On Nov. 2, 2020, the U.S. Securities and Exchange Commission (SEC) adopted final rules to “simplify, harmonize, and improve” the current exempt offering framework
for the benefit of investors, emerging companies and more seasoned issuers.
The final rules adopted by the SEC are largely similar to the
proposed rules issued in March 2020, with a few exceptions.
Background and Purpose of Amendments
The Securities Act of 1933, as amended (Securities Act), and applicable SEC regulations require that any securities offering be
registered under the Securities Act unless the offering qualifies for an
exemption from registration. Private companies, entrepreneurs and investors
often use one or more exemptions from registration requirements to raise
capital for new businesses or to fund business growth. According to the
SEC’s press release, these newly amended rules are intended to “harmonize, simplify, and
improve the multilayer and overly complex exempt offering framework” and
“promote capital formation and expand investment opportunities while
preserving or improving important investor protections.”
The amended rules become effective 60 days after publication in the Federal
Register, except for the extension of the temporary relief Regulation
Crowdfunding provisions, which will be effective upon publication in the
Integration Framework (Safe Harbor Provisions)
The SEC replaced the existing integration framework, including the
five-factor test in Rule 502(a) of the Securities Act, with a new
comprehensive integration framework comprised of a general principle of integration and four safe harbor provisions applicable
to all securities offerings under the Securities Act. The new integration
framework is set forth in new Securities Act Rule 152. To harmonize and
simplify the integration framework, all other integration provisions of the
Securities Act will be removed and replaced with a cross-reference to the
integration and safe harbor rules of Rule 152.
The general principle of integration in new Rule 152(a) looks to the
particular facts and circumstances of each offering, and applies when the
new safe harbor provisions under Rule 152(b) are not applicable.
Specifically, the general principle provides that offers and sales will be
integrated if, based on the particular facts and circumstances, the issuer
can show that each offering either complies with the registration
requirements of the Securities Act or is exempt from registration.
For issuers considering the application of the general principle to an
exempt offering that prohibits general solicitation and one or more other
offerings, new Rule 152(a)(1) requires that the issuer have a reasonable
belief with respect to each purchaser in the exempt offering prohibiting
general solicitation that either (i) the issuer did not solicit the
purchaser through use of general solicitation, or (ii) the issuer
established a substantive relationship with the purchaser before the exempt
In the context of two or more concurrent offerings, each relying on an
exemption from Securities Act registration that permits general
solicitation, new Rule 152(a)(2) clarifies that an issuer’s general
solicitation offering materials for one offering that includes information
about the material terms of the concurrent offering under another
exemption, may constitute an “offer” of securities in such other offering,
and therefore, the offer must comply with all the terms and conditions for
the exemption being relied on for such other offering.
New Rule 152(b) provides four nonexclusive safe harbors in which offerings
will not be integrated:
- Any offering made 30 days before the commencement of any other offering
or 30 days after the termination or completion of any other offering will
not be integrated with such other offering. However, in the case of an
exempt offering for which general solicitation is not permitted that
follows 30 calendar days or more after an offering that allows general
solicitation, the provisions of Rule 152(a)(1) apply.
- Offers and sales made in compliance with Regulation S or Securities Act
Rule 701, pursuant to an employee benefit program, will not be integrated
with other offerings.
- An offering for which a registration statement under the Securities Act
has been filed will not be integrated if it is made after (i) a terminated
or completed offering for which general solicitation is not permitted; (ii)
a terminated or completed offering for which general solicitation is
permitted made only to qualified institutional buyers and institutional
accredited investors; or (iii) an offering for which general solicitation
is permitted that terminated or completed more than 30 calendar days before
commencement of the registered offering.
- Offers and sales made in reliance on an exemption in which general
solicitation is permitted will not be integrated if made subsequent to any
terminated or completed offering.
The safe harbors apply to both offerings for which a registration statement
has been filed under the Securities Act and exempt offerings.
To further clarify when the safe harbors apply, new Rule 152 provides
factors to consider for determining when an offering has “commenced,”
“terminated” or been “completed.”
The final rules also amend Rule 506(b) to limit the number of
non-accredited investors purchasing in Rule 506(b) offerings to no more
than 35 within a 90 calendar day period. This change is intended to prevent issuers from undertaking serial
Rule 506(b) exempt offerings each month permitting up to 35 non-accredited
investors in each offering in reliance on the 30-day safe harbor.
Increase in Offering and Investment Limits in Various Exempt Offerings
The amended rules increase offering and investment limits as follows:
- The Tier 2 Regulation A maximum offering amount will increase from $50
million to $75 million, and the maximum offering amount for secondary sales
will increase from $15 million to $22.5 million.
