SEC Updates Reg CF, Reg A+ with new rules and higher limits

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During an open meeting of the Securities and Exchange Commission (SEC), the Commission authorized updates to the excluded offering community that are created to improve accessibility to capital, increase access for investors while maintaining current investor protection criteria.

In a party-line vote, the Commission accepted brand-new regulations that enhance Reg CF financing to $5 million, from present $1.07 million, as well as Reg A+, Tier II offerings to $75 million, from existing $50 million.

Regulation 504 of Reg D saw its optimum funding cap raised to $10 million from $5 million.

Additional improvements including testing the waters, special purpose vehicles (SPVs) for Reg CF offerings made the cut in a process that started long ago but were officially engaged by the present commission when it was revealed that a testimonial of the excluded offering ecosystem would certainly be conducted.

In his remarks SEC Chairman Jay Clayton specified that today’s step would certainly “harmonize, simplify and improve various structural and procedural aspects of our exempt offering framework.”

The recommended amendments reflect a comprehensive, retrospective review of a framework that has, over time, unfortunately, become difficult to navigate, for both investors and businesses, particularly smaller and medium-sized businesses. Some have referred to it as a “patchwork” – I will explain this in a bit more detail later. Today’s amendments would rationalize that framework, increase efficiency, and facilitate capital formation, while preserving or enhancing important investor protections,” said Chair Clayton.

Today’s amendments would justify that structure, increase effectiveness, and also assist in resources formation, while preserving or improving essential capitalist securities.”These businesses and their prospective investors must navigate a system of multiple exemptions and safe harbors, each with different requirements. While each component in this patchwork system makes some sense in isolation, collectively, there is substantial room for improvement. The staff has identified various costly and unnecessary frictions and uncertainties and crafted amendments that address those inefficiencies in the context of a more rational framework that will facilitate capital formation for small and medium-sized businesses and benefit investors for years to come.”

Commissioners Hester Peirce and Elad Roisman sustained the rule changes. Commissioner Peirce stated they require to do more for smaller sized companies, the drivers of funding development.

“We have to do a better job of getting capital to businesses,” said Commissioner Peirce. “I view today’s work on harmonizing, simplifying, and improving the exemptive framework to be a positive step, but we have more work to do to ensure that small- and medium-sized businesses all across the country can raise capital in a way that works for them, supports economic growth, and is consistent with investor protection.

Commissioners Caroline Crenshaw as well as Allison Herren Lee both stressed that additional opening of personal markets will indicate that retail investors will certainly be subjected to investment possibilities with greater risk.

The 3-2 ballot made certain the rules were adopted as Chair Clayton accompanied Commissioners Roisman as well as Peirce in backing the action.

“These changes are a reflection of how far this industry has come since 2016. Regulation Crowdfunding has had a fundamentally positive impact for thousands of local economies and small businesses across the country, and with these changes, we are optimistic that these positive impact will accelerate much more. So many people and companies have worked so hard over the years to prove that Regulation Crowdfunding can be a sustainable force for good, and we are grateful that the Commission recognized this potential and worked so hard to advance a thoughtful framework. The SEC has always been viewed as the global thought leader on how to strengthen capital markets — with these changes, it has made an incredible statement that the democratization of private capital markets accesible to everyone is truly an important and worthwhile goal to pursue and protect.”

Reg. CF has actually had an essentially positive influence for hundreds of local economic situations and also small companies, and with these updates, we are confident that these positive effect will certainly speed up a lot more. Doug Ellenoff, of the law office of Ellenoff, Grossman & Schole, a longtime Fintech advocate stated the changes announced will certainly help make crowdfunding sustainable.

“Once again the SEC must be recognized for listening to the Association of Online Investment Platform’s RE questions and advancing proposed rules that are necessary to further advance the crowdfunding industry. Increasing the maximum amount that can be raised through the Regulation Crowdfunding exemption is the single most important issue that has been needed to attract more and better quality issuers and to provide online investment platform with fees to scale up their operations. The other proposals are important for other reasons and in the aggregate will enhance the industry’s viability for the future.” The SEC should definitely be acknowledged for advancing proposed regulations that are necessary to make Reg. CF more viable.

Under Chairman Clayton, the SEC has actually been extremely positive in advertising financial access for local business as well as economic inclusion for retail investors. The harmonization rule is a perfect closure to his successful tenure at the Compensation

The updated guidelines, described below, will go into effect in January of 2021.

For Regulation Crowdfunding, the amendments:

  • raise the offering limit in Regulation Crowdfunding from $1.07 million to $5 million;
  • amend the investment limits for investors in Regulation Crowdfunding offerings by:
    • removing investment limits for accredited investors; and
    • using the greater of their annual income or net worth when calculating the investment limits for non-accredited investors; and
  • extend for 18 months the existing temporary relief providing an exemption from certain Regulation Crowdfunding financial statement review requirements for issuers offering $250,000 or less of securities in reliance on the exemption within a 12-month period.

    For Regulation A, the amendments:

    • raise the maximum offering amount under Tier 2 of Regulation A from $50 million to $75 million; and
    • raise the maximum offering amount for secondary sales under Tier 2 of Regulation A from $15 million to $22.5 million

“Test-the-Waters” and “Demo Day” Communications. The Commission is amending offering communications rules, by:

  • permitting an issuer to use generic solicitation of interest materials to “test-the-waters” for an exempt offer of securities prior to determining which exemption it will use for the sale of the securities;
  • permitting Regulation Crowdfunding issuers to “test-the-waters” prior to filing an offering document with the Commission in a manner similar to current Regulation A; and
  • providing that certain “demo day” communications will not be deemed general solicitation or general advertising.

Regulation Crowdfunding and Regulation A Eligibility. The amendments establish rules that permit the use of certain special purpose vehicles that function as a conduit for investors to facilitate investing in Regulation Crowdfunding issuers. The amendments additionally impose eligibility restrictions on the use of Regulation A by issuers that are delinquent in their Exchange Act reporting obligations.

Other Improvements to Specific Exemptions. The amendments also:

  • change the financial information that must be provided to non-accredited investors in Rule 506(b) private placements to align with the financial information that issuers must provide to investors in Regulation A offerings;
  • add a new item to the non-exclusive list of verification methods in Rule 506(c);
  • simplify certain requirements for Regulation A offerings and establish greater consistency between Regulation A and registered offerings; and
  • harmonize the bad actor disqualification provisions in Regulation D, Regulation A, and Regulation Crowdfunding.