Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets

Federal RegisterMar 31, 2020

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 227, 229, 230, 239, 249, 270, and 274

[Release Nos. 33-10763; 34-88321; File No. S7-05-20]

RIN 3235-AM27

Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets

AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rule.

SUMMARY:

The Securities and Exchange Commission is proposing amendments to facilitate capital formation and increase opportunities for investors by expanding access to capital for entrepreneurs across the United States. Specifically, the proposed amendments would simplify, harmonize, and improve certain aspects of the exempt offering framework to promote capital formation while preserving or enhancing important investor protections. 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 in the exempt offering framework that may impede access to investment opportunities for investors and access to capital for issuers.

DATES:

Comments should be received on or before June 1, 2020.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's internet comment form (

https://www.sec.gov/rules/proposed.shtml

); or

• Send an email to

rule-comments@sec.gov.

Please include File Number S7-05-20 on the subject line.

Paper Comments

• Send paper comments to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-05-20. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method of submission. The Commission will post all comments on the Commission's website (

http://www.sec.gov/rules/proposed.shtml

). Comments also are available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly.

We or the staff may add studies, memoranda, or other substantive items to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on our website. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at

www.sec.gov

to receive notifications by email.

FOR FURTHER INFORMATION CONTACT:

Anthony Barone or John Byrne, Special Counsel, Office of Small Business Policy, or Steven G. Hearne, Senior Special Counsel, Office of Rulemaking, at (202) 551-3460, Division of Corporation Finance; Lawrence Pace or Benjamin Kalish, Senior Counsel, at (202) 551-6792, Division of Investment Management; U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

We are proposing to amend or add the following rules and forms:

Commission reference

CFR citation

(17 CFR)

Regulation Crowdfunding:

Rule 100 through 503

§§ 227.100 through 227.503.

Rule 100

§ 227.100.

Rule 201

§ 227.201.

Rule 204

§ 227.204.

Rule 206

§ 227.206.

Rule 503

§ 227.503.

Securities Act of 1933 (Securities Act):

Rule 147

§ 230.147.

Rule 147A

§ 230.147A.

Rule 148

§ 230.148.

Rule 152

§ 230.152.

Rule 155

§ 230.155.

Rule 241

§ 230.241.

Regulation A:

Rule 251 through 263

§§ 230.251 through 230.263.

Rule 251

§ 230.251.

Rule 255

§ 230.255.

Rule 259

§ 230.259.

Rule 262

§ 230.262.

Regulation D:

Rule 501 through 508

§§ 230.501 through 230.508.

Rule 502

§ 230.502.

Rule 504

§ 230.504.

Rule 506

§ 230.506.

Regulation S:

Rule 901 through 905

§§ 230.901 through 230.905.

Rule 902

§ 230.902.

Rule 906

§ 230.906.

Regulation S-K:

Item 10 through 1305

§§ 229.10 through 229.1305.

Item 601

§ 229.601.

Form S-6

§ 239.16.

Form N-14

§ 239.23.

Form 1-A

§ 239.90.

Form C

§ 239.900.

Securities Exchange Act of 1934 (Exchange Act):

Form 20-F

§ 249.200f.

Form 8-K

§ 249.308.

Investment Company Act of 1940 (Investment Company Act):

Rule 3a-9

§ 270.3a-9.

Form N-8B-2

§ 274.12.

Securities Act and Investment Company Act:

Form N-1A

§§ 239.15A and 274.11A.

Form N-2

§§ 239.14 and 274.11a-1.

Form N-3

§§ 239.17a and 274.11b.

Form N-4

§§ 239.17b and 274.11c.

Form N-5

§§ 239.24 and 274.5.

Form N-6

§§ 239.17c and 274.11d.

Table of Contents

15 U.S.C. 77a

et seq.

15 U.S.C. 78a

et seq.

15 U.S.C. 80a-1

et seq.

