Earlier this week, the Securities and Exchange Commission (SEC) voted to approve significant updates to the exempt offering framework that were introduced in a June 2019 concept release and more formally proposed in March of this year. Intended to simplify and improve the exempt offering framework for companies in order to stimulate capital formation, and expand investment opportunities for investors, these updates primarily impact offerings under Regulation Crowdfunding, Regulation A, and Rule 504 of Regulation D. They also harmonized certain requirements and provisions under each regulation and more clearly established how an issuer can move from one registration exemption to another.
The context for these changes
Offerings of the sale of securities must be either be registered with the SEC or qualify for an exemption from registration. Smaller businesses seeking to raise seed or growth capital rely on these exemptions, as the traditional registration process is generally costly and time-intensive, limiting it to larger, more mature companies. These updates to the exempt offering framework are intended to make capital formation more efficient while maintaining important investor protections.
According to the SEC, “the amendments generally:
- Establish more clearly, 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; and
- harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions.”
Now, let’s dive into the major updates for each offering exemption type.
Regulation Crowdfunding Amendments
Increased offering limits
One of the most exciting updates to the Regulation Crowdfunding exemption is the offering limit increase from $1.07 million to $5 million within a 12-month period. This is great news for startups looking to raise a larger amount.
Use of Special Purpose Vehicles (SPVs)
Another big update is the use of Special Purpose Vehicles (SPV) as an investment conduit for Regulation Crowdfunding offerings. Previously, the use of SPVs was limited to private offerings, generally made under Regulation D, that were primarily available only to accredited investors. SPVs can help issuers to streamline their cap table, while also potentially allowing small investors to invest alongside a lead investor that could better negotiate terms.
Regulation Crowdfunding issuers will now be permitted to use generic solicitation of interest materials to “test-the-waters” before filing an offering document with the SEC.
There have also been updates for both accredited and non-accredited Regulation Crowdfunding investors. Investment limits for accredited investors have been removed entirely, while non-accredited investors will be able to calculate their annual investment limit using the greater of their annual income or net worth.
Temporary relief extension
The last major update for Regulation Crowdfunding is an 18-month extension for existing temporary relief provisions introduced in May of this year and first extended in September. Intended to mitigate capital formation challenges presented by the COVID-19 pandemic, the temporary measures include relief from certain Regulation Crowdfunding financial statement review requirements for issuers offering $250,000 or less of securities (in reliance on the exemption within a 12-month period).
Regulation A Amendments
The maximum offering amount an issuer could raise under Tier 2 of Regulation A was capped at $50 million within a 12-month period. With these amendments, that maximum offering amount has been bumped up to $75 million. Additionally, the maximum amount for secondary sales under Tier 2 of Regulation A has been increased from $15 million to $22.5 million.
Rule 504 of Regulation D Amendments
Previously, the annual maximum offering amount permitted under Rule 504 of Regulation D was $5 million. This has been increased to $10 million, which is a significant increase for companies seeking growth capital.
Issuers will be able to use generic solicitation of interest materials to “test-the-water” for an exempt offering before determining which exemption it will use for the securities sale. “Demo day” communications will also now not fall under the category of general solicitation or advertising.
When will these measures go into effect?
The amendments will be effective 60 days after publication in the Federal Register, except for the extension of the temporary Regulation Crowdfunding, which will be effective immediately upon publication in the Federal Register. Until then, we are optimistic about this progress and are looking forward to being able to work with both our issuers and investors under this improved framework.