Today, November 2, 2020, the Securities and Exchange Commission (SEC) voted to adopt amendments proposed in March 2020 that harmonize and modernize the exempt offering framework. Predictably, the SEC Commissioners were split in their vote, with two Commissioners voting against the amendments. Despite the statements of the dissenting Commissioners, who cited investor protection issues, it is important to note that the SEC’s Division of Economic Risk and Analysis (DERA) has undertaken several studies, including a recent study published in August 2020, regarding the private markets, providing ample economic analysis and data.
The changes brought about by the amendments are incremental, not revolutionary, but nonetheless important to both private companies and to public companies that rely on private placements as capital-raising alternatives. The amendments simply acknowledge the reality of our current capital markets. The amount of capital raised in exempt offerings in the United States vastly exceeds the amount raised in SEC-registered offerings. In its proposing release on these measures, the SEC noted that in 2019, registered offerings accounted for $1.2 trillion of new capital, compared to $2.7 trillion that was estimated to have been raised in exempt offerings. Given that the statistics collected and analyzed by the SEC’s DERA rely on Form D filings, it is likely that the amounts attributable to exempt offerings are understated since many exempt offerings made to institutional accredited investors are made in reliance on the statutory private placement exemption in Section 4(a)(2) of the Securities Act of 1933, as amended (the Securities Act). Emerging companies continue to rely on successive rounds of private placements to fund their growth and continue to defer their initial public offerings or other exits. As a result, exempt offerings have become increasingly important to the capital markets. The framework relating to offering exemptions has come together over many years through the adoption of various safe harbors, including those under Regulation D of the Securities Act, and those that have developed following the enactment in 2012 of the Jumpstart Our Business Startups (JOBS) Act. Increased reliance on private capital markets and the choice to defer IPOs is not solely, or even largely, the result of regulatory change. Today’s amendments, which rationalize a number of exempt offering alternatives, will not dramatically change the dynamics of public versus private.
Among other changes, the amendments:
- Modernize the framework for the securities integration analysis, by establishing general guiding principles, and establishing four clear integration safe harbors, which should result in greater clarity and certainty;
- Revise the requirements for verification of investor status in Rule 506(c) offerings;
- Increase the offering thresholds for Regulation A offerings, Regulation Crowdfunding Offerings and Rule 504 offerings;
- Provide additional certainty regarding certain communications that do not constitute general solicitation; and
- Align the disclosure requirements for exempt offerings that include non-accredited investors.
The amendments will be effective 60 days after publication in the Federal Register, except for the extension of the temporary Regulation Crowdfunding provisions, which will be effective upon publication in the Federal Register. A detailed client alert will follow. Watch our blog, as well, for details regarding an upcoming webcast on these developments. The fact sheet may be accessed here. The final rules may be accessed here.