Important Amendments Made to Offerings by the SEC

SEC Nov 16, 2020

On November 2nd, 2020, the SEC voted to approve several amendments to the crowdfunding rules for individual investors.

The changes, which include raising the amount that can be raised under various exemptions, serve to benefit non-institutional investors. The announcement was made via press release on the SEC's website.

Specifically, the press release starts off stating:

"The Securities and Exchange Commission today voted to amend its rules in order to harmonize, simplify, and improve the multilayer and overly complex exempt offering framework. These amendments will promote capital formation and expand investment opportunities while preserving or improving important investor protections."

The press release goes on to admit that, "The registration process generally is designed for larger companies with substantial resources." It also acknowledges that there are a significant number of legitimate businesses and entrepreneurs that would like to remain in compliance with the SEC but are simply unable to do so due to the complex web of rules, requirements, hurdles and hoops that companies must go to in order to gain compliance with the SEC.

The proposed amendments that the SEC approved were as follows:

  • "Establish more clearly, in one broadly applicable rule, the ability of issuers to move from one exemption to another"
  • "Increase the offering limits for Regulation A, Regulation Crowdfunding, and Rule 504 offerings, and revise certain individual investment limits"
  • "Set clear and consistent rules governing certain offering communications, including permitting certain 'test-the-waters and 'demo day' activities"
  • "Harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions"

Looking into the 'Test the Waters' Provision

One of the more understated, yet important amendments approved by the SEC was their 'test the waters' provision.

For those that do not know, this provision refers to the act of announcing that one is planning or 'considering' a fundraise. This act, in itself, can trigger a number of technicalities among the older SEC provisions.

Namely:

  1. Prior to September 2019, only investors that were pursuing Regulation A exempt offerings were allowed to engage in 'testing the waters' among U.S. investors. Those looking to host a fundraise outside of the Reg A exempt fundraise were limited with regards to how they could 'test the waters'.
  2. In an amendment to the 'test-the-waters' provision approved September 26th, 2019, the SEC declared, "Under the new rule, all issuers will be allowed to gauge market interest in a possible initial public offering or other registered securities offering through discussions with certain institutional investors prior to, or following, the filing of a registration statement." Before this provision, certain offerings were required to file with the SEC within X number of days from the filing of their registration statement.

It appears that we have the Obama administration to thank for at least the prior provision, since the SEC press release specifically attributes this change in their stance to the 'test-the-waters' provisions.

The press release states specifically that:

"The final rule benefits form the staff's experience with the test-the-waters accommodation that has been available to EGCs since the Jumpstart Our Business Startups Act (JOBS Act)"

- statement from SEC Chairman Jay Clayton

Following this statement, the press release further clarifies its stance, asserting:

"The new rule is one of several SEC initiatives that build on JOBS Act provisions intended to encourage companies to access our public markets."

Back to the New Amendments Approved by the SEC

If you're looking for a more granular description of the amendments passed by the SEC, then the best reference would be the pdf of proposed amendments (which are now approved) from the SEC, which were published March 2020.

These most recent amendments to the SEC's securities regulations also appear to be a product of the JOBS Act (and perhaps the increasing tenuousness of the U.S. economical outlook as the COVID pandemic rages on with seemingly no end in sight).

In the opening paragraph, the proposal provides the core motivation behind its creation, stating:

"Over the years ,and particularly since Congress passed the Jumpstart Our Business Startups Act of 2012, the Commission has introduced, expanded, or otherwise revised a number of exemptions from registration. The proposed amendments seek to address gaps and complexities int he exempt offering framework that may impede access to investment opportunities for investors and access to capital for issuers."

It appears that the submissions from users ended up being successful because the changes that were finalized by the SEC at the top of this month (November 2nd, 2020), have created a dramatically different landscape for any and all entities looking to raise funds for their business ventures.

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