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Summary of SEC’s Final Rule for Reg CF, Reg A+, Reg D (2020 Updates)

On Monday, November 2, 2020, the U.S. Securities and Exchange Commission (SEC) voted 3-2 in favor of adopting proposed changes to the exempt offering framework. The updates include some much-anticipated Regulation Crowdfunding (Reg CF) and Regulation A+ (Reg A+) amendments that industry proponents expect will lead to a tipping point in the number of issuers who will make use of these niche fundraising exemptions.

While there were a few modifications to the adopted amendments compared to what was proposed (e.g. SAFEs will not be prohibited under Reg CF), most of the updates were adopted as originally proposed.

The SEC’s final rule can be found in all of its 388-pages-of-glory here.

But we assume that most of you won’t want (or be able) to take the time to read the entire document. So we read the entire document (yes, really) and have summarized the key points that equity crowdfunding investors and founders should be aware of below.

Summary of SEC’s 2020 Final Rule – Updates to Reg CF, Reg A+, and Reg D

The final rule, titled “Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets”, will mostly relax and streamline the current regulations in question.

According to Chairman Clayton’s public statement, the overhauled regulations accomplish three primary objectives:

  1. remaining true to proven principles for retrospective review and modernization, improving all three components of our mission: investor protection, capital formation and market integrity; 
  2. addressing the substantial changes in our marketplace, including changes in communications technology and access to capital; and greatly reducing costs, particularly for smaller and medium-sized business as well their investors.

Republic, one of the top three Reg CF platforms, said in an email newsletter: “In our estimation, these changes will increase the total addressable universe of companies from billions to trillions in total value, creating an enormous opportunity for the platforms poised to facilitate this investment.”

In short – these changes are a big deal. Here they are.

Changes to Regulation Crowdfunding (Reg CF)

Of the most interest to equity crowdfunding investors and founders, there were some substantial changes that will go into effect in early 2021, including:

  1. Increased offering limits
    1.  Increase the 12-month Reg CF offering limit from $1.07 million to $5 million
  2. Investor limit updates
    1. Remove all investor limits for accredited investors
    2. Change the calculation of 12-month investor limits for non-accredited investors from using the “lesser of” net worth and income to the “greater of” net worth and income, allowing most investors to be able to invest more
  3. Extension of temporary COVID-19 relief (effective immediately)
    1. Current temporary relief crowdfunding measures will be in effect for an additional 18 months, with a new expiration date of August 28, 2022
  4. Creation of a new Special Purpose Vehicle (SPV) – “crowdfunding vehicle”
    1. To allow for a single line item entry on cap tables, a new type of SPV called a “Crowdfunding Vehicle” was created to act as a conduit for investors to hold shares in a crowdfunding company without introducing cap table (particularly Section 12(g) of the Exchange Act) concerns for issuers.
  5. Testing the Waters and Generic Solicitation
    1. Similar to what’s already allowed under Reg A+, issuers intending to use Reg CF may now legally solicit investor interest, orally or in writing, prior to filing a Form C (or even prior to selecting which exemption will be used). This “testing the waters” will help issuers gauge investor interest before selecting an intermediary platform and prior to starting the Reg CF offering process.
    2. Testing the waters will not have to be done on an intermediary’s platform.
    3. Unlike Rule 255 of Reg A, Rule 206 for Reg CF will only permit issuers to test the waters before the Form C is filed.
    4. Note: State Blue Sky laws are not going to be preempted for these generic solicitations.
  6. Exemption from General Solicitation for “Demo Days” and Similar Events
    1. “As adopted, an issuer will not be deemed to have engaged in general solicitation if the communications are made in connection with a seminar or meeting sponsored by a college, university, or other institution of higher education, a State or local government or instrumentality of a State or local government, a nonprofit organization, or an angel investor group, incubator, or accelerator.”
    2. The information that an issuer may provide under Rule 204 was also expanded to include 1) use of proceeds and 2) issuer’s progress toward meeting its funding goals.

Proposed changes that were NOT adopted include:

  1. Restricting the types of securities (e.g. SAFEs) that can be offered under Reg CF
  2. Aligning Reg CF securities with Reg A+ securities

Potential regulatory issues that weren’t yet addressed include:

  1. Need to consider state preemption of Blue Sky laws (i.e. not being subject to each state’s local securities regulations) with respect to testing-the-waters offers made under Rule 241 as well as secondary sales of Reg CF and Reg A Tier 2 securities.

