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Multiple Changes To Private Offering Compliance And Disclosure Interpretations (C&DI)

The SEC has been fine-tuning its Compliance and Disclosure Interpretations (C&DI), making multiple amendments, additions and deletions on September 20, 2017. The SEC made revisions to reflect changes to Rules 147 and 504, the repeal of Rule 505, as well as numerous non-substantive revisions throughout the C&DI to update for current rules and statutory references. Likewise, several C&DI have been removed that did not accurately reflect current rules.

On October 26, 2016, the SEC passed new rules to modernize intrastate and regional securities offerings. The final new rules amended Rule 147 to reform the rules and allow companies to continue to offer securities under Section 3(a)(11) of the Securities Act of 1933 (“Securities Act”). The SEC created a new Rule 147A to accommodate adopted state intrastate crowdfunding provisions. New Rule 147A allows intrastate offerings to access out-of-state residents and companies that are incorporated out of state, but that conduct business in the state in which the offering is being conducted. In addition, the SEC amended Rule 504 of Regulation D to increase the aggregate offering amount from $1 million to $5 million and to add bad-actor disqualifications from reliance on the rule. Finally, the SEC repealed the rarely used and now redundant Rule 505 of Regulation D.

Amended Rule 147 and new Rule 147A took effect on April 20, 2017. Amended Rule 504 took effect on January 20, 2017, and the repeal of Rule 505 was effective May 22, 2017. For a review of the rule changes, see my blog HERE.

This blog summarizes the substantive changes in the C&DI. Non-substantive changes were made to twenty-two C&DI, which the SEC marked with an asterisk (*) to indicate that they had been modified.

Regulation D

The SEC has made multiple changes to the C&DI related to Regulation D.

Rule 503Filing of Notice of Sales (Form D)

Rule 503 sets forth the requirements related to the filing of a Form D, notice of sales, with the SEC when completing an offering in reliance on Regulation D, including Rules 504 and 506.  In 2009, the SEC issued a C&DI (Question 257.07) confirming that the filing of a Form D is not a condition to the availability of the exemptions under Rules 504 and 506.

All offers and sales of securities must comply with both federal and state securities laws, unless federal law specifically pre-empts state law compliance. The National Securities Markets Improvement Act of 1996 (“NSMIA”) amended Section 18 of the Securities Act to pre-empt state blue sky review of specified securities and offerings. The pre-empted securities are called “covered securities.” For more information on the NSMIA, see HERE and HERE.

The new C&DI (Question 257.08) bolsters the comfort level for issuers that fail to file a Form D (hopefully inadvertently) by confirming that the failure to file a Form D does not effect the Section 18 “covered security” status of securities issued under a Rule 506 offering.

Rule 504 – Exemption for Limited Offerings and Sales of Securities Not Exceeding $5 Million

The SEC has issued three new and withdrawn one C&DI related to Rule 504. Rule 504 provides an exemption from registration for offers and sales up to $5 million in securities in any twelve-month period. The purpose of Rule 504 is to assist small businesses in raising seed capital by allowing offers and sales of securities to an unlimited number of persons regardless of their level of sophistication – provided, however, that the offerings remain subject to the federal anti-fraud provisions; furthermore, general solicitation and advertising is prohibited unless sales are limited to accredited investors.

Rule 504, like Regulation A, is unavailable to companies that are subject to the reporting requirements of the Securities Exchange Act, are investment companies or are blank-check companies. Rule 144 has bad actor disqualification provisions matching those provisions in Rule 506. For more information on bad actor disqualification provisions, see HERE.

Rule 504 offerings do not pre-empt state law and are, in essence, a deferral to the states for small offerings. Rule 504 prohibits the use of general solicitation and advertising unless the offering is made (i) exclusively in one or more states that provide for the registration of the securities and public filing and delivery of a disclosure document; or (ii) in one or more states that piggyback on the registration of the securities in another state and they are so registered in another state; or (iii) exclusively according to a state law exemption that permits general solicitation and advertising so long as sales are made only to accredited investors (i.e., a state version of the federal 506(c) exemption).

The SEC has consistently viewed exempt offerings that involve general solicitation as public offerings. Accordingly, where a Rule 504 offering involves general solicitation or advertising, it would be considered a public offering.

