In another move that should expand access to capital (see previous coverage of the slight expansion of the Accredited Investor standard here), the SEC on November 2, 2020 raised the caps on the amount that can be raised under certain offering exemptions.
As a baseline rule, the United States securities regulatory regime is: all offerings must either (a) be registered with the SEC (it is expensive and time-consuming to register; and ongoing compliance is also expensive and time-consuming), or (b) qualify for an exemption from registration. As previously noted, the structure of registration exemptions has been criticized (Chairman Clayton described the current landscape as “a patchwork” in his statement in support of the amendments). The amendments here, which were approved along a party-line vote with all three Republican commissioners in favor and both of the two Democratic commissioners against, were described by the SEC in its press release as 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.”
Similarly to the Accredited Investor changes, this is a relatively modest change in the overall scope of things, but it is still important to be aware of. It will increase access to capital, but likely by a modest amount – this won’t revolutionize the capital markets or anything.
These changes included:
- significantly (almost 5x) raising the cap on equity crowdfunding under Regulation Crowdfunding (Regulation CF) from $1.07 million annually to $5 million annually
- a 50% increase in the cap on Reg A+ offerings, from $50 million per year to $75 million per year
- doubling the maximum offering amount for Rule 504 of Regulation D from $5 million to $10 million
- expanding the “test-the-waters” accommodation available to Regulation Crowdfunding (Regulation CF) issuers
These changes, very similar to the expansion of the Accredited Investor definition, are meant to expand the private capital markets. It’s a worthy goal, since it’s well-established that the cost of undertaking an IPO and the cost of being a public company are both major. As previously noted, in 2019, the amount of private capital-raising was over double the amount of public capital-raising ($1.2 trillion vs $2.7 trillion).
In particular, commentators and observers are predicting that the Regulation CF amendments will have the biggest change on the fundraising landscape. I am inclined to agree. It is, no doubt, a common story for an issuer to start down the road of preparing a Regulation CF exempt offering, only to jettison such plans when confronted with the cost-benefit analysis of the expense of a Regulation CF exempt offering compared to the only $1.07 million that could be raised in such an offering. The new cap of $5 million for Regulation CF should make this exemption significantly more appealing for companies considering taking advantage of it.
The amendments also established a broad “integration framework”.
You may wonder, what does that mean?
Well, issuers often look at or consider multiple options from the “menu” of exemption safe harbors when evaluating their fundraising options. Not surprising, since the “patchwork” of exemptions has such different features (from differing filing requirements and disclosure requirements to different fundraising caps, etc). However, under SEC rules, when different offering exemptions are used, questions may arise as to the need to view the offerings as “integrated” for purposes of analyzing compliance. Integration can be a dangerous prospect for an issuer, and accidentally cause one or more of the offerings to go over the applicable fundraising cap.
In these amendments, four additional non-exclusive safe harbors from integration were announced such that companies may make exempt offerings within 30 days of each other instead of the current six-month waiting period and offerings made pursuant to an employee benefit plan under Rule 701 will not be integrated with other offerings, amongst others. This provides additional benefits to private companies to enable them to plan more effectively for each fundraising round.
Lastly, an “under the radar” change that may be bigger than you think – take note of the SEC’s new rules permitting certain special purpose vehicles or “SPVs” to invest in a single company under Regulation CF. Previously, an individual who wished to participate/invest in a Regulation CF offering was required to hold securities in his or her own individual name. This is less than ideal for many reasons, both from the investor side (unnecessary administrative complexity, tax considerations, problems for family offices) and from the company/issuer side (massive shareholder lists and extensive cap tables with potentially thousands of names, and all the attending administrative complexities thereof)
The new amendments allow for limited-purposes crowdfunding SPVs, provided that the SPVs meet certain conditions (essentially, SPVs that are specifically designed to avoid only the problem outlined above).
Stay tuned to the blog for more updates.
This blog post is provided by Law Offices of Ryan Reiffert, PLLC for educational and informational purposes only and is not intended and should not be construed as legal advice.