I. Introduction

A. Background

B. Overview of Current Exemptions

1. Regulation D

2. Regulation A

3. Regulation Crowdfunding

4. Rule 147 and Rule 147A

II. Discussion of Proposed Amendments

A. Integration

1. Integration Principles

a. General Principle of Integration

b. Application of the General Principle of Integration

2. Integration Safe Harbors

3. Conforming Amendments to Securities Act Exemptions

B. General Solicitation and Offering Communications

1. Exemption From General Solicitation for “Demo Days” and Similar Events

2. Solicitations of Interest

3. Other Regulation Crowdfunding Offering Communications

C. Rule 506(c) Verification Requirements

D. Harmonization of Disclosure Requirements

1. Rule 502(b) of Regulation D

2. Confidential Information Standard

3. Proposed Amendments To Simplify Compliance With Regulation A

E. Offering and Investment Limits

1. Regulation A

2. Rule 504

3. Regulation Crowdfunding

F. Regulation Crowdfunding and Regulation A Eligibility

1. Regulation Crowdfunding Eligible Issuers

2. Regulation Crowdfunding Eligible Securities

3. Regulation A Eligibility Restrictions for Delinquent Exchange Act Filers

G. Bad Actor Disqualification Provisions

III. General Request for Comment

IV. Economic Analysis

A. Broad Economic Considerations

B. Baseline

C. Economic Effects of the Proposed Amendments

1. Integration

2. General Solicitation and Offering Communications

3. Rule 506(c) Verification Requirements

4. Disclosure Requirements

5. Offering and Investment Limits

6. Eligibility Requirements in Regulation Crowdfunding and Regulation A

7. Bad Actor Disqualification Provisions

V. Paperwork Reduction Act

A. Summary of the Collection of Information

B. Summary of the Effects on the Collections of Information

C. Incremental and Aggregate Burden and Cost Estimates

VI. Small Business Regulatory Enforcement Fairness Act

VII. Initial Regulatory Flexibility Analysis

A. Reasons for, and Objectives of, the Proposed Action

B. Legal Basis

C. Small Entities Subject to the Proposed Rules

D. Projected Reporting, Recordkeeping and Other Compliance Requirements

E. Duplicative, Overlapping, or Conflicting Federal Rules

F. Significant Alternatives

G. Request for Comment

Statutory Authority and Text of Proposed Rule Amendments

I. Introduction

A. Background

The Securities Act requires that every offer

and sale of securities be registered with the Securities and Exchange Commission (the “Commission”), unless an exemption from registration is available. In various circumstances, registration is not necessary, nor is it the most effective means, to achieve the objectives of the Securities Act or the Commission's mission more broadly. In recognition of the fact that registration is not always necessary or appropriate, the Securities Act contains a number of exemptions from its registration requirement and the Commission is authorized to adopt additional exemptions. As an example, emerging companies—from early-stage start-ups seeking seed capital to companies that are on a path to become a public reporting company—may use the exempt offering rules to access critical capital needed to grow and scale. Our dynamic markets benefit from a robust pipeline of new companies—supported by the exempt offering framework—that can one day join the public markets. The exempt offering framework also supports the capital needs of many small and medium-sized companies that contribute substantially to our economy but that are unlikely to become public companies due to their size, the nature of their capital needs, or other factors.

See

15 U.S.C. 77b(a)(3) (noting that an offer includes every attempt to dispose of a security or interest in a security, for value; or any solicitation of an offer to buy a security or interest in a security).

The scope of exempt offerings has evolved over time through Commission rules and legislative changes. Significantly, the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) greatly expanded the options to raise capital in exempt offerings.

Since then, the Fixing America's Surface Transportation Act of 2015 (the “FAST Act”)

and the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (the “Economic Growth Act”)

resulted in further expansions of, and revisions to, many of our exemptions.

The current exempt offering framework is complex and made up of differing requirements and conditions, which may be confusing and difficult for issuers, who bear the burden of demonstrating the availability of any exemption,

to navigate. Smaller companies, which may be more likely to rely on these exemptions given the initial and ongoing costs associated with conducting a registered offering and becoming a reporting company, may find the framework particularly difficult to navigate given their more limited resources.

Public Law 112-106, 126 Stat. 306 (2012). The JOBS Act, among other things: (1) Directed the Commission to revise Rule 506 to eliminate the prohibition against general solicitation or general advertising for offers and sales of securities to accredited investors (

See

Section 201(a)(1)); (2) added Section 4(a)(6) [15 U.S.C. 77d(a)(6)] and Section 4A [15 U.S.C. 77d-1(b)] to the Securities Act and directed the Commission to issue rules to permit certain crowdfunding offerings (

See

Section 302); and (3) directed the Commission to expand Regulation A (

See

Section 401).