- The Rule 504 maximum offering amount will increase from $5 million to $10
- The Regulation Crowdfunding offering limit will increase from $1.07
million to $5 million. Plus, amendments to the investment limits for
investors in Regulation Crowdfunding offerings:
- remove investment limits for accredited investors; and
- change the method of calculating the investment limits for non-accredited
investors to use the greater of their annual income or net worth.
Covered Security Status
To clarify that securities issued under Regulation Crowdfunding are
“covered securities” within the meaning of the Securities Act and are not
subject to state securities law registration and qualification
requirements, a new Rule 504 was added to Regulation Crowdfunding to
confirm that purchasers in a Regulation Crowdfunding offering are
“qualified purchasers” for purposes of Section 18(b)(3) of the Securities
Extension of Relief for Financial Statement Review
The amended rules extend for 18 months the existing temporary relief
provided for certain Regulation Crowdfunding financial statement review
requirements for issuers offering a target amount of more than $107,000 but
no more than $250,000 of securities in reliance on the exemption within a
12-month period. These issuers may provide financial statements and certain
information from the issuers’ federal income tax returns, both certified by
the issuer’s principal executive officer, rather than financial statements
reviewed by an independent public accountant that would otherwise be
required under the rules. This temporary relief will apply only if reviewed
or audited financial statements of the issuer are not otherwise available.
Section 4A(f)(3) of the Securities Act prohibits investment companies, as
defined in the Investment Company Act of 1940, as amended (Investment Company Act), or companies that are excluded from the definition of an investment company
under section 3(b) or 3(c) of the Investment Company Act, from using the
Regulation Crowdfunding exemption. As a result, investors purchasing
securities in an offering under Regulation Crowdfunding may not invest
through a special purpose vehicle, which can create certain practical
impediments for issuers using Regulation Crowdfunding, such as unwieldy and
lengthy stockholder lists.
To address these impediments, the final rules adopted a number of changes
related to limited-purpose crowdfunding vehicles. The final rules amend the
definition of “investment company” under Rule 3a-9 of the Investment
Company Act to exclude crowdfunding vehicles that meet certain conditions
designed to require that they function as a conduit for investors to invest
in a business seeking to raise capital through a crowdfunding vehicle.
These conditions require, among other things, that the crowdfunding vehicle
be organized and operated for the sole purpose of directly acquiring,
holding and disposing of securities issued by a single crowdfunding issuer,
and raising capital in one or more offerings made in compliance with
Regulation Crowdfunding. Consistent with the crowdfunding vehicle’s purpose
as a conduit, the amended rules will require the crowdfunding vehicle to
redeem or offer to repurchase its securities if there is a liquidity event
applicable to the crowdfunding issuer since its reason for existence will
cease on the occurrence of such liquidity event.
The amended rules consider crowdfunding vehicles and crowdfunding issuers
to be co-issuers and will generally require that they jointly file the Form
C. A crowdfunding issuer may file its own Form C if it is separately
offering securities both through a crowdfunding vehicle and directly to
Demo Day Exemption From General Solicitation
“Demo days” and similar events are generally organized by a group or entity
(such as a university, angel investors, an accelerator or an incubator)
that invites issuers to present their businesses to potential investors,
with the aim of securing investment. New Securities Act Rule 148 provides
that communications in connection with a “demo day” will not be deemed
general solicitation or general advertising as long as certain conditions
are met, including that more than one issuer participates in the event, and
that the event is sponsored by a college, university or other institution
of higher education; a state or local government (or instrumentality
thereof); a nonprofit organization; or an angel investor group, incubator
or accelerator. In addition, no advertisement for the event may reference a
specific offering of securities by the issuer, and the sponsor of the event
- make investment recommendations or provide investment advice to attendees
of the event;
- engage in any investment negotiations between the issuer and investors
attending the event;
- charge attendees of the event any fees, other than reasonable
- receive any compensation for making introductions between event attendees
and issuers, or for investment negotiations between the parties; or
- receive any compensation with respect to the event that would require it
to register as a broker or dealer under the Securities Exchange Act of 1934, as amended (Exchange Act), or as an investment adviser under the Investment Advisers Act of 1940,
The issuer is only permitted to notify demo day attendees of the following:
- that the issuer is in the process of offering or planning to offer
the type and amount of securities being offered;
- the intended use of the proceeds of the offering; and
the unsubscribed amount in an offering.
In addition, if the event allows attendees to participate virtually, new
Rule 148 restricts online participation in the event to (i) individuals who
are members of, or otherwise associated with, the sponsor organization;
(ii) individuals the sponsor believes to be accredited investors; and (iii)
individuals who were invited to the event by the sponsor based on industry
or investment-related experience reasonably selected by the sponsor in good
faith, and disclosed in the public communications about the event.