Changes to Regulation A (Reg A+)

  1. Increased offering limits
    1. Increased Reg A+ Tier 2 offering limit from $50 million cap to $75 million cap
    2. Increased Reg A+ Tier 2 secondary sales limit from $15 million to $22.5 million
  2. Exemption from General Solicitation for “Demo Days” and Similar Events (same as Reg CF, above)

Changes to Regulation D

  1. Increased offering limits
    1. Increased Rule 504 maximum limit from $5 million to $10 million (for regional multi-state offerings)
  2. Rule 506(b) amendment to allow for no more than 35 non-accredited investors in a 506(b) offering within a 90-calendar-day-period
  3. Rule 506(c) accredited investor verification requirement clarifications
  4. Exemption from General Solicitation for “Demo Days” and Similar Events (same as Reg CF, above)

Other Exemption Updates

  1. Establishing an integration framework for serial (i.e. back-to-back) offerings
  2. Harmonization of Disclosure Requirements (Reg A and Reg D)
  3. Harmonization of Bad Actor Disqualification Provisions between Reg A, Reg CF, and Reg D

Check out the complete final rule document for all the updates. We have reproduced the exemption overview table (Table 1 – Overview of Capital Raising Exemptions) from the SEC’s final rule at the bottom of this article.

When will the SEC’s Reg CF changes go into effect?

The SEC’s final rule will go into effect 60 days after hitting the federal register, which typically takes several weeks. Expect the changes to go into effect in late January or February 2021.

What are the potential implications of the SEC’s 2020 exempt offering updates?

Proponents of the recent SEC changes hope that the changes will:

  1. Encourage a higher quantity of issuers (i.e. startups/entrepreneurs) to use Reg CF
  2. Encourage higher quality issuers to use Reg CF
  3. Reduce the cost of capital (due to required disclosures, etc.) to issuers
  4. Reduce confusion around the various exemptions and provide a more integrated exempt offering framework

Opponents of the recent SEC changes argue that:

  1. The changes are being made without sufficient data to justify the need for such updates
  2. Relaxing the regulations will compromise investor protections that were in place and could lead to increased risk of fraud
  3. Making the private markets more attractive may erode the public markets

Overview of Capital-Raising Exemptions Matrix

Click here for Google Doc version of the table below. Reproduced from SEC final rule, Table 1 – Overview of Capital-Raising Exemptions.

Type of Offering Offering Limit
within 12-month
Period
General Solicitation Issuer Requirements Investor
Requirements
SEC Filing
Requirements
Restrictions
on Resale
Preemption of
State Registration
and Qualification
Section 4(a)(2) None No None Transactions by an
issuer not involving
any public offering.
See SEC v. Ralston
Purina Co.
None Yes. Restricted securities No
17 CFR
230.506(b)
(“Rule 506(b)”
of
Regulation D)
None No “Bad actor” disqualifications apply Unlimited accredited investors Up to 35 sophisticated but non-accredited investors in a 90-day period 17 CFR 239.500 (“Form D”) Yes. Restricted securities Yes
17 CFR 230.506(c) (“Rule 506(c)”) of Regulation D None Yes “Bad actor” disqualifications apply Unlimited accredited investors Issuer must take reasonable steps to verify that all purchasers are accredited investors* Form D Yes. Restricted securities Yes
Regulation A: Tier 1 $20 million
Permitted; before qualification, testing the waters permitted before and after the offering statement is filed

U.S. or Canadian issuers

Excludes blank check companies, registered investment companies, business development companies, issuers of certain securities, certain
issuers subject to a Section 12(j) order, and Regulation A and Exchange Act reporting companies that have not filed certain required reports.

“Bad actor”
disqualifications apply*

No asset-backed securities.

None Form 1-A, including two years of financial statements Exit report No No
Regulation A: Tier 2 $75 million Non-accredited
investors are subject to
investment limits
based on the greater of
annual income and net
worth, unless securities
will be listed on a
national securities
exchange
Form 1-A, including two years of audited financial statements Annual, semi-annual, current, and exit reports No Yes
Rule 504 of Regulation D $10 million Permitted in limited circumstances Excludes blank check companies, Exchange Act reporting companies, and investment companies “Bad actor” disqualifications apply None Form D Yes. Restricted securities except in limited circumstances No
Regulation Crowdfunding; Section 4(a)(6) $5 million Testing the waters permitted before Form C is filed Permitted with limits on advertising after Form C is filed Offering must be conducted on an internet platform through a registered intermediary Excludes non-U.S. issuers, blank check companies, Exchange Act reporting companies, and investment companies “Bad actor” disqualifications apply No investment limits for accredited investors Non-accredited investors are subject to investment limits based on the greater of annual income and net worth Form C, including two years of financial statements that are certified, reviewed or audited, as required Progress and annual reports 12-month resale limitations Yes
Intrastate: Section 3(a)(11) No Federal limit (generally, individual State limits between $1 and $5 million) Offerees must be instate residents. In-state residents “doing business” and incorporated in-state; excludes registered investment companies Offerees and purchasers must be instate residents None Securities must come to rest with in-state residents No
Intrastate: Rule 147 No Federal limit (generally, individual State limits between $1 and $5 million) Offerees must be instate residents. In-state residents “doing business” and incorporated in-state; excludes registered investment companies Offerees and purchasers must be instate residents None Yes. Resales must be within State for six months No
Intrastate: Rule 147A No Federal limit (generally, individual State limits between $1 and $5 million) Yes In-state residents and “doing business” instate; excludes registered investment companies Purchasers must be instate residents None Yes. Resales must be within State for six months No

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