On November 2, the Securities and Exchange Commission (SEC) announced that it voted 3-2 to amend the rules to simplify the “overly complex” multi-layer procedures for exempt securities offerings. The changes attempt to “harmonize, simplify, and improve” the existing framework to make it easier for companies to conduct offerings. The SEC claimed the amendments “address gaps and complexities” and facilitate both access to investment opportunities and access to capital.
According to the SEC’s Fact Sheet, the amendments generally:
- Establish in one broadly applicable rule, the ability of issuers to move from one exemption to another;
- Increase the offering limits for Regulation A, Regulation Crowdfunding, and Rule 504 offerings, and revise certain individual investment limits;
- Set clear and consistent rules governing certain offering communications, including permitting certain “test-the-waters” and “demo day” activities to not be deemed general solicitation or general advertising; and
- Harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions.
The maximum Reg A offering was raised from $50 million to $75 million for initial sales, and from $15 million to $22.5 million for secondary sales. The maximum Rule 504 offering increased from $5 million to $10 million. Regulation Crowdfunding offering limits increased from $1.07 million to $5 million, with investment limits removed for accredited investors. Further, the temporary exemption for Regulation Crowdfunding financial statement review requirements will be extended 18 months for issuers offering $250,000 or less of securities within a 12-month period.
The amendments also change the financial information that must be provided to non-accredited investors in Rule 506(b) private placements to align with the financial information issuers must provide to investors in Regulation A offerings. Notably, the amendments repeal the requirement for audited financial in Rule 506(b) offerings of up to $20 million involving non-accredited investors.
“For many small and medium-sized businesses, our exempt offering framework is the only viable channel for raising capital,” said SEC Chairman Jay Clayton. “These businesses and their prospective investors must navigate a system of multiple exemptions and safe harbors, each with different requirements. While each component in this patchwork system makes some sense in isolation, collectively, there is substantial room for improvement.”
The amendments were adopted by a 3-2 vote, with Commissioners Hester Peirce and Elad Roisman claiming in their statements that the rules do not go far enough, and Commissioners Allison Herren Lee and Caroline Crenshaw claiming the rules damage investor protections and lack adequate data to support their adoption.
The SEC first proposed simplifying the existing framework in June 2019 and announced in March 2020 that it voted to introduce the changes. The amendments will go effective 60 days after publication in the Federal Register, except for the extension of the temporary Regulation Crowdfunding provisions, which will be effective upon publication in the Federal Register. A full overview of these critical changes can be found in the chart here, provided by the SEC in the announcement. The final rule can be found here.