Testing the Waters
Generic Solicitation of Interest Exemption
The new rules create an offering exemption that will permit issuers, and
those communicating on their behalf, to use generic solicitation of interest materials to determine level of interest in a contemplated offering of
securities exempt from registration under the Securities Act, before making
a determination as to the particular exemption from registration under
which the offering will be conducted, as long as certain conditions are
met. Under this new Securities Act Rule 24, the testing-the-waters material
must state all of the following:
- The issuer is considering an offering of securities exempt from
registration under the Securities Act, but has not determined a specific
exemption from registration the issuer intends to rely on for the
subsequent offer and sale of the securities.
- No money or other consideration is being solicited, and if sent in
response, will not be accepted.
- No offer to buy the securities can be accepted and no part of the
purchase price can be received until the issuer determines the exemption
under which the offering is intended to be conducted and, where applicable,
the filing, disclosure or qualification requirements of such exemption are
- A person’s indication of interest involves no obligation or commitment of
No solicitation or acceptance of money or other consideration, nor of any
commitment, binding or otherwise, from any person will be permitted until
the issuer makes a determination as to the exemption to be relied on and
the offering has commenced.
The SEC also adopted amendments to Regulation A and Regulation Crowdfunding
to require that the Rule 241 generic solicitation materials be made
publicly available as an exhibit to the offering materials filed with the
SEC if a Regulation A or Regulation Crowdfunding offering is commenced
within 30 days of the generic solicitation of interest.
Similar to new Rule 241, new Securities Act Rule 206 allows Regulation
Crowdfunding issuers to test the waters with prospective investors before
filing the Form C; however, all generic solicitation materials must later
be filed in conjunction with the Form C. Crowdfunding issuers are also
required to include a legend on testing-the-waters materials, stating all
of the following:
- No money or other consideration is being solicited, and if sent, will not
- No offer to buy the securities can be accepted and no part of the
purchase price can be received until the offering statement is filed and
only through an intermediary’s platform.
- A prospective purchaser’s indication of interest is nonbinding.
The final rules also allow issuers to communicate orally with potential
investors after filing the Form C so long as the issuer complies with
amended Rule 204. Among the changes to Rule 204 is an expansion of the
information that issuers may provide to prospective investors in accordance
with Rule 204, including (i) a brief description of the planned use of the
proceeds of the offering, and (ii) information on the issuer’s progress
toward meeting its funding. In addition, an issuer may now provide
information about the terms of an offering under Regulation Crowdfunding,
in the offering materials for a concurrent offering without violating Rule
204, so long as the information provided about the Regulation Crowdfunding
offering is made in compliance with Rule 204.
Accredited Investor Verification Method
Rule 506(c) permits issuers to generally solicit and advertise an offering,
provided that all purchasers in the offering are accredited investors, the
issuer takes reasonable steps to verify that purchasers are accredited
investors, and certain other conditions in Regulation D are satisfied. Rule
506(c) provides a principles-based method for verification of accredited
investor status as well as a nonexclusive list of verification methods. The
final rules allow an issuer to rely on a prior verification of accredited
investor status for an investor to establish that the investor remains an
accredited investor at the time of a subsequent sale as long as the
investor provides a written representation stating that the investor
continues to qualify as an accredited investor, and the issuer is not aware
of information to the contrary. There is a five-year time limit on the
issuer’s ability to rely on the prior verification.
The final rules also reaffirm and update the SEC’s prior guidance with
respect to the principles-based method for verification of accredited
investor status, and what may be considered “reasonable steps” to verify an
investor’s accredited investor status. The SEC staff cautioned issuers that
it continues to believe that an issuer will not be considered to have taken
reasonable steps to verify accredited investor status if it requires only
that a person check a box in a questionnaire or sign a form, absent other
information about the purchaser indicating accredited investor status.
Financial Statement Requirements in Rule 506(b) Offerings
The amended rules 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. Specifically, for Rule 506(b) offerings up to $20
million, the requirement for audited financial statements will be the same
as the financial statement requirements applicable to Tier 1 Regulation A
offerings. For Rule 506(b) offerings greater than $20 million, issuers will
be required to provide audited financial statements and comply with
Regulation S-X requirements similar to those applicable to Tier 2
Regulation A offerings.
Confidential Information Standard for Exhibit Filings
The current rule requiring registrants to file material contracts as
exhibits to their disclosure documents with the SEC, permits registrants to
redact provisions or terms of exhibits required to be filed if those
provisions or terms both (i) are not material, and (ii) would likely cause
competitive harm to the registrant if publicly disclosed. This “competitive
harm” requirement was patterned on the standard then being used by the U.S.