One new C&DI (Question 258.03) confirms that a private fund which relies on either the Section 3(c)(1) or 3(c)(7) exemption from registration under the Investment Company Act of 1940 would not be able to make a public Rule 504 offering. The Investment Company Act exemptions in Sections 3(c)(1) and 3(c)(7) are not available to funds that conduct public offerings.  If a private fund made a “public offering” of its securities, that private fund would no longer be able to rely on the applicable exclusion under Section 3(c)(1) or (7) and thus would be required to be registered under the Investment Company Act, unless another exclusion or exemption is available.

In the same C&DI, the SEC notes that a private fund could, however, rely on Rule 506(c) without losing its Investment Company Act exemption because Section 201(b)(2) specifically provides that offerings under Rule 506(c) are not considered “public offerings” under the federal securities laws. Interestingly, on November 17, 2016, the SEC issued a C&DI related to the integration of a 506(b) offering with a new 506(c) offering. Relying on Securities Act Rule 152, the SEC concluded that the two offerings would not integrate because the subsequent Rule 506(c) offering would be considered a “public offering.” See my blog HERE.

In new Question 258.05, the SEC confirms that the example for calculating aggregate offering price found in the instructions to Rule 504 does not contemplate integration of multiple offerings. Withdrawn Question 258.04 had also dealt with the calculation of the aggregate offering price.

In new Question 258.06, the SEC addresses the compliance date for the new Rule 504 bad actor disqualifications. That is, Rule 504 is not available to any issuer that is subject to disqualification under Rule 506(d) on or after January 20, 2017. On or after this date, issuers must determine if they are subject to bad actor disqualification any time they are offering or selling securities in reliance on Rule 504.

Rule 505

C&DI Questions 259.01 through 259.05 and 659.01 relating to Rule 505 have all been withdrawn consistent with the withdrawal of the Rule 505 exemption effective May 22, 2017.

Rule 506Exemption for Limited Offers and Sales Without Regard to Dollar Amount of Offering

Rule 506(b) allows offers and sales to an unlimited number of accredited investors and up to 35 unaccredited investors, provided however that if any unaccredited investors are included in the offering, certain delineated disclosures, including an audited balance sheet and financial statements, are provided to potential investors. Rule 506(b) prohibits the use of any general solicitation or advertising in association with the offering. Rule 506(c) requires that all sales be strictly made to accredited investors and adds a burden of verifying such accredited status to the issuing company.

The SEC did not add any new C&DI on Rule 506 but did withdraw Question 260.02, which had addressed the now outdated preclusion of general solicitation or advertising for any Rule 506 offering.

Rule 147

For a complete summary of Rule 147, see HERE. The SEC has each added one and deleted one C&DI related to determining residence of a trust.

Section 3(a)(11) of the Securities Act of 1933, as amended (Securities Act) provides an exemption from the registration requirements of Section 5 for “[A]ny security which is a part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within or, if a corporation, incorporated by and doing business within, such State or Territory.” Section 3(a)(11) is often referred to as the Intrastate Exemption.  Rule 147, as amended is a safe harbor under Section 3(a)(11) of the Securities Act.

Rule 147 defines the residence of a purchaser that is a legal entity, such as a corporation or trust, as the location where, at the time of the sale, it has its principal place of business. The Rule specifies that if a trust is not a separate legal entity, it is deemed to be a resident of each state or territory in which its trustee is, or trustees are, resident.

The added C&DI (541.03) provides that where a family trust is not a separate legal entity and has two trustees residing in two separate states, an issuer may offer and sell securities to the trust, in reliance on Rule 147, as long as the Rule 147 offering is being conducted in one of the states in which a trustee resides.

The deleted C&DI (541.02) had provided that a trust could not be offered securities where the trust had a non-resident beneficiary that held a 50% interest in the trust.

The Author
Laura Anthony, Esq.
Founding Partner
Anthony L.G., PLLC
A Corporate Law Firm

Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC has served clients providing fast, personalized, cutting-edge legal service.  The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including siting on the board of directors of the American Red Cross for Palm Beach and Martin Counties, and providing financial support to the Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others. She is also a financial and hands-on supporter of Palm Beach Day Academy, one of Palm Beach’s oldest and most respected educational institutions. She currently resides in Palm Beach with her husband and daughter.

Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.

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