SEC Approves Rules to Modernize and Simplify Exempt Offerings (2023)

On November 2, 2020, the Securities and Exchange Commission ("SEC") passed amendments ("Amendments") to certain rules under the Securities Act of 1933, as amended ("Securities Act"), intended, among other things, to close loopholes in to close the law and reduce complexity in the context of an exempt offering that could impede access to capital for issuers and thus limit investment opportunities, while preserving or enhancing investor protection. The changes affect many types of exempt offerings, including offerings conducted under Regulation D and Regulation S. Below we highlight certain changes that may be of particular concern to our customers who regularly make offerings under these exemptions. Changes take effect 60 days after publication in the Federal Register.

Background

Regulation D consists of a set of rules that provide various exceptions to the Securities Act's registration requirements. Rule 506(b) of Regulation D is a non-exclusive safe harbor under section 4(a)(2) of the Securities Act under which an issuer may offer and sell an unlimited number of securities, provided that the offers are made without the use of general solicitation or general advertising and sales are made only to authorized investors and up to 35 non-accredited investors who meet the standard of investment sophistication. Another non-exclusive safe harbor, Rule 506(c) of Regulation D is essentially the same as Rule 506(b), except that (1) offers may be made by general solicitation or general advertising and (2) all purchasers of the offers must be authorized investor, and the issuer must take reasonable steps to verify the status of the authorized investor. Rule 506(c) provides a principles-based method for verifying Authorized Investor status, as well as a non-exclusive list of verification methods that issuers may use, but are not required to use, when attempting to meet verification requirements with regard to individuals. Offers under Rule 506(b) and Rule 506(c) must comply with a number of other terms and conditions set forth in Regulation D, including the requirements in Rule 502(a) related to integration (discussed below).

Regulation S provides a safe haven for registration under the Securities Act for offers and sales outside the United States. Rule 903 of Regulation S requires, among other things, that (i) the offer or sale is made in an "offshore transaction" and (ii) that the issuer or distributor does not engage in "directed sales efforts" in the United States, of its subsidiaries , or any person acting on behalf of any of the above. "Directed sales efforts" are generally defined as any activity undertaken for the purpose of, or which could reasonably be expected to have the effect of, conditioning a market in the United States for securities offered under Regulation S .

The existing Rule 502(a) provides that "offers and sales made more than six months before the commencement of a Regulation D offering or more than six months after the completion of a Regulation D offering shall not be considered part of that Regulation D offering, unless during these six month periods there are no offers or sales of securities by or for the issuer that are of the same or similar class to those being offered or sold under Regulation D... The existing Rule 502(a) includes five factors to consider in determining whether offers and sales should be integrated for the purposes of the Regulation D exemption. In addition, in enacting Regulation S, the SEC stated that “[offshore transactions conducted under Regulation S will not be integrated with registered domestic offerings or domestic offerings that qualify for an exemption from registration under the Securities Act." As described above, offerings that are exempt from registration under the Securities Act under Rule 506(b), Rule 506(c) and Regulation S must meet a number of conditions that vary depending on the exemption claimed. If two offers based on different exemptions were to be integrated, the integrated offer may no longer qualify for either of the exemptions because the integrated offer may not meet the conditions of any exemption.

Changes to the Integration Framework

The amendments include important changes to Article 152, which will replace the current integration framework. New rule 152(a) sets out the general principle of integration, and new rule 152(b) provides four new safe harbors for integration. The new rule includes an anti-circumvention provision that states that the provisions of the rule will not have the effect of avoiding integration for transactions or series of transactions that, while technically compliant, are part of a plan or plan to registration requirements of the Securities Act.

