Potential Safe Harbors from Integration for Repeat Offerings

Here’s an essential question for anyone issuing multiple securities transactions: must the transactions be included in one single offering? To answer this question, issuers must refer to the myriad rules and Securities and Exchange Commission (SEC) guidance documents that make up the current Securities Act integration framework for registered and exempt offerings. There is a complicated process in place that issuers must follow to answer the question. In March of 2020, to provide issuers with a clearer and more straightforward answer, the Commission proposed a “general principle of integration,” as well as four new safe harbors from integration.

Let’s discuss both the general principle and the recently proposed safe harbors in greater detail and gain a deeper understanding of the process.

How Safe Harbors Fit Into the General Integration Principle

According to a March SEC press release, the general integration principle would require the issuer to look at each offering individually to determine its compliance with either the Securities Act registration requirements or a registration exemption rule. According to the Commission’s March rule proposal, the intention of the safe harbors is “to reduce uncertainty and provide greater confidence to issuers in planning and choosing their capital raising options under the Securities Act, including registered offerings.” It is crucial to keep in mind that these safe harbors tend to be useful for repeat issuers but, to a lesser extent, for their affiliates.

Please note that these proposed rules would also reduce the six-month time period for the current Securities Act integration safe harbors from six months to 30 days to increase consistency among the various rules and regulations. This shortened time frame would, according to the Commission, expand an issuer’s choices for raising capital while deterring issuers from inappropriately creating multiple offerings out of one single offering, to avoid registration. Instead, issuers wishing to avoid SEC registration have several key exemptions available, including those in Regulation D of the Securities Act. For example, Rule 506(c) of Regulation D allows for general advertising or solicitation, although actual sales must go only to a special category of verified investors called accredited investors.

The Four Newly Proposed Safe Harbors from Integration

All four of the newly proposed, non-exclusive safe harbors from integration are incorporated in Rule 152. Under each of these safe harbors, the offering under consideration would not be integrated with another offer. In other words, if you issue an offer meeting any of these conditions, you won’t have to do any additional integration analysis once these rules go into effect. Please note that these safe harbors may not apply to grassroots crowdfunding offerings.

Now let’s go through each of the integration safe harbors separately:

Safe Harbor 1 applies to an offering made 30 calendar days before another, or an offering made 30 calendar days after a completed offering. Issuers utilizing this provision must still follow the guidelines for their chosen SEC registration exemption. For an offering under an exemption that does not allow general solicitation, the purchasers must have a prior “substantive relationship” with the issuer, which typically means they are friends, business associates, relatives, or colleagues.

Under Safe Harbor 2, an offer or sale would not be integrated with any other offers if it utilizes the registration exemption in Rule 701 in accordance with an employee benefit plan, or if it complies with Regulation S. For your information, Regulation S applies to certain sales and offers made outside of the U.S. that are not registered with the SEC.

Safe Harbor 3 may apply if the issuer files a Securities Act registration statement. The offering in question may begin after a completed or terminated offering that does not permit general solicitation. Alternatively, if the terminated or completed offering operates under a rule that does permit general solicitation or advertising, then sales must be made only to institutional accredited investors and qualified institutional buyers. Finally, the safe harbor also applies to any offer made more than 30 calendar days after a terminated or completed offering.

Under Safe Harbor 4, if an issuer uses an exemption that permits general solicitation, such as Rule 506(c) of Regulation D, then the offer may begin subsequent to any prior completed or terminated offering.

A Notable Omission: Sophisticated Investors

In January 2020, we wrote about efforts to revise accredited investor criteria, including a proposed sophisticated investor category. Currently, all those wishing to qualify as accredited investors must generally go through a verification process that demonstrates a certain level of income or net worth using financial documentation. These levels are fixed, with no adjustment for inflation. Last year, however, there were multiple attempts to create a category of verified investors that fall outside these restrictions. In October 2019, Congressman French Hill, R-Ark. introduced legislation that would have adjusted the income and net worth criteria for inflation and included certain licensed brokers and advisors in the accredited investor category, regardless of their net worth or income. The bill, H.R. 4762, would have also allowed other individuals with “qualifying education or experience,” as determined by the SEC, to become verified accredited investors. Unfortunately for many, the bill never made it to the floor for a vote. About two months later, the SEC proposed its own amendments to the accredited investor definition that would have also included registered advisors, as well as natural persons with certain other professional certifications and designations. The amendments did not include any adjustments for inflation; however, as SEC analysis determined that such a change by itself would decrease the pool of qualified accredited investors. The SEC’s request for comment brought in many responses, as these are significant concerns for many issuers and investors.

If the SEC allows industry experts and other professionals to invest in projects that match their expertise, this will expand the pool of investors while still protecting the public from bad actors. These sophisticated investors would have the knowledge and experience to weigh the risks of an offering versus its potential returns. In addition, there was a proposed change to the criteria qualifying an entity as an accredited investor. If implemented, this change would affect a variety of groups, including Indian tribes, by creating a new accredited investor category for them. To qualify in the new category, the entity would need to own more than $5 million USD of investments, as defined in Rule 2a51-1(b) under the Investment Company Act, as long as the entity was not formed to invest in the securities offered.

Notably, we are still waiting on an update from the SEC on the sophisticated investor category, as well as other proposed modifications to accredited investor criteria involving entities. Be sure to follow VerifyInvestor.com on social media for all the latest accredited investor news and views.