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SEC Adopts Exempt Offering Rule Changes That Increase Offering Limits and Harmonize Exempt Offerings

November 18, 2020
Hinshaw Alert

The Securities and Exchange Commission (SEC) on November 2, 2020, adopted a set of amendments to simplify and improve the exempt offering framework. The amendments are designed to make it easier for issuers to access the capital markets and to provide additional investment opportunities for investors.

The amendments, among other things, increase the offering limits in offerings relating to Regulation A, Regulation Crowdfunding, and Rule 504 of Regulation D.

These amendments will be effective in early January of 2021.

Regulation A

Current Offering Limits

On March 25, 2015, the SEC adopted rules that significantly expanded and revised Regulation A, creating two tiers of Regulation A offerings:

The portion of the aggregate offering price attributable to the securities of selling securityholders may not exceed 30% of the aggregate offering price of a particular offering in:

  1. The issuer's first offering pursuant to Regulation A; or
  2. Any subsequent Regulation A offering that is qualified within one year of the qualification date of the issuer's first offering.

New Offering Limits

The amendments increase the maximum offering amount under a Tier 2 offering from $50 million to $75 million and increase the maximum amount of secondary sales from $15 million to $22.5 million.

Crowdfunding

Current Offering and Investment Limits

The crowdfunding rules contain the following thresholds and limits:

The investor-purchase limits are calculated on all crowdfunding purchases made by an investor during any 12-month period. Thus, an investor's purchases in all crowdfunding transactions during such period must be aggregated (and not just from the current offering in which the investor is participating).

The net-worth and annual-income tests are calculated using the accredited-investor tests contained in Rule 501 of Regulation D.

New Offering and Investment Limits

The amendments increase the maximum offering limits under Regulation Crowdfunding from $1.07 million for a 12-month period to $5 million.

In addition, they eliminate the purchase limitations for accredited investors. Accredited investors will be able to purchase any amount of securities in a crowdfunding offering and are not subject to the 12-month period rule.

The amendments allow non-accredited investors to purchase during any 12-month period:

As a consequence, a non-accredited investor satisfying the requirements of the second bullet point above will be able to purchase up to $107,000 in all crowdfunding offerings in which the investor participates during a 12-month period.

Temporary Relief for Certain Crowdfunding Offers

The SEC extended temporary relief until August 28, 2022, of certain financial-statement-review requirements for issuers offering $250,000 or less of securities in a crowdfunding offering.

Rule 504

Current Offering Limits

Rule 504 permits sales of up to $5 million of securities during any 12-month period.

New Offering Limits

The amendments increase Rule 504's maximum offering limits from $5 million to $10 million during any 12-month period.

Safe Harbor Exemptions

The SEC's integration rules and guidance seek to prevent an issuer from avoiding the 1933 Securities Act registration requirements by artificially dividing a single offering into multiple offerings. This division allows an issuer to rely on different exemptions for multiple offerings that would be unavailable if the offerings were combined.

The SEC's integration rules and guidance, however, present problems for issuers legitimately using multiple private offering exemptions, either concurrently or within close proximity to each other. The SEC may determine that one or more of the exemptions do not apply when the offerings are viewed as being "integrated" for purposes of analyzing compliance, which could cause the issuer to lose that exemption.

To assist issuers in avoiding integration problems, the new SEC rule (Rule 152) provides four simple, non-exclusive safe harbors from integration. The new rule provides that:

Test the Waters and Demo Day Communications

Regulatory restrictions have been placed on communications to potential investors in exempt offerings. Such restrictions limit an issuer's ability to reach such investors.

The amendments revise the SEC's offering communications rules by:

Regulation Crowdfunding and Regulation A Eligibility

The amendments permit the use of certain special purpose vehicles that function as a conduit for investors to facilitate investing in Regulation Crowdfunding offerings.

The amendments impose eligibility restrictions on the use of Regulation A by issuers that are delinquent in their Exchange Act reporting obligations.

Other Improvements

The amendments also: