On November 1, 2018, the North American Securities Administrators Association, Inc. (“NASAA”) released for public comment proposed updates to the SCOR Statement of Policy and the SCOR Form (Form U-7).  According to the NASAA, the proposed updates are meant to incorporate many of the investor protections that have been put in place under state and federal crowdfunding laws in light of the evolution and availability of methods to raise capital in small offerings.

Changes to the SCOR Statement of Policy (last updated in 1996)

  • Application of SCOR:  The proposed updates amend the types of federal exempt offerings that can be registered at the state level under the SCOR Statement of Policy.  Specifically, SCOR will no longer apply to Regulation A offerings, but will apply to the registration of intrastate offerings exempt under new federal Rule 147A.  Additionally, the proposed updates increase the offering amount limitation from $1 million to $5 million, in line with the Rule 504 offering amount limitation increase.
  • Issuer Eligibility:  The proposed updates remove the existing requirement that the offering price for securities offered be greater than or equal to $1.00 per share or unit of interest.
  • Financial Statements:  The proposed updates revise the financial statement requirements to provide for tiered compilation, review, and audit requirements based on the amount of the offering.  In addition to the tiered approach, the proposed updates require (1) an issuer’s CEO and CFO to certify that annual financial statements are true and complete in all material respects and (2) an issuer provide interim financial statements if annual financial statements are dated more than 120 days prior to the date of filing.  The proposed updates to the financial statement requirements are based on Regulation Crowdfunding.
  • Bad Actor Disqualifications:  The proposed updates revise the bad actor disqualification provisions to merge aspects of federal bad actor provisions applicable to Rule 506 and Rule 504 offerings and to capture individuals materially participating in the offering or the operations of the issuer, as well as events that may include the potential for fraud.  The proposed updates, however, veer from related federal provisions and do not grandfather any bad acts that occurred prior to the adoption of the SCOR Statement of Policy.
  • Investment Limits:  The proposed updates incorporate the individual investment limits set forth in federal Regulation Crowdfunding and require that in each sale of securities in a SCOR offering, an issuer must reasonably believe that the aggregate amount of securities sold to any investor by one or more issuers offering or selling securities under a SCOR offering during the twelve-month period preceding the date of sale, together with the securities sold by the issuer to the investor, does not exceed:
    1. The greater of $2,000 or 5% of the lesser of the investor’s annual income or net worth if either the investor’s annual income or net worth is less than $100,000; or
    2. 10% of the lesser of the investor’s annual income or net worth, not to exceed an amount sold of $100,000, if both the investor’s annual income and net worth are equal to or more than $100,000.
  • Sales Reporting Requirement:  The proposed updates incorporate a sales reporting requirement similar to that contained in intrastate crowdfunding laws and federal Regulation Crowdfunding, which would require an issuer to file a sales report no later than 30 days after the termination or completion of an offering or, if the offering has not been terminated or completed within 12 months, file a sales report containing the information required in Section VIIIA for the initial 12 months.
  • Ongoing Reporting Obligations:  The proposed updates incorporate ongoing reporting requirements based on those required under Regulation Crowdfunding.  An issuer would be subject to the ongoing reporting requirements until the earlier of (1) the securities issued in connection with the SCOR offering are no longer outstanding or (2) the issuer liquidates or dissolves its business.
  • Review Standards:  The proposed updates include a new provision related to review standards and, unlike the proposed updates set forth above, is optional.  In jurisdictions that choose to adopt this provision, offerings will be reviewed for disclosure and for compliance with applicable Statements of Policy with certain modifications incorporated from NASAA’s Coordinated Review Protocol for Regulation A offerings.  Specifically, (1) the Statement of Policy Regarding Promoters’ Equity Investment will not apply and (2) the Statement of Policy Regarding Promotional Shares will apply except that one-half of any promotional shares required to be locked-in or escrowed may be released on the first and second anniversary of the date of completion of the offering, such that all shares may be released from lock-in or escrow by the second anniversary of the date of completion of the offering.

Changes to the SCOR Form (Form U-7) (last updated in 1999)

  • The proposed updates to the SCOR Form are meant to streamline the form by removing duplicative or unnecessary items and to make the form more user friendly.

Comments on the proposed updates to the SCOR Statement of Policy and SCOR Form are due by December 3, 2018.

On October 23, 2018, the Heritage Foundation hosted a discussion entitled, “Problems with the JOBS Act and How They Can Be Fixed” that featured University of Kentucky College of Law Professor Rutherford B. Campbell. The discussion centered on the impact of the 2012 Jumpstart Our Business Startups Act (the “JOBS Act”), its benefits, its shortcomings, and recommendations on how to address those shortcomings related to Titles II, III and IV.

The JOBS Act was enacted to reduce the regulatory burden on small businesses seeking to raise capital to launch or grow their business. Campbell praised Title II’s elimination of the prohibition against general solicitation and general advertising under Rule 506(c). However, he lamented that Rule 506(c) was still limited to sales to accredited investors. Campbell discussed Title III and argued that small businesses are simply not utilizing Regulation Crowdfunding. Campbell noted the mere $49 million in funds that was raised through Regulation Crowdfunding in 2017. He asserted that the limitations and concerns regarding integration “make no sense at all.” As an alternative, Campbell recommends a two-way regulatory integration safe harbor that allows for crowdfunding and permits traditional advertising while conducting a campaign. Additionally, Campbell recommends rethinking the periodic reporting requirement under Regulation Crowdfunding. By doing so, Campbell believes more small businesses will utilize Regulation Crowdfunding. Campbell then examined Regulation A+ under Title IV, noting there are still compliance, accounting and legal hindrances. As a solution, Campbell proposes federal preemption for Tier 1 offerings. Overall, Campbell advocates for the implementation of these recommendations to enhance the current regulatory framework for small business capital formation.