Public Law 114-94, 129 Stat. 1312 (2015).

Public Law 115-174, 132 Stat. 1296 (2018).

The FAST Act added Section 4(a)(7) to the Securities Act [15 U.S.C. 77d(a)(7)], providing a new exemption for private resales of securities.

See

Section 76001. Among other changes, the Economic Growth Act required the Commission to amend Regulation A to permit entities subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act to use the exemption.

See

Section 508.

See SEC

Ralston Purina Co.

, 346 U.S. 119, 126 (1953) (“Keeping in mind the broadly remedial purposes of federal securities legislation, imposition of the burden of proof on an issuer who would plead the exemption seems to us fair and reasonable.”).

See, e.g.,

comments of Sara Hanks, CEO, CrowdCheck, at the 38th Annual SEC Government-Business Forum on Small Business Capital Formation (Aug. 14, 2019),

available at https://www.sec.gov/files/2019-sec-government-business-forum-small-business-capital-formation-transcript.pdf,

transcript at 132-135.

On June 18, 2019, the Commission issued a concept release that solicited public comment on possible ways to simplify, harmonize, and improve the exempt offering framework under the Securities Act to promote capital formation and expand investment opportunities while maintaining appropriate investor protections.

In the Concept Release, the Commission noted that the regulatory framework for exempt offerings has evolved, and the significance of the exempt securities markets has increased both in terms of the absolute amounts raised and relative to the public registered markets. In 2019, registered offerings accounted for $1.2 trillion (30.8 percent) of new capital, compared to approximately $2.7 trillion (69.2 percent) that we estimate was raised through exempt offerings.

Of the approximately $2.7 trillion estimated as raised in exempt offerings in 2019, Table 1 shows the amounts that we estimate were raised under each of the identified exemptions.

Concept Release on Harmonization of Securities Offering Exemptions, Release No. 33-10649 (June 18, 2019) [84 FR 30460 (June 26, 2019)] (“Concept Release”).

Unless otherwise indicated, information in this release on Regulation D, Regulation A, and Regulation Crowdfunding offerings is based on analyses by staff in the Commission's Division of Economic Risk and Analysis (“DERA”) of data collected from SEC filings.

See

Concept Release, at Section II.

“Other exempt offerings” includes Section 4(a)(2), Regulation S, and Rule 144A offerings. The data used to estimate the amounts raised in 2019 for other exempt offerings includes: (1) Offerings under Section 4(a)(2) of the Securities Act that were collected from Thomson Financial's SDC Platinum, which uses information from underwriters, issuer websites, and issuer Commission filings to compile its Private Issues database; (2) offerings under Regulation S that were collected from Thomson Financial's SDC Platinum service; and (3) resale offerings under Rule 144A that were collected from Thomson Financial SDC New Issues database, Dealogic, the Mergent database, and the Asset‐Backed Alert and Commercial Mortgage Alert publications, to further estimate the exempt offerings under Section 4(a)(2) and Regulation S. We include amounts sold in Rule 144A resale offerings because those securities are typically issued initially in a transaction under Section 4(a)(2) or Regulation S but generally are not included in the Section 4(a)(2) or Regulation S data identified above. These numbers are accurate only to the extent that these databases are able to collect such information and may understate the actual amount of capital raised under these offerings if issuers and underwriters do not make this data available. The data on Rule 144A debt offerings from Mergent is available only through the end of August 2019. We have extrapolated the data to obtain a full calendar year.

Table 1—Overview of Amounts Raised in the Exempt Market in 2019

Exemption

Amounts reported

or estimated as

raised in 2019

($ billion)

Rule 506(b) of Regulation D

$1,492

Rule 506(c) of Regulation D

Regulation A: Tier 1

0.044

Regulation A: Tier 2

0.998

Rule 504 of Regulation D

0.228

Regulation Crowdfunding

0.062

Other exempt offerings

1,167

The Commission requested comment on several possible approaches to amend the framework as a whole and to improve specific provisions of the existing exemptions.

While commenters voiced many perspectives on what changes would best serve the interests of emerging companies raising capital, as well as small and medium sized companies more generally, and the investors in those companies, a consistent theme in their comments was that many elements of the current structure work effectively and a major restructuring is not needed.

Many commenters suggested improvements to the less frequently used capital raising pathways to improve their efficacy.

Based on the comments received on the Concept Release, as well as other input from market participants,

we are proposing a set of amendments that would generally retain the current exempt offering structure and reduce potential friction points identified by commenters, which together are intended to facilitate capital formation while preserving and in some cases enhancing investor protections. We believe that these amendments would address gaps and complexities in the exempt offering framework and help provide viable alternatives to the dominant capital raising tools, such as offerings to accredited investors under Rule 506(b) of Regulation D, benefiting issuers and investors by creating an offering framework that is more consistent, transparent, and manageable, and that reflects the evolving capital needs of our markets.

Unless otherwise indicated, comments cited in this release are to comment letters received in response to the Concept Release, which are

available at https://www.sec.gov/comments/s7-08-19/s70819.htm.

See, e.g.,

letter from AngelList Advisors, LLC dated September 25, 2019 (“AngelList Letter”) (generally supporting the exempt offering framework); letter from CrowdCheck, Inc. dated October 30, 2019 (“CrowdCheck Letter”) (generally supporting Regulation A and Regulation Crowdfunding); and letter from Crowdfund Capital Advisors dated September 24, 2019 (“CCA Letter”) (generally supporting Regulation Crowdfunding).

See also

Recommendation of the SEC Small Business Capital Formation Advisory Committee regarding the exemptive offering framework (Dec. 13, 2019),

available at https://www.sec.gov/spotlight/sbcfac/recommendation-harmonization-general-principles.pdf

(“2019 Small Business Advisory Committee Recommendation on the Exemptive Offering Framework”) (stating that “[t]he elements of the current exempt offering framework that are functioning well should be maintained, and therefore, the Commission should `do no harm' to Rule 506(b) of Regulation D”); and Report of the 2019 SEC Government-Business Forum on Small Business Capital Formation (Dec. 2019),

available at https://www.sec.gov/files/small-business-forum-report-2019.pdf

(“2019 Forum Report”), at 4 (noting that panelists discussed the importance of maintaining the elements of the exempt framework that are functioning well for marketplace participants, such as the private placement exemption and Rule 506(b) safe harbor), and at 30 (quoting panelist Bart Dillashaw: “don't mess with 506(b) because there is this venture, angel, private investment role that seems to work pretty well, and certainly a lot of money is raised on it”).

See, e.g.,

comment letters discussed in Sections II.B.3, II.D.3.c, II.F and II.G.

See, e.g.,

2019 Forum Report (recommending that the Commission improve clarity and education through, among other things, the use of “consistent terms in exempt offering rules for ease of understanding” and “bright line rules and examples to provide clarity for investors, small businesses, and lawyers”); and 2019 Small Business Advisory Committee Recommendation on the Exemptive Offering Framework (recommending that the exempt framework should be amended to make it less complex for small businesses to raise capital).

We welcome feedback and encourage interested parties to submit comments on any or all aspects of the proposed rule amendments. When commenting, it would be most helpful if you include the reasoning behind your position or recommendation.

B. Overview of Current Exemptions

The Securities Act contains a number of exemptions from its registration requirements and authorizes the Commission to adopt additional exemptions. Most of these exemptions are based on characteristics of the securities themselves, though some exempted securities are identified based on the transaction in which they are offered or sold.

Section 4 of the Securities Act identifies transactions that are exempt from the registration requirements.

In addition, Section 28 of the Securities Act, which was added by the National Securities Markets Improvement Act of 1996 (“NSMIA”),

further authorizes the Commission to exempt other persons, securities, or transactions to the extent “necessary or appropriate in the public interest [and] consistent with the protection of investors.”

For example, Section 3(b)(1) of the Securities Act authorizes the Commission to exempt certain issues of securities where the aggregate amount offered does not exceed $5 million to the extent that “the enforcement of this title with respect to such securities is not necessary in the public interest and for the protection of investors by reason of the small amount involved or the limited character of the public offering.” 15 U.S.C. 77c(b)(1).

15 U.S.C. 77d.

Public Law 104-290, 110 Stat. 3416 (Oct. 11, 1996).

15 U.S.C. 77z-3.

Table 2 summarizes some of the characteristics of the most commonly used exemptions

from registration.

Commission rules also provide exemptions for certain offerings where the purpose of the offering is other than to raise capital. For example, 17 CFR 230.701 (“Rule 701”) exempts certain sales of securities made to compensate employees, consultants, and advisors.

Generally, Table 2 is organized by typical offering size from largest to smallest. The information in this table is not comprehensive and is intended only to highlight some of the more significant aspects of the current rules. Certain regulatory exemptions from registration are based on statutory provisions, but provide specific frameworks or safe harbors to comply with the statutory exemptions. For example, Rule 506(b) provides a safe harbor to comply with the exemption under Section 4(a)(2) [15 U.S.C. 77d(a)(2)], and Rule 147 provides a safe harbor under Section 3(a)(11) [15 U.S.C. 77c(a)(11)]. An issuer may choose not to avail itself of one of these specific regulatory exemptions and instead conduct an offering pursuant to the statutory exemption itself, such as Section 4(a)(2), following principles-based requirements that have been developed over time.

Table 2—Overview of Capital-Raising Exemptions

Type of offering

Offering limit within 12-month period

General solicitation

Issuer requirements

Investor requirements

SEC filing

requirements

Restrictions on resale

Preemption of state registration and qualification

Section 4(a)(2)

None

Transactions by an issuer not involving any public offering.

See SEC

Ralston Purina Co

None

Yes. Restricted securities

No.

Rule 506(b) of Regulation D

None

“Bad actor” disqualifications apply

Unlimited accredited investors. Up to 35 sophisticated but non-accredited investors

Form D

Yes. Restricted securities

Yes.

Rule 506(c) of Regulation D

None

Yes

“Bad actor” disqualifications apply

Unlimited accredited investors. Issuer must take reasonable steps to verify that all purchasers are accredited investors

Form D

Yes. Restricted securities

Yes.

Regulation A: Tier 1

$20 million

Permitted; before qualification, testing-the-waters permitted before and after the offering statement is filed

U.S. or Canadian issuers. Excludes blank check companies,* registered investment companies, business development companies, issuers of certain securities, and certain issuers subject to a Section 12(j) order. “Bad actor” disqualifications apply. No asset-backed securities

None

Form 1-A, including two years of financial statements. Exit report

No.

Regulation A: Tier 2

$50 million

Non-accredited investors are subject to investment limits based on the greater of annual income and net worth, unless securities will be listed on a national securities exchange

Form 1-A, including two years of audited financial statements. Annual, semi-annual, current, and exit reports

Yes.

Rule 504 of Regulation D

$5 million

Permitted in limited circumstances

Excludes blank check companies, Exchange Act reporting companies, and investment companies. “Bad actor” disqualifications apply

None

Form D

Yes. Restricted securities except in limited circumstances

No.

Regulation Crowdfunding; Section 4(a)(6)

$1.07 million

Permitted with limits on advertising after Form C is filed. Offering must be conducted on an internet platform through a registered intermediary

Excludes non-U.S. issuers, blank check companies, Exchange Act reporting companies, and investment companies. “Bad actor” disqualifications apply

Investment limits based on the lesser of annual income and net worth

Form C, including two years of financial statements that are certified, reviewed or audited, as required. Progress and annual reports

12-month resale limitations

Yes.

Intrastate: Section 3(a)(11)

No federal limit (generally, individual state limits between $1 and $5 million)

Offerees must be in-state residents

In-state residents “doing business” and incorporated in-state; excludes registered investment companies

Offerees and purchasers must be in-state residents

None

Securities must come to rest with in-state residents

No.

Intrastate: Rule 147

No federal limit (generally, individual state limits between $1 and $5 million)

Offerees must be in-state residents

In-state residents “doing business” and incorporated in-state; excludes registered investment companies

Offerees and purchasers must be in-state residents

None

Yes. Resales must be within state for six months

No.

Intrastate: Rule 147A

No federal limit (generally, individual state limits between $1 and $5 million)

Yes

In-state residents and “doing business” in-state; excludes registered investment companies

Purchasers must be in-state residents

None

Yes. Resales must be within state for six months

No.

