Rule amendments harmonize registration exemptions, eliminating complexity and facilitating access to capital and investment while preserving or enhancing important investor protections.
The Securities and Exchange Commission has voted to amend its rules in order to harmonize, simplify, and improve the multilayer and overly complex exempt offering framework. These amendments will promote capital formation and expand investment opportunities while preserving or improving important investor protections.
A core component of the federal regulatory regime is the requirement that all securities offerings be registered with the Commission or qualify for an exemption from registration. The registration process generally is designed for larger companies with substantial resources. As a result, many entrepreneurs and emerging businesses raise capital by selling securities in reliance on an offering exemption. This important capital formation activity ranges from raising seed capital for new businesses to growth capital for companies of all sizes, including those on the path to a registered initial public offering.
The amendments are the next step in the Commission’s efforts to improve the exempt offering framework for the benefit of investors, emerging companies, and more seasoned issuers. The amendments follow the Commission’s June 2019 concept release and March 2020 proposing release on the harmonization of offering exemptions and benefit from extensive public engagement. The amendments address gaps and complexities in the exempt offering framework that impede access to capital for issuers and access to investment opportunities for investors.
“For many small and medium-sized business, our exempt offering framework is the only viable channel for raising capital. These businesses and their prospective investors must navigate a system of multiple exemptions and safe harbors, each with different requirements,” said Chairman Jay Clayton. “While each component in this patchwork system makes some sense in isolation, collectively, there is substantial room for improvement. The staff has identified various costly and unnecessary frictions and uncertainties and crafted amendments that address those inefficiencies in the context of a more rational framework that will facilitate capital formation for small and medium-sized businesses and benefit investors for years to come.”
Facilitating Capital Formation and Expanding Investment Opportunities by Streamlining Access to Capital for Entrepreneurs
Nov. 2, 2020
The Securities and Exchange Commission today amended the rules under the Securities Act of 1933 to simplify, harmonize, and improve certain aspects of the exempt offering framework to promote capital formation while preserving or enhancing important investor protections.
The amendments generally:
An updated summary chart of the offering exemptions is included at the end of this fact sheet for reference.
Entrepreneurs and emerging businesses often use the exempt offering framework under the Securities Act for such purposes as raising seed capital for a new business or funding their businesses’ growth. This can be a critical step on the path to an initial public offering and navigating that path has required navigating the complex exempt offering framework. The complexity of that framework reflects its evolution over time through legislative changes and Commission rules that have resulted in differing requirements and conditions for exemption. In many cases, businesses, particularly smaller enterprises, have found the framework confusing and difficult to navigate.
In March 2020, the Commission issued proposed amendments and solicited public comment on its proposals to simplify, harmonize, and improve the exempt offering framework under the Securities Act. Informed by the comments received, as well as other feedback including recommendations of the Commission’s advisory committees, the SEC’s Government-Business Forum on Small Business Capital Formation, and direct outreach to, and engagement with, investors and issuers, the amendments are intended to reduce potential friction points to make the capital raising process more effective and efficient to meet evolving market needs.
Integration Framework. When issuers use various private offering exemptions in parallel or in close time proximity, questions can arise as to the need to view the offerings as “integrated” for purposes of analyzing compliance. This need results from the fact that many exemptions have differing limitations and conditions on their use, including whether the general solicitation of investors is permitted. If exempt offerings with different requirements are structured separately but analyzed as one “integrated” offering, it is possible that the integrated offering will fail to meet all the applicable conditions and limitations.
The amendments establish a new integration framework that provides a general principle that looks to the particular facts and circumstances of two or more offerings, and focuses the analysis on whether the issuer can establish that each offering either complies with the registration requirements of the Securities Act, or that an exemption from registration is available for the particular offering.
The amendments additionally provide four non-exclusive safe harbors from integration providing that:
Offering and Investment Limits. The Commission is amending the current offering and investment limits for certain exemptions.
“Test-the-Waters” and “Demo Day” Communications. The Commission is amending offering communications rules, by:
Regulation Crowdfunding and Regulation A Eligibility. The amendments establish rules that permit the use of certain special purpose vehicles that function as a conduit for investors to facilitate investing in Regulation Crowdfunding issuers. The amendments additionally impose eligibility restrictions on the use of Regulation A by issuers that are delinquent in their Exchange Act reporting obligations.
Other Improvements to Specific Exemptions. The amendments also:
The amendments will be 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.