SEC Improves Exempt Offering Framework, Provides More Clarity and Flexibility

What to know about the new Integration Framework and Safe Harbor provisions 

Part 1

By Julie Herzog

It should come as welcome news to investors, emerging companies and seasoned issuers that the U.S. Securities and Exchange Commission (SEC) voted to amend its rules to simplify, harmonize, and improve the current exempt offering framework.

The final rules, adopted by the SEC on Nov. 2, 2020, largely resemble the proposed rules issued in March 2020, although they do include some modifications incorporated after soliciting public comments and receiving input from key stakeholders, investors and issuers. The new rules take effect 60 days after publication in the Federal Register and are intended to reduce potential friction points, making the capital raising process more effective and efficient to better meet evolving market needs.

In this post, I will focus specifically on SEC changes regarding the Integration Framework, Safe Harbor Provisions and Offering and Investment Limits. In follow-up posts, I will cover “Test-the-Waters” and “Demo Day” Communications, Accredited Investor Verification Methods and Financial Statement Requirements in Rule 506(b) Offerings.

Background

In order to fully understand the new amendments, a little history is in order. A core component of the federal regulatory system is the requirement that all securities offerings be registered with the Commission or qualify for an exemption from registration. The registration process is generally designed for larger companies with substantial resources. As a result, many entrepreneurs and emerging businesses raise capital by selling securities in reliance on an offering exemption. This important capital formation activity ranges from raising seed capital for new businesses to growth capital for companies of all sizes, including those on the path to a registered initial public offering.

Integration Framework

The SEC has replaced its existing integration framework in Rules 152 and 155 with a sweeping new framework set forth in Securities Act Rule 152, which states that the integration of private and public offerings have been amended to permit concurrent private and public offerings. This is intended to make it easier to pursue exempt offerings.

The rationale behind this change is that when issuers use various private offering exemptions in parallel or in close time proximity, questions can arise as to the need to view the offerings as “integrated” for purposes of analyzing compliance. This need for integration arises because many exemptions have differing limitations and conditions on their use, including whether the general solicitation of investors is permitted. If exempt offerings with different requirements are structured separately but analyzed as one “integrated” offering, it is possible that the integrated offering will fail to meet all the applicable conditions and limitations.

As such, the amendments establish a new integration framework providing a general principle that looks to the particular facts and circumstances of two or more offerings, and focuses the analysis on whether the issuer can establish that each offering either complies with the registration requirements of the Securities Act, or that an exemption from registration is available for the particular offering.

Safe Harbor Provisions

Rule 152 also includes four non-exclusive safe harbor provisions that will apply to all securities offerings under the Securities Act. The new safe harbors in Rule 152 are:

1. Any offering made more than 30 calendar days before the commencement of any other offering, or more than 30 calendar days after the termination or completion of any other offering, will not be integrated with such other offering(s); provided that:

   1. in the case where an exempt offering for which general solicitation is prohibited follows by 30 calendar days or more an offering that allows general solicitation, the issuer has a reasonable belief, based on the facts and circumstances, with respect to each purchaser in the exempt offering prohibiting general solicitation, that the issuer (or any person acting on the issuer’s behalf) either did not solicit such purchaser through the use of general solicitation or established a substantive relationship with such purchaser prior to the commencement of the exempt offering prohibiting general solicitation;

2. Offers and sales made in compliance with Rule 701, pursuant to an employee benefit plan, or in compliance with Regulation S will not be integrated with other offerings;

3. An offering for which a Securities Act registration statement has been filed will not be integrated if it is made subsequent to:

   1. a terminated or completed offering for which general solicitation is not permitted,

   2. a terminated or completed offering for which general solicitation is permitted that was made only to qualified institutional buyers and institutional accredited investors, or

   3. an offering for which general solicitation is permitted that terminated or was completed more than 30 calendar days prior to the commencement of the registered offering; and

4. Offers and sales made in reliance on an exemption for which general solicitation is permitted will not be integrated if made subsequent to any terminated or completed offering.

Offering and Investment Limits

The Commission also increased Rule 504’s maximum offering amount from $5 million to $10 million.

For a more detailed account and explanation of the SEC rule amendments, please see the final rules and/or review the SEC table that provides an overview of the principal private offering exemptions.

If you have questions about the potential implications of the amended rules on your business, the experienced corporate attorneys at Fortis Law Partners are here to help.