Circuit Court of Appeals for the District of Columbia relating to what was
confidential under Exemption 4 of the Freedom of Information Act. In June
2019, the U.S. Supreme Court rejected the Circuit Court’s longstanding test
for determining what was confidential under Exemption 4 and adopted a new
definition of “confidential” that does not include a competitive harm
requirement. The Supreme Court stated that “[a]t least where commercial or
financial information is both customarily and actually treated as private
by its owner and provided to the government under an assurance of privacy,
the information is ‘confidential’ within the meaning of Exemption 4.”
The amended rules adjust the exhibit filing requirements under Regulation
S-K and in various forms to remove the competitive harm requirement and
replace it with a standard more closely aligned with the Supreme Court’s
definition of “confidential.” Under the new standard, information may be
redacted from material contracts if it is the type of information the
issuer both customarily and actually treats as private and confidential,
and if the information is also not material.
Simplification of Disclosure Requirements in Regulation A Offerings
The amended rules extend to Regulation A issuers certain accommodations
presently available to reporting companies. Regulation A issuers will now
have the option to file redacted material contracts and plans of
acquisition, reorganization, arrangement, liquidation or succession without
applying for confidential treatment, consistent with the recent amendments
to Regulation S-K. The amended rules also will allow Regulation A issuers
to redact information in any exhibit listed in Item 17 of Form 1-A that
“would constitute a clearly unwarranted invasion of personal privacy,” such
as home addresses, bank account numbers and social security numbers.
In addition, to further harmonize and simplify the process of publicly
filing previously nonpublic Regulation A offering statements, amendments
and SEC correspondence, Regulation A issuers will now be able to use EDGAR
to make these documents available to the public using the same process as
issuers conducting a registered offering, instead of submitting them as
exhibits to an offering statement as required under the old Regulation A
Also under the amended rules, (i) issuers may incorporate by reference
previously filed financial statements into their Regulation A offering
statements if they satisfy criteria similar to the requirement in
connection with Form S-1; and (ii) the SEC may declare
as abandoned a particular post-qualification amendment to a Regulation
A offering statement, consistent with the rule applicable to registered offerings.
Regulation A Eligibility
Under the existing rules, Regulation A includes an eligibility requirement
that an issuer conducting a Regulation A offering must have filed with the
SEC all reports required to be filed, if any, pursuant to Rule 257 during
the two years before the filing of the offering statement (or for such
shorter period that the issuer was required to file such reports). However, because Exchange Act registrants are not required to
file reports pursuant to Rule 257, the existing eligibility provision does
not expressly require those registrants to have filed their Exchange Act
reports in order to rely on Regulation A. Under the amended rules, issuers
that fail to comply with the Exchange Act reporting requirements in a
two-year period preceding the filing of an offering statement are
ineligible to conduct a Regulation A offering. By adopting this limitation,
the amended rules hold Exchange Act reporting companies to the same
standard as repeat Regulation A issuers.
Bad Actor Disqualification (Look-Back Period)
Bad actors are disqualified from using Regulation A, Regulation D and
Regulation Crowdfunding to offer and sell securities. In order to harmonize
the disqualification provisions across the exempt offering framework, the
amended rules will make the disqualification look-back period the same for
participants in each of these exempt offerings — both from the time of
filing of the offering document and from the time of sale (except there
will be no change to the disqualification look-back period for covered
beneficial owners under Regulation A and Regulation Crowdfunding).
For a more detailed account and explanation of the adopted changes, please
see the final rules.
Next Steps for Potential Issuers
These new rules should provide more flexibility for issuers and simplify
capital formation through exempt offerings. Some of the steps companies
relying on these amended exemptions may consider include the following:
- When initiating a securities offering, consider the revised offering and
investment limits, preliminary communications and filing requirements that
may make it easier and more cost-effective to raise capital through an
exempt securities offerings.
- Structure exempt offerings to occur more than 30 days apart or otherwise
within the new safe harbors provided in Rule 152, or otherwise analyze
integration issues under the new general principle of integration.
- Reassess participation in demo days and confirm that the sponsor and
issuer conduct the demo day within the new safe harbor.
- Check applicable state blue sky laws to make sure there is also a state
law exemption for any contemplated test-the-water solicitations.
- Change how redactions of material contracts filed with the SEC are
evaluated to the new confidentiality standard based on whether the
information is customarily and actually treated as private and confidential
and whether it also is not material.
- Evaluate whether use of a limited purpose crowdfunding vehicle might be
helpful in any future Regulation Crowdfunding offering.
- Consider whether the new safe harbor for verification of accredited
investor status based on previous verification within a five-year period
would make a Rule 506(c) offering a more viable option for raising capital.
- Update questionnaires and other covered person materials used in
connection with an exempt offering in light of the new “bad actors”
- Remember to redact personally identifiable information, such as home
addresses and bank account and social security numbers, from filings with
For additional guidance on the information in this alert, please contact
any of the authors of this alert, any member of McGuireWoods’
securities compliance team or your primary McGuireWoods contact.
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