* While the exemptions identified here as excluding blank check companies do not use the term “blank check company,” they exclude development stage issuers that have no specific business plan or purpose or have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies, which is substantially similar to the definition of blank check company in Securities Act Rule 419, used elsewhere in Commission rules.

See

17 CFR 230.419.

As Table 2 illustrates, the current exemptions impose a variety of conditions designed to protect investors, including both initial investors and those purchasing securities in the secondary market.

Exemptions tend to incorporate more investor protection measures where non-accredited or less sophisticated investors are permitted to participate in the offering.

Resales of securities issued in unregistered offerings are required to be registered under the Securities Act when no exemption from registration is available. When resale registration occurs, purchasers in the secondary market receive the disclosure and other benefits that accompany registration. In certain cases, including offers and sales pursuant to the Rule 144 safe harbor under Securities Act Section 4(a)(1), resales do not require registration. A key premise of the Rule 144 safe harbor is that once a restricted security has come to rest for a period of time in the hands of an investor who is at investment risk, that investor is deemed not to have purchased the securities with a view to distribution and would be deemed not to be an underwriter, after meeting Rule 144's holding period and other conditions, absent a scheme to avoid registration. Since adopting Rule 144, the Commission has shortened its holding periods several times. The staff is evaluating whether the current holding periods are sufficient to protect investors in certain circumstances, such as the sale of equity securities acquired on conversion of a debt security held for the applicable holding period where the conversion price has been structured so that the investor may not have meaningful investment risk during the holding period other than issuer bankruptcy.

1. Regulation D

Regulation D, adopted in 1982,

is a series of rules that sets forth three exemptions from the registration requirements of the Securities Act.

One exemption, Rule 506(b) of Regulation D, is a non-exclusive safe harbor under Section 4(a)(2) of the Securities Act pursuant to which an issuer may offer and sell an unlimited amount of securities, provided that offers are made without the use of general solicitation or general advertising and sales are made only to accredited investors and up to 35 non-accredited investors who meet an investment sophistication standard.

A second exemption, Rule 506(c) of Regulation D, provides an exemption without any limitation on offering amount pursuant to which offers may be made through general solicitation or general advertising, so long as the purchasers in the offering are limited to accredited investors and the issuer takes reasonable steps to verify their accredited investor status.

Revision of Certain Exemptions From Registration for Transactions Involving Limited Offers and Sales, Release No. 33-6389 (Mar. 8, 1982) [47 FR 11251 (Mar. 16, 1982)] (“Regulation D Adopting Release”).

Rules 500 through 503 of Regulation D contain the notes, definitions, terms, and conditions that apply generally throughout Regulation D. The exemptions and safe harbor of Regulation D are set forth in Rule 504, Rule 506(b), and Rule 506(c). Rule 507 of Regulation D is a provision that disqualifies issuers under certain circumstances from relying on Regulation D for failure to file a notice of sales on Form D. Rule 508 of Regulation D provides that certain insignificant deviations from a term, condition, or requirement of Regulation D will not necessarily result in the loss of a Regulation D exemption.

See

Rule 506(b)(2)(ii) (stating that each purchaser who is not an accredited investor either alone or with a purchaser representative has such knowledge and experience in financial and business matters that such purchaser is capable of evaluating the merits and risks of the prospective investment, or the issuer reasonably believes immediately prior to making any sale that such purchaser comes within that description).

The Commission adopted Rule 506(c) in 2013 to implement Section 201(a) of the JOBS Act.

See

Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings, Release No. 33-9415 (Jul. 10, 2013) [78 FR 44771 (Jul. 24, 2013)] (“Rule 506(c) Adopting Release”).

Offerings under both Rule 506(b) and Rule 506(c) must satisfy the conditions of:

• Rule 501 (definitions for the terms used in Regulation D);

• Rule 502(a) (integration);

• Rule 502(d) (limitations on resale); and

• Rule 506(d) (“bad actor” disqualification).

Offerings under Rule 506(b) must also satisfy the conditions of:

• Rule 502(b) (type of information to be furnished); and

• Rule 502(c) (limitations on the manner of offering).

