On June 18, 2019, the Securities and Exchange Commission issued a concept release (available here) announcing that it isseeking comment on “possible ways to simplify, harmonize, and improve the exempt offering framework to promote capital formation and expand investment opportunities while maintaining appropriate investor protections.”
The regulatory regime that permits offerings of securities without registration under the Securities Act of 1933, as amended, is a multifaceted and sometimes difficult to navigate system, particularly for small businesses and emerging companies. The current registration exemptions were not adopted as part of one cohesive regulatory scheme, but rather developed and evolved over time through both Commission rules and legislative changes. Despite this complicated regulatory framework, the private capital markets havecontinued to increase, raising approximately $2.9 trillion in 2018, nearly double the approximately $1.5 trillion raised in thepublic capital markets in the same year. As the number and size of private offerings have continued to grow, so too has the need for clear and streamlined guidelines for the registration exemptions. As stated in the concept release, “our capital markets would benefit from a comprehensive review of the design and scope of our framework for offerings that are exempt from registration.”
Consistent with the SEC’s Strategic Plan (available here) and Regulatory Flexibility Agenda (available here), the goal of the SEC’s overhaul effort is “to expand investment opportunities while maintaining appropriate investor protections and to promote capital formation.” In remarks at the Nashville 36|86 Entrepreneurship Festival (available here), SEC Chairman Clayton emphasized that the concept release and the SEC’s efforts to simplify access to offering exemptions are consistent with the SEC’s overall priorities to ensure that capital-raising is “rational, accessible, and effective.”
Specifically, the SEC’s concept release requests feedback on whether:
• the current exempt offering framework, as a whole, is consistent, accessible, and effective – or whether the SEC should consider changes to simplify the exempt offering framework;
• changes should be made to streamline specific capital-raising exemptions, including the private placement exemption and Rule 506 of Regulation D, Regulation A, Rule 504 of Regulation D, the intrastate offering exemptions, and Regulation Crowdfunding;
• there may be gaps that make it difficult to rely on a particular exemption to raise capital at key stages of a company’s business cycle, particularly for small businesses;
• the limitations on who can invest in certain exempt offerings, or the amount they can invest, provide an appropriate level of investor protection – or create an undue obstacle to capital formation or investor access to investment opportunities, including whether the persons and companies that fall within the “Accredited Investor” definition are appropriate;
• the SEC should take steps to facilitate capital formation in exempt offerings through pooled investment funds – and whether retail investors should be allowed greater exposure to growth stage companies through such funds; and
• the SEC should revise its rules governing exemptions for resales of securities to facilitate capital formation and to promote investor protection by improving secondary market liquidity.
The concept release also addressed the complexities surrounding the integration doctrine and its related safe harbors. The SEC seeks comment on whether a single integration doctrine that would apply to all exempt offers would make it easier for issuers to transition from one exemption to another, and, ultimately, to a registered offering without negatively impacting investor protections. In addition, the SEC seeks comment with regard to changes to current safe harbor rules(such as whether the six-month waiting period in Regulation D should be shortened), whether certain types of transactions should not be subject to integration, and whether it should create any new safe harbor rules (such as one for offers and sales of securities prior to the commencement of a subsequent exemption). The SEC also seeks comment on several issues relating to the use of general solicitation in private offerings and what impact it has on integration analysis.
In addition, consistent with prior comments from the SEC Committee on Small and Emerging Companies (available here), the SEC seeks input on how it might revise the investor eligibility criteria for private offerings. The SEC has essentially asked whether the definition of Accredited Investor should include qualities other than the current bright line tests based on the income or wealth of an individual investor, such as the sophistication of the investor or the amount of the investment. The SEC is also seeking commenton specific conditions of each of the current capital-raising exemptions and whether the investment protections of those exemptions are appropriately structured to encourage capital formation, while mitigating the risk of not having the traditional investor protections of registration.
This line of thinking reflects the stated goals of ChairmanClayton to open private markets more widely so that retailinvestors can participate in emerging companies early in their development. With an increasing percentage of U.S. companies staying private longer, it is more critical than ever that individual investors be permitted to participate in private offerings. For example, crowdfunding rules established by the Jumpstart Our Business Startups Act attempted to open the door to ordinary investors through online funding portals (but these rules have received a lackluster response, according to the concept release). With this concept release and any rule making that follows, the SEC is seeking to increase engagement and reliability for exempt offerings by reducing limitations, revising requirements, and expanding access to create a more streamlined process overall, without losing sight of investor protection.
The concept release provides for a 90-day public comment period following its publication in the Federal Register. Comments may be submitted via (1) e-mail to [email protected] (include “File Number S7-08-19” on the subject line), (2) the SEC Internet comment form (https://www.sec.gov/rules/concept.shtml), or (3) paper comments to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090 (include reference to “File Number S7-08-19” in your written response).
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Special appreciation to associates Rodrigo Surcan, Harrison Tucker, Louis Matthews and summer associate Adri Langemeier for their contributions to this post.