The Securities and Exchange Commission (SEC) has adopted a series of amendments to rules under the Securities Act of 1933 (Securities Act) applicable to offerings exempt from public registration. The amendments will become effective 60 days after they are published in the Federal Register, which will likely be in the first half of 2021.
The purpose of the amendments is to simplify, harmonize, and improve certain aspects of the exempt offering framework. The amendments are intended to promote capital formation while preserving or enhancing important investor protections. The most significant changes include:
- a single comprehensive rule to address integration across a broad range of settings;
- amendments to clarify and update rules concerning investor communications;
- updates to verification procedures for “accredited investor” status under Rule 506(c) of Regulation D; and
- increases in offering size limits for certain exempt offerings.
New Integration Framework Under Amended Rule 152
Integration is the concept where certain nominally distinct offerings made in reliance on private offering exemptions are treated as a single offering. The integration rules are meant to discourage issuers from artificially separating a single offering into multiple offerings in order to avoid registration requirements. Separate offerings may be integrated due to overlap or because the offerings are commenced in close proximity to each other. Because many exemptions have differing limitations and conditions on their use, determining whether different offerings should be “integrated” is critical in order to accurately assess whether a particular exemption applies.
Amended Rule 152 provides a new comprehensive framework for resolving questions of integration across all types of exempt offerings. The general principle of the revised rule is that offers and sales in differing offerings will not be integrated, if based on the facts and circumstances, the issuer can establish that each offering either (1) complies with the registration requirements of the Securities Act, or (2) an exemption from registration is available.
One area of particular importance is whether general solicitation is permitted under the applicable exemption. “General solicitation” refers to an issuer publicly marketing the offering, and encompasses a broad range of efforts by the issuer to publicly inform potential investors about the terms of an offering and inviting them to purchase the offered securities. A number of exemptions from registration prohibit any general solicitation. Under the amended rule, for an exemption that prohibits general solicitation, the issuer must reasonably believe that each purchaser in the offering was either not solicited through a general solicitation, or that the issuer had established a substantive relationship with the purchaser prior to the commencement of the offering that prohibits general solicitation.
Further, if there are multiple offerings that permit general solicitation, the amended rule provides that offering materials for one offering that includes information about the material terms of another offering may also constitute an offer of securities in that offering. Therefore, if the two offerings rely on different exemptions then the first offering must also comply with the exemption used in the second offering.
New Safe Harbors From Integration
Amended Rule 152 provides four safe harbors from integration, as detailed below:
- Safe Harbor #1. Offers made more than 30 days before the commencement of another offering, or more than 30 days after the termination or completion of an offering, will not be subject to integration with such other offering. Under prior guidance, six months was cited as a reasonable waiting period. However, the new safe harbor clarifies that if the first offering permits general solicitation and the second offering prohibits general solicitation, the issuer must reasonably believe that each purchaser in the second offering was not solicited through general solicitation, or that it had established a substantive relationship with such purchaser prior to the commencement of the second offering. As has been the case for years, in a private offering made without the use of general solicitation, a substantive and pre-existing relationship with each investor is critical, whether established by the issuer or its licensed agent.
- Safe Harbor #2. Exempt offerings under Rule 701 (for offerings pursuant to employee benefit plans or arrangements), or in compliance with Regulation S (for offerings made overseas), will not be integrated with any other offering.
- Safe Harbor #3. Offerings for which a registration statement has been filed will not be integrated with an earlier private offering under the following circumstances: (1) if the registered offering is made after the private offering was terminated or completed and no general solicitation was permitted in the private offering; (2) if the registered offering is made after the private offering was terminated or completed and general solicitation was made only to qualified institutional buyers (QIBs) or institutional accredited investors; or (3) if the registered offering commences at least 30 days after the private offering was terminated or completed. Institutional accredited investors include banks, broker-dealers, investment advisers, insurance companies, investment companies, business development companies, employee benefit plans, and family offices and certain other entities with over $5 million in investments.
- Safe Harbor #4. For offers and sales made in reliance on an exemption for which general solicitation is permitted, the offering will not be integrated with any prior offering that was terminated or completed.
Taken together, the new integration rules and safe harbors make clear that, unless an offering occurs within 30 days of another offering, the issuer of a private offering that permits general solicitation need not be concerned with questions of integration. This additional certainty will provide issuers increased flexibility to pursue offerings under various exemptions without concerns over integration.
Rule 148 now exempts certain “demo day” communications from registration requirements. The new rule, which provides that such communications will not be deemed to involve general solicitation, is intended to allow issuers to state that they are seeking capital when discussing their business plans with potential investors without impacting their ability to rely on Rule 506(b) for the offering.
Testing the Waters Rule
Rule 241 creates a new exemption under which issuers now have the ability to “test the waters” for exempt offerings. Under the new rule, an issuer is permitted to solicit indications of interest in a potential exempt offering either orally or in writing, provided that the issuer must not have settled on a specific exemption upon which it intends to rely for the potential offering. The rule is designed to allow issuers to gauge market interest, tailor the size and other terms of an offering, and reduce the costs of conducting an exempt offering.
Verification Rules for Accredited Investors
Rule 506(c), which permits general solicitation in a Rule 506 offering if sales are made only to accredited investors, requires that issuers take reasonable steps to “verify” that its investors qualify as accredited investors, rather than just rely on each investor’s certification.
Under new amendments to Rule 506(c), if an issuer took reasonable steps to verify the accreditation of an investor within the past five years, then the investor will remain an accredited investor as of the time of a subsequent sale if the investor provides a written representation that it continues to qualify and the issuer is not aware of information to the contrary.
Revised Maximum Offering Amounts
The amendments increase the maximum offering amount permitted under a number of rules and regulations. The table below outlines the maximum offering amounts under the revised rules.
|Offering Type||Previous Maximum Offering Amount||New Maximum Offering Amount|
|Rule 504||$5 million||$10 million|
|Tier 2 of Regulation A||$50 million||$75 million|
|Secondary Sales Under Tier 2 of Regulation A||$15 million||$22.5 million|
|Regulation Crowdfunding||$1.07 million||$5 million|