On June 18, 2019, the SEC issued a concept release seeking public comment on ways to simplify, harmonize and improve the regulatory framework governing private offerings of securities. The SEC issues concept releases to solicit the public’s views on securities law issues and considers responses to improve its rulemaking process.
All securities offerings in the United States must be either registered under the Securities Act of 1933 or exempt from registration. Historically, registered offerings were a retail investor’s primary investment option. Over the past ten years, however, investment activity in exempt markets has increased significantly compared to the public registered markets. According to SEC data, exempt offerings in 2018 raised over twice as much new capital as registered offerings ($2.9 trillion as compared to $1.4 trillion, respectively).
Over the same ten-year period, a patchwork of SEC rules and legislative enactments has dramatically changed the scope of these exempt offerings, and according to the SEC, the resulting framework “is complex and made up of differing requirements and conditions, which may be difficult for issuers . . . to navigate.”
The proliferation of exempt offerings has caused the SEC to reassess the current framework and consider whether rule changes should be implemented to make exempt offerings more accessible to a broader range of issuers and investors. Early-stage and smaller issuers, in particular, are likely to require an efficient exempt offering market, given the costs associated with conducting a registered offering and becoming a reporting company. Investors who are not accredited (as defined in Rule 501 of the SEC’s Regulation D) are excluded from participation in many investment opportunities and could benefit from expanded access to exempt offerings.
The SEC seeks to design its framework in a manner that expands investment opportunities and promotes capital formation while maintaining the appropriate level of investor protection. To that end, the release contains 138 enumerated requests for comment—many of which include multiple sub-requests.
As indicated in its press release, the SEC seeks input on the following topics:
- The Exempt Offering Framework - Whether the Commission’s exempt offering framework, as a whole, is consistent, accessible and effective for both companies and investors or whether the Commission should consider changes to simplify, improve or harmonize the exempt offering framework.
- The Capital Raising Exemptions within the Framework - Whether there should be any changes to improve, harmonize or streamline any of the capital raising exemptions, specifically: the private placement exemption and Rule 506 of Regulation D, Regulation A, Rule 504 of Regulation D, the intrastate offering exemptions and Regulation Crowdfunding.
- Potential Gaps in the Framework - Whether there may be gaps in the Commission’s framework that may make it difficult, especially for smaller companies, to rely on an exemption from registration to raise capital at key stages of their business cycle.
- Investor Limitations - Whether the limitations on who can invest in certain exempt offerings, or the amount they can invest, provide an appropriate level of investor protection (i.e., whether the current levels of investor protection are insufficient, appropriate or excessive) or pose an undue obstacle to capital formation or investor access to investment opportunities, including a discussion of the persons and companies that fall within the “accredited investor” definition.
- Integration - Whether the Commission can and should do more to allow companies to transition from one exempt offering to another and, ultimately, to a registered public offering, if desired, without undue friction or delay.
- Pooled Investment Funds - Whether the Commission should take steps to facilitate capital formation in exempt offerings through pooled investment funds, including interval funds and other closed-end funds, and whether retail investors should be allowed greater exposure to growth-stage companies through pooled investment funds in light of the potential advantages and risks of investing through such funds.
- Secondary Trading - Whether the Commission should revise its rules governing exemptions for resales of securities to facilitate capital formation and to promote investor protection by improving secondary market liquidity.
Public Comment Period
The SEC will accept comments on the issues raised in the concept release for 90 days after the release is published in the Federal Register.
Special thanks to our summer associate Rob Cowan (Texas, 2020) for his contributions to this update.
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