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SEC Proposed Rule Changes For Exempt Offerings – Part 1

On March 4, 2020, the SEC published proposed rule changes to harmonize, simplify and improve the exempt offering framework.  The SEC had originally issued a concept release and request for public comment on the subject in June 2019 (see HERE).  The proposed rule changes indicate that the SEC has been listening to capital markets participants and is supporting increased access to private offerings for both businesses and a larger class of investors.  Together with the proposed amendments to the accredited investor definition (see HERE), the new rules could have as much of an impact on the capital markets as the JOBS Act has had since its enactment in 2012.

The June concept release sought public comments on: (i) whether the exemptive framework as a whole is effective for both companies and investors; (ii) ways to improve, harmonize and streamline the exemptions; (iii) whether there are gaps in the regulations making it difficult for smaller companies to raise capital;

SEC Adopts New Rule To Expand Testing The Waters For All Companies

The SEC has adopted final rules allowing all issuers to test the waters prior to the effectiveness of a registration statement in a public offering.  The proposed rules were published in February of this year (see HERE). The final rules are largely the same as proposed.  The rule change is designed to encourage more companies to go public.  Although it will help in this regard, a much larger expansion of testing the waters, allowing unlimited testing the waters (subject to anti-fraud of course) for all registered offerings under $50 million, would go far to improve the floundering small cap IPO market.

Prior to the rule change, only emerging growth companies (“EGCs”) (or companies engaging in a Regulation A offering) could test the waters in advance of a public offering of securities.  The proposal implements a new Securities Act Rule 163B.  For an in-depth analysis of testing the waters and communications during an offering process, see my two-part blog HERE

When Can Separate Issuer Offerings That Occur Within a Short Time Be Integrated?

The integration doctrine prevents issuers from circumventing the registration requirements of the Securities Act of 1934 by determining whether two or more securities offerings are really one offering that does not qualify as an exempt offering, or an exempt offering is really part of a registered public offering.

Securities Act Release No. 33-4552 (November 6, 1962) sets forth a five factor test that is used as a guideline in determining whether the separate offerings of an issuer that occur within a short time of one another will be integrated. These same factors are set forth in the Note to Rule 502(a) of Regulation D, which factors address whether the offerings:

  1. are part of a single plan of financing;
  2. involve the issuance of the same class of securities (convertible securities, warrants, and other
  3. derivative instruments generally are deemed to be the same class as the underlying security unless the terms of the primary security prohibit exercises until at least the one
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