A third exemption, Rule 504 of Regulation D, provides an exemption from registration under the Securities Act for the offer and sale of up to $5 million of securities in a 12-month period.

Rule 504 was adopted pursuant to the Commission's authority under Section 3(b)(1) of the Securities Act.

Prior to rule changes adopted by the Commission in 2016, the aggregate amount of securities that could be offered and sold in a 12-month period under Rule 504 was $1 million.

In general, issuers

relying on Rule 504 may not use general solicitation or advertising to market the securities, and purchasers in a Rule 504 offering will receive securities subject to the limitations on resale in Rule 502(d). However, Rule 502(c)'s limitation on manner of offering and Rule 502(d)'s resale limitations are inapplicable if the issuer offers and sells the securities in compliance with certain state registration requirements, public filing, and delivery requirements or, if sales are made only to accredited investors, according to state law exemptions from registration that permit general solicitation and general advertising.

Rule 504.

15 U.S.C. 77c(b)(1).

See

Exemptions to Facilitate Intrastate and Regional Securities Offerings, Release No. 33-10238 (Oct. 26, 2016) [81 FR 83494 (Nov. 21, 2016)] (“Intrastate and Regional Offerings Release”). The removal of Rule 505 was effective on May 22, 2017. Rule 505 was an exemption from Securities Act registration that had been available to both non-reporting and reporting companies so long as the aggregate offering amount did not exceed $5 million in a 12-month period and certain other conditions were met.

See

Rule 504(a) (disqualifying entities that are subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, investment companies, or blank check companies from issuing securities under Rule 504).

See

Rule 504(b)(1).

In 2019, issuers in the Regulation D market raised approximately $1.56 trillion (average proceeds of $25.4 million). The vast majority of capital raised in this market, approximately $1.5 trillion (average proceeds of $26.5 million), was raised under Rule 506(b). Out of the remaining amount, offerings under Rule 506(c) raised approximately $66 billion (average proceeds of $17 million) and offerings under Rule 504 raised approximately $228 million (average proceeds of $0.6 million).

2. Regulation A

Regulation A was originally adopted by the Commission in 1936 as an exemption for small issuances under the authority of Section 3(b) of the Securities Act.

Section 401 of the JOBS Act

amended Section 3(b) of the Securities Act by designating Section 3(b), the Commission's exemptive authority for offerings of up to $5 million, as Section 3(b)(1), and adding new Sections 3(b)(2) through 3(b)(5) to the Securities Act.

Section 3(b)(2) directed the Commission to adopt rules adding a class of securities exempt from the registration requirements of the Securities Act for offerings of up to $50 million of securities within a 12-month period. Sections 3(b)(2) through (5) specify certain terms and conditions for such exempt offerings and authorize the Commission to adopt other terms, conditions, or requirements as necessary in the public interest and for the protection of investors. In 2015, the Commission adopted final rules to implement Section 401 of the JOBS Act by creating two tiers of Regulation A offerings: Tier 1, for offerings of up to $20 million in a 12-month period; and Tier 2, for offerings of up to $50 million in a 12-month period.

In 2018, the Commission adopted further amendments to the issuer eligibility and related provisions pursuant to the Economic Growth Act to allow issuers that are subject to the ongoing reporting requirements of Section 13 or 15(d) of the Exchange Act to use the exemption.

Table 3 broadly summarizes the Commission requirements for each tier.

See

Release No. 33-632 (Jan. 21, 1936).

See

Sec. 401(a), Public Law 112-106, 126 Stat. 306 (Apr. 5, 2012).

See

15 U.S.C. 77c(b)(2) through (5).

See

Amendments for Small and Additional Issues Exemptions under the Securities Act (Regulation A), Release No. 33-9741 (March 25, 2015) [80 FR 21806 (Apr. 20, 2015)] (“2015 Regulation A Release”).

See

Amendments to Regulation A, Release No. 33-10591 (Dec. 19, 2018) [84 FR 520 (Jan. 31, 2019)] (“2018 Regulation A Release”).

Table 3—Overview of Regulation A Requirements

Tier 1

Tier 2

Issuer Requirements

U.S. or Canadian issuers; excludes blank check companies, registered investment companies, business development companies, issuers of certain securities, and certain issuers subject to a Section 12(j) order.

