On November 2, 2020, the Securities and Exchange Commission released its amendments to certain of its rules in order to harmonize, simplify, and improve the multilayer and overly complex exempt offering framework. These amendments are intended to promote capital formation for early stage companies and expand investment opportunities for investors in those companies. Several of the amendments cover the rules for the potential integration of two or more securities offerings. A new integration framework was established 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.
Issuers and their counsel will wish to concentrate on the four non-exclusive safe harbors from integration as set forth in the amendments. Those safe harbors are as follows:
1. Any offering made more than 30 days before commencement of any offering or more than 30 days after termination or completion of another offering will not be integrated, provided an exempt offering in which general solicitation is prohibited follows by 30 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:
(i) the issuer has a reasonable belief that each purchaser was not solicited by general solicitation; or
(ii) the issuer established a substantive relationship with the purchaser prior to commencement of the exempt offering which prohibits general solicitation.
2. 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:
(a) a terminated or completed offering for which general solicitation is prohibited;
(b) a terminated or completed offering for which general solicitation is permitted that was made only to qualified institutional buyers and institutional accredited investors; or
(c) 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.
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.
These amendments to the previously existing rules governing integration should help guide issuers in confidently determining their options with respect to initiating additional offerings of their securities.
Possibilities for Pre-Offering Communications:
Rules that prohibit or limit issuers of securities from conducting general solicitation of purchasers have long been an essential element in determining whether an offering is private and therefore exempt from registration under the 1933 Securities Act. There are exceptions, including a rule that allows issuers to gauge market interest in a registered public offering through discussions with certain institutional investors and another rule that allows Regulation A issuers to solicit interest in a potential offering from the general public. Recognizing that these prohibitions and limitations may have impeded the raising of capital without offsetting benefit, the Release makes important changes to the regulatory structure that permit broadened opportunities for pre-offering communication between investors and issuers in the context of offerings that are exempt from registration.
In a significant deviation from the prior regulatory position, under new Rule 241, an issuer may communicate orally or in writing to determine whether there is interest in a contemplated offering of securities exempt from the registration requirements of the Securities Act. To be exempt, the communications must be made prior to the time the issuer determines on which of the several available exemptions from registration it will rely and commences the offer in compliance with the exemption. Issuers should be aware, however, that a solicitation will be deemed to be the offer of a security for sale for purposes of the antifraud provisions of the securities laws.
There are some conditions attached to the benefits of new Rule 241. First, if within 30 days after the generic solicitation of interest the issuer opts to proceed with an offering that is exempt under Rule 506(b), the issuer must provide those purchasers with the written generic solicitation of interest materials it has used. Second, the Release expressly provides that Rule 241 does not preempt applicable state securities laws. Third, it is only the solicitation of interest that is exempt from registration. When the issuer makes offers to sell to, or accepts offers to buy from, investors, it must either comply with the available exemption from registration for the offer or register the offer.
In a second significant modification, the Release adopts new Rule 206, permitting issuers to test the waters prior to filing a Form C with the SEC, a step which has not been allowed in the past. Similarly, the Release amends existing Rule 204 so that once the crowdfunding issuer has filed its Form C with the SEC, oral communications with prospective investors are permitted.
In line with creating additional opportunities for issuers and investors to have a dialogue, the Release adopts a new rule, Rule 148, which removes “demo-day” communications from the scope of general solicitation and prescribes which activities will be permissible by issuers and these events and which will not. The new rule represents a major expansion of “demo-day” activities that will now be allowed at these events and should enable issuers to tailor their presentations to both the raising of capital as well as the description of their businesses.
The release then addresses an issue that often arises in the context of general solicitations and advertisements that are permitted as part of offerings made to accredited investors under Rule 506(c), where verification of the status of a purchaser as an accredited investor is required each time that purchaser invests. The existing Rule 506(c) requires that the issuer must take reasonable steps to verify that purchasers are accredited investors. The Rule provides a non-exclusive list of steps that the issuer may take to verify an investor’s status. The Release provides some relief in this regard by permitting issuers, in the case where an issuer has taken reasonable steps to verify the status of the investor during the prior five years and the issuer is not aware of information to the contrary, to rely on the written representation of the investor made at the time of sale that the investor continues to qualify as an accredited investor.
In terms of securities regulation, these changes have major significance and are likely to change behaviors and practices around private placements. There will also be knock-on effects from new practices and areas of potential liability as well. Issuers are encouraged to consult with qualified securities law practitioners regarding their offering plans.