SEC approves exempt offerings rule benefitting small businesses and retail investors - 05 November 2020

The SEC’s exempt private offerings rule to enhance small business capital raising efforts receives commissioner approval and dissent.

The SEC voted 3-2 to approve a final rule comprising a year-long 400-page proposal to harmonize 10 long-time exempt offering provisions, by relaxing certain restrictions on them to make the exemptions more available to small- and medium-sized businesses for capital raising purposes.

The final rule changes voted on (and approved) do the following:

  • Raise the Regulation A, Tier 2 offering limit from $50 million to $75 million (and for secondary sales, from $15 million to $22.5 million);
  • Raise the Regulation D, Rule 504 offering limit from $5 million to $10 million;
  • Also pertaining to Regulation D, revise Securities Act Rule 502(b) concerning financial statement information, to refer to revised Form 1-A requirements;
  • Raise the crowdfunding aggregate amount sold (inflation adjusted) from $1,070,000 to $5 million;
  • Also pertaining to crowdfunding: (1) change "lesser of" to "greater of" in two instances to allow non-accredited investors to make larger investments; (2) remove investment limits for accredited investors; (3) expand the ability to advertise offerings; and (4) add Investment Company Rule 3a-9 (to the 1940 Act rules) to clarify that a "crowdfunding vehicle" is not an investment company if certain conditions are met;
  • Amend the integration rules for exempt offerings so that these rules refer to a single integration provision to be housed in proposed Securities Act Rule 152;
  • Add "or such sale" or similar language to the look-back periods in the bad actor disqualification provisions of numerous rules in order to harmonize these look-back periods with the language contained in Securities Act Rule 506(d);
  • Expand an issuer’s ability to test-the-waters by adding Securities Act Rule 241, which: (1) allows any issuer to test-the-waters for indications of interest in a communication before selecting a type of exempt offering, but the SEC’s antifraud rules apply, and an issuer cannot ask for, or receive, consideration or engage in a binding commitment until selecting the type of exempt offering and starting the offering; (2) requires any communication to state four conditions set forth in the rule; (3) defines "indication of interest" as "any written communication under this rule," and (4) permits an issuer to require a person to state in a response form their "name, address, telephone number, and/or e-mail address;"
  • Pertaining to Regulation S-K, permits certain information to be redacted from exhibits (which is required by Regulation S-K Rule 601), by retaining the "not material" requirement for exclusion of information from an exhibit, but changing the current competitive harm prong to one addressing information that the registrant "customarily and actually" treats as "private or confidential;"
  • Regarding demo day events, adds new Securities Act Rule 148 to clarify that demo day events do not constitute general advertising or solicitation if certain conditions are met; the rule mirrors the Helping Angels Lead Our Startups (HALOS) Act of 2019; and
  • Makes conforming amendments to Forms S-6, N-14, 1-A, C, 20-F, S-K, N-1A, N-2, N-3, N-4, N-6 and N-8B-2.

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