1. Principles of Integration

The general principle of integration under the new Rule 152(a) applies to all offers and sales of securities that do not fall within one of the four safe harbors set out in the new Rule 152(b). New Rule 152(a) provides that offers and sales will not be integrated if, based on certain facts and circumstances, the issuer can determine that each offer meets the registration requirements of the Securities Act or that an exemption from registration is available for a special offer. This Fact and Circumstances Analysis is a codification of the SEC's earlier guidance first issued in 2007 in the context of concurrently registered and private offerings, and extends it to other contexts. New Rule 152 replaces the traditional five-factor test found in existing Rule 502(a), which has been amended to refer simply to new Rule 152. New Rule 152(a)(1) provides that for an exempt offering that prohibits general solicitations offers and sales will not be integrated with other offers if the issuer, based on the facts and circumstances, reasonably believes that with respect to a purchaser in an exempt offer that prohibits general solicitation, the issuer (or any person on behalf of the issuer) or (i) has not solicited that buyer by general invitation or (ii) has established a substantial relationship with that buyer prior to the commencement of the offering. The acceptance notice states that under the integration principle in the new Rule 152(a), an issuer may make simultaneous offers on Rule 506(b) and Rule 506(c) without integration issues, as long as the provisions of the new Rule 152( a) )(1 ) and all other conditions of applicable exemptions are met. However, the Acceptance Statement cautions that a blanket solicitation permitted in connection with a single offer that states the material terms of a concurrent or subsequent exempt offer that prohibits blanket solicitation may constitute an offer for a concurrent or subsequent exempt offer that general solicitation and thereby violates the general solicitation prohibition to collect offers with respect to that concurrent or subsequent offering that prohibits the general collection of offers. As a result of this caution, issuers may, in certain circumstances, prefer to rely on the safe harbor of Rule 152(b) rather than the general wording of Rule 152(a). In addition, the Acceptance Notice warns that an issuer may not participate in a general invitation under Rule 506(c) and subsequently sell to investors in a Rule 506(b) offering unless the issuer has solicited purchases under of the offer under Rule 506(b) by using a common reference used in a Rule 506(c) offer, or the issuer has established a substantial relationship with such purchaser prior to the entry into force of Rule 506(b). ) offer.

2. Safe harbor integration

New Rule 152(b) lists the following four non-exclusive safe harbors for integration: (i) any offer made more than 30 calendar days before the commencement of any other offer, or more than 30 calendar days after the completion or completion of any other offering will not be integrated with such other offering; provided that, for an exempted offering that does not allow general solicitation until 30 calendar days or more after an offering that allows general solicitation, the provisions of Rule 152(a)(1) (discussed above) apply, (ii ) the offers and sales made pursuant to Rule 701, under an employee benefit plan or Regulation S under the Securities Act, will not be integrated with other offerings, (iii) registered offers made after terminated or completed offerings for which general invitations are not permitted (or after certain discontinued or completed offerings that allow general collection) will not be integrated, and (iv) offers and sales made under an exemption that allow general collection will not be integrated if made after a discontinued or completed offer. Below we highlight certain aspects of the first two safe harbors and the fourth safe harbor.

• 30 days safe haven. As discussed above, the existing Rule 502(a) provides a safe haven from integration for offerings outside the six-month period. New Rule 152(b)(1) shortens this six-month period to ensure that offers made more than 30 calendar days apart are not included, provided the offer is an exempt offer for which general invitations are prohibited (e.g., Rule 506(b) an offer) that follows 30 calendar days or more after an offer that permits a general offer (e.g., an offer under Rule 506(c),), the provisions of Rule 152(a) (1) applicable. such factual pattern requires the issuer to have a reasonable belief, based on the facts and circumstances, that with respect to a purchaser in an exempt offer that prohibits general solicitation (i.e., a Rule 506(b) offer), the issuer Institution (or any person acting on its behalf) (i) has not solicited that buyer by general invitation or (ii) has established a substantial relationship with that buyer before the start of the offer. The SEC states in the Acceptance Release that waiting less than 30 days after the termination or completion of an offering before commencing a subsequent offering would not necessarily result in incorporation, provided the terms of the general principle of incorporation in Rule 152 (a) become known. The amendments include the new Rule 152(d), which provides that the termination of an offer is deemed to have occurred when the issuer and its agents cease attempting to make further offers in such offer to sell the securities of the issuer. institution, and includes a non-exclusive list of factors to be considered when the offering is considered terminated or completed. New Rule 152(d) provides that an offer made pursuant to Regulation D is deemed to be terminated or completed on the latest date on which (i) the issuer has entered into a binding undertaking to sell all securities to be sold pursuant to the offer ( subject only to conditions beyond the investor's control); or (ii) the issuer and its agents have ceased making further offers to sell the issuer's securities under such offer.
• Regulation S Safe harbour. New Rule 152(b)(2) codifies the SEC's long-standing position, as discussed above, that simultaneous offshore offerings conducted under Regulation S are not currently and will not be integrated with registered domestic offerings or domestic offers made pursuant to any exception. . The acceptance notice states that in determining the availability of this safe harbor it will still be necessary to review each transaction for compliance with Regulation S and the terms of the other exemption. In proposing this safe harbor, the SEC also proposed changes to the definition of “directed sales efforts” in Rule 902(c) and proposed Rule 906 under Regulation S to address perceived concerns about whether Regulation S and Rule 506 can be enforced simultaneously (c). ) offers, especially if the offers are made over the Internet, or that general solicitation activities in connection with a Rule 506(c) offer would be considered a "targeted selling effort" under the current Rule 902(c) under Regulation S. Commentators argued that the existing regulatory framework adequately addresses such concerns and commentators expressed concerns that the proposed changes would disrupt existing market practices, the SEC decided not to adopt these proposed changes to Regulation S. However, to address the noted concerns of some commentators, the SEC states in the Adoption Release that it does not believe the general activity of soliciting exempt domestic offerings would preclude reliance on Regulation S for simultaneous offshore offerings. The SEC also states that it is aware that issuers have made domestic exempt or registered offerings concurrently with Regulation S offerings under existing SEC guidance, and that compliance with the terms of Regulation S and other applicable exemptions, such as Rule 506 (c), depend on the facts and circumstances of a particular situation. The acceptance notice states that using the same website to solicit US Rule 506(c) investors and offshore Regulation S investors, for example, could raise concerns about the issuer's compliance with the Regulation S prohibition on targeted sales because the provision of material on the website could be considered to have a market-conditioning effect in the United States. In such situations, the notice of acceptance states that the issuer may take certain steps to distinguish between Regulation S and domestic material offerings.
• Safe haven for offers or sales that precede exempt offers that allow general invites. New rule 152(b)(4) provides a safe haven for exemption-based offers and sales that allow generalized collection if such offers and sales are made after a terminated or completed offer. Importantly, the Statement of Acceptance provides guidance on how an issuer can rely on the new Rule 152(b)(4) if, for example, it initiated an offering under Rule 506(b) and then made a general solicitation based on of Rule 506. (C). ), so long as the issuer, after making a general request, relies on Rule 506(c) for all subsequent sales, effectively terminating the Rule 506(b) offering, including selling only to authorized investors and taking reasonable steps to establish the authorized investor status of each client. The clearance release states that the use of a general increase under Rule 506(c) will not affect the exempt status of previous offers and sales of securities made under Rule 506(b). Further, an issuer need not use different offering materials for offerings that rely on different exemptions, so long as the issuer complies with the disclosure and other requirements of each applicable exemption.

