must verify accredited investor status. Third-party verification of domestic and international investors with VerifyInvestor.com is an easy and affordable way to vet the people interested in these highly desirable offerings.