The first rule of federal securities laws is often said to be that an offer and sale of securities is either: (1) registered with the SEC, (2) exempt from registration, or (3) illegal. Many companies use transaction exemptions to design their capital raises through private placements. For some companies, this process can still be complicated and burdensome because the SEC's rules and regulations vary depending on the specific exemption.
The SEC acknowledged that companies and investors may benefit from a simpler and more streamlined approach. On June 19th, the SEC Staff issued a 200-plus page concept release (the "Concept Release"), requesting input on how to simplify, harmonize, and improve the rules related to private securities offerings. In the Concept Release, the SEC Staff emphasizes balancing the interests of capital formation with investor protection, and requests public comment on broad and specific questions. Commenters are asked whether the current rules accomplish the stated goals, whether the framework is too complex and needs to be simplified, and whether the exemptions provide options for companies at all stages of their life cycle.
In framing many of these questions and requests for comments, the Concept Release relates data and analyses on relevant topics, including the amounts raised in different types of exempt offerings, the number of accredited investor households in the U.S., and the median amount raised in an exempt offering.
Much of the Concept Release walks through in detail the various limitations and requirements of the private placement exemptions (including Regulation D Rules 506(b) and 506(c), Regulation A, Regulation D Rule 504, intrastate offering exemptions, and Regulation Crowdfunding. In addition, the SEC Staff notes that the vast majority of exempt offerings only include accredited investors, then discusses potential modifications to the definition of "accredited investor" to include more than those individuals who meet the financial thresholds (generally $1 million in assets or $200,000 in income in the last two years). Potential expansion could include those who hold minimum investments, who have certain professional credentials, who pass a test to qualify, or who opt in to the status after receiving disclosure about the risks of the investment.
The Concept Release also discusses the integration analyses applied in the context of exempt offerings, as well as pooled investments, and the rules and regulations governing resales.
The SEC will accept public comment on the issues presented in the Concept Release for ninety days after the Concept Release is published in the Federal Register (or September 24, 2019). Comments can be submitted via the SEC website here: https://www.sec.gov/cgi-bin/ruling-comments. The Concept Release covers specific questions and rules, and solicits comments to broader unifying changes to the private placement framework. Simplifying, harmonizing and improving the private securities offering rules are worthy goals and some form proposed rule changes are expected and welcomed by issuers and investors. Stay tuned, as we continue to review any proposed rules in this area.
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