On September 25, 2018, the Securities and Exchange Commission’s (“SEC”) Division of Trading and Markets released Compliance and Disclosure Interpretations (“C&DIs”) to frequently-asked questions regarding Regulation Crowdfunding. Specifically, the SEC provided C&DIs related to the Rule 300 series of Regulation Crowdfunding which applies to requirements for intermediaries, including broker-dealers and funding portals. Additionally, the SEC Staff provided C&DIs related to the Rule 400 series of Regulation Crowdfunding, which contains rules specifically applicable to funding portals.

These address, among other things, the financial interests of an intermediary in the issuer, due diligence requirements for intermediaries, requirements for the delivery of educational materials by intermediaries, intermediary requirements with respect to transactions, changes and cancellation of an offering, and intermediary payments to third parties for directing investors to their platform. The SEC Staff notes that an intermediary is permitted to have a financial interest in the issuer.

Additionally, the C&DIs provide instructions on how to register as a funding portal and notes amendments to Form Funding Portal must be made within 30 days after information previously submitted becomes inaccurate. Moreover, interpretation was given regarding the Rule 402 conditional safe harbor for funding portals and recordkeeping requirements for funding portals.

The C&DIs can be found in full on the SEC’s website.

July 19 – 20, 2018

PLI New York Center
1177 Avenue of the Americas
(2nd Floor)
New York, NY 10036

This program will provide an overview and discussion of the basic aspects of the U.S. federal securities laws by leading in-house and law firm practitioners as well as SEC staff. Emphasis will be placed on the interplay among the Securities Act of 1933, the Securities Exchange Act of 1934, the Sarbanes-Oxley Act, the Dodd-Frank Act, the JOBS Act, the securities related provisions of the FAST Act, related SEC regulations and significant legislative and regulatory changes and proposals.

Partner Anna Pinedo will lead a session titled “Securities Act Exemptions” on Day One of the program. Topics will include:

  • Exempt securities versus exempt transactions;
  • Private placements, including offerings under Rules 504 and 506 of Regulation D;
  • Regulation A+ offerings;
  • “Intrastate” offerings, including new Rule 147A;
  • Crowdfunding;
  • Employee equity awards;
  • Rule 144A offerings;
  • Regulation S offerings to “non-U.S. persons”; and
  • Resales of restricted and controlled securities: Rule 144, Section 4(a)(7) and 4(a)(1½).

PLI will provide CLE credit.

For more information, or to register, please visit the event website.

Regulation Crowdfunding (Regulation CF) took effect on May 16, 2016. In line with the second anniversary of the implementation of the Regulation CF, the Heritage Foundation organized a discussion regarding the market. The host noted that approximately $112 million has been raised through crowdfunding since the effective date of Regulation CF. The panel considered possible amendments to, and improvements to, the crowdfunding framework. For example, the panelists recommended, among other things, (i) increasing to $3 million for the maximum amount that eligible companies may raise through crowdfunding, (ii) allowing financial review (instead of a full-blown audit) until a company raises $5 million, and (iii) streamlining the number of mandatory disclosures. The full discussion may be viewed here.

May 21 – 22, 2018

PLI New York Center
1177 Avenue of the Americas
(2nd Floor)
New York, NY 10036

Join PLI’s expert faculty of leading practitioners and regulators as they discuss and analyze the changing regulatory framework and market for private offerings. The faculty will begin by addressing the basics of private placements, sales of restricted securities, Rule 144 and Section 4(a)(1-1/2) transactions and block trades. Speakers will also address the changes to private and exempt offerings brought about by the JOBS Act, including matchmaking platforms, “accredited investor” crowdfunding, offerings using general solicitation, Rule 144A offerings, and the practical implications of these changes for issuers, broker-dealers and investment advisers. Panelists will discuss the considerations that have led many companies to remain private longer and defer IPOs, while creating liquidity opportunities for holders through private secondary trading markets. Panelists will also address the basics of traditional private placements, PIPE transactions, and Rule 144A transactions, as well as recent developments affecting each of these capital-raising alternatives.

Partner Anna Pinedo will serve as chairperson for this event and will speak on the “Welcome and Introduction to Private Placements and Hybrid Financings” panel on day one of the conference and on the “Welcome and Introduction to Conducting Hybrid Offerings” panel on day two. Partner Michael Hermsen will speak on the “Regulation A Offerings” panel on day one.

To register for this conference, or for more information, please click here.

The final report from the Forum session held last fall in Austin, Texas was recently published.  The recommendations were consistent with those of prior such gatherings. We summarize the principal recommendations.  First, the Forum recommends amendment of the accredited investor definition in order to expand the categories of qualification to include, regardless of net worth or net income, certain persons holding FINRA licenses or CPA or CFA designations, knowledgeable employees, and persons that have passed a sophistication test.  Second, the Forum recommends amendments to Regulation A to mandate blue sky preemption for secondary trading of Regulation A Tier 2 securities, allow at-the-market offerings, allow reporting companies to use Regulation A, increase the offering threshold to $75 million, and require portals conducting Regulation A offerings to be registered.  Third, the Forum notes that the SEC ought to lead a joint effort with FINRA to provide clear guidance to participants in Regulation Crowdfunding offerings.  Fourth, the Forum recommends various changes to Regulation Crowdfunding, including, among other things, raising the investor’s investment limitations and to increase the offering limit.  Fifth, the Forum recommends exempting small or intermittent finders from broker-dealer registration requirements.