A new method of verifying the authorized investor

As noted above, Rule 506(c) permits issuers to engage in general solicitation and advertising, provided that (i) all purchasers in the offering are accredited investors, (ii) the issuer takes reasonable steps to confirm that the buyers are accredited investors, and (iii) certain other conditions in Rule D are met. Rule 506(c) provides a principles-based method for verifying Authorized Investor status, as well as a non-exclusive list of verification methods that issuers may use in meeting the verification requirement with respect to individuals. The changes include a new verification safe harbor that allows an issuer to determine that an investor for whom the issuer has previously taken reasonable steps to verify as an Authorized Investor remains an Authorized Investor from the time of the subsequent sale, if the investor provides a written statement to the contrary, and the issuer is unaware of any information to the contrary. As an amendment to the proposed rule in response to commenter feedback, the new Rule 506(c)(2)(ii)(E) includes a time limit on an issuer's ability to rely on prior verification. As a result, a written statement made under this method of verification will satisfy the issuer's obligation to verify the person's authorized investor status for a period of five years from the date the person was previously verified as an authorized investor.

While the SEC has not passed any additional changes to expand the list of verification methods, the Adoption Release reaffirms and updates the SEC's previous guidance regarding a principles-based method for verifying accredited investors and what may be considered " reasonable steps' to establish the status of an authorized investor, to address concerns that regulators or other market participants may question an issuer's screening method, regardless of the analysis the issuer has performed in making the decision, and to encourage more issuers to rely on additional screening methods tailored to their specific facts and circumstances. The Adoption Release states that the purpose of the principles-based method is to provide issuers with significant flexibility in deciding the steps necessary to verify qualified investor status and to avoid being required to follow unified verification methods that may be inappropriate or unnecessary for a business. particular offer or purchaser in light of the facts and circumstances. Indeed, the Adoption Release states that the SEC believes that in some circumstances the determination of "reasonable steps" need not be materially different from the development by the issuer of "reasonable belief" within the meaning of Rule 506(b) ). For example, the Statement of Acceptance states that an issuer's receipt of a statement from an investor regarding his or her accredited status may satisfy the requirement of reasonable steps if the issuer takes reasonable account of the investor's prior factual relationship or other facts that ensure that the investor is accredited. status clear. The acceptance notice also states that the same statement may not meet the reasonableness of action requirement if the issuer has no other available information about the investor or has information that does not support the belief that the investor was an authorized investor. The SEC warns issuers that it still believes an issuer is not deemed to have taken reasonable steps to verify the status of an accredited investor if it, or those acting on its behalf, merely require someone to tick a box on a questionnaire. or sign a form, without any other information about the client indicating the status of an authorized investor.

The entire publication, including footnotes, is availablehere.