Offering Limit within a 12-month Period

$20 million

$50 million.

Offering Communications

Testing-the-waters permitted before and after the offering statement is filed.

Investor Limits

No limits

Non-accredited investors are subject to investment limits based on annual income and net worth, unless securities will be listed on a national securities exchange.

SEC Filing Requirements

Form 1-A filed with the Commission, including two years of financial statements (which may be unaudited)

Form 1-A filed with the Commission, including two years of audited financial statements.

Restrictions on Resale

No.

Disqualification Provisions

Felons and bad actors disqualified in accordance with Rule 262.

Preemption of State Registration and Qualification

Yes.

Ongoing Reporting

Exit report

due within 30 calendar days after termination or completion of an offering

Annual report

on Form 1-K due within 120 calendar days of issuer's fiscal year end;

Semi-annual report

on Form 1-SA due within 90 calendar days after the end of the first six months of issuer's fiscal year;

Current reports

on Form 1-U due within four business days of occurrence of one of the events specified in that form; and if applicable, an

exit report

on Form 1-Z to terminate an issuer's reporting obligations.

The Commission is required by Section 3(b)(5) of the Securities Act to review the Tier 2 offering limit every two years. In addition to revisiting the Tier 2 offering limit, the Commission stated in the 2015 Regulation A Release that the staff would undertake to review the Tier 1 offering limit at the same time.

The Commission also stated that the staff would study and submit a report to the Commission no later than five years following the adoption of the amendments on the impact of both Tier 1 and Tier 2 offerings on capital formation and investor protection.

The staff report on Regulation A, which includes additional detail on Regulation A, is discussed in Section II.E.1.

See

2015 Regulation A Release, at Section II.A.

See id.

The 2015 Regulation A Release stated that the report would include, but not be limited to, a review of: (1) The amount of capital raised under the amendments; (2) the number of issuances and amount raised by both Tier 1 and Tier 2 offerings; (3) the number of placement agents and brokers facilitating the Regulation A offerings; (4) the number of federal, state, or any other actions taken against issuers, placement agents, or brokers with respect to both Tier 1 and Tier 2 offerings; and (5) whether any additional investor protections are necessary for either Tier 1 or Tier 2.

From June 2015 through December 2019, issuers in the Regulation A market reported raising approximately $2.4 billion in 382 qualified offerings. The vast majority of capital raised under Regulation A, approximately $2.2 billion (90.6 percent), was raised under Tier 2, with only $230 million (9.4 percent) raised under Tier 1.

3. Regulation Crowdfunding

Title III of the JOBS Act added Securities Act Section 4(a)(6), which provides an exemption from registration for certain crowdfunding transactions.

To qualify for the exemption under Section 4(a)(6), transactions must meet a number of statutory requirements including limits on the amount an issuer may raise, limits on the amount an individual may invest and a requirement that the transactions be conducted through an intermediary that is registered as either a broker-dealer or a “funding portal.” In addition, Title III added Section 4A to the Securities Act, which requires, among other things, that issuers and intermediaries that facilitate transactions under Section 4(a)(6) provide certain specified information to investors and the Commission. Title III also mandated that the Commission establish bad actor provisions disqualifying certain issuers from availing themselves of the Section 4(a)(6) exemption and adopt rules to exempt from the registration requirements of Section 12(g), either conditionally or unconditionally, securities acquired pursuant to an offering under Section 4(a)(6). In 2015, to implement the requirements of Title III, the Commission adopted Regulation Crowdfunding, which became effective on May 16, 2016.

On March 31, 2017, the Commission adjusted for inflation certain thresholds in Regulation Crowdfunding, as required by Section 4A(h).

From May 2016 through December 2019, issuers in the Regulation Crowdfunding market reported raising approximately $170 million in 795 completed offerings (an average of approximately $0.21 million raised in each offering).

Crowdfunding generally refers to a method of capital raising in which an entity or individual raises funds via the internet from a large number of people typically making small individual contributions.

See

Crowdfunding, Release No. 33-9974 (Oct. 30, 2015) [80 FR 71387 (Nov. 16, 2015)] (“Crowdfunding Adopting Release”).

See

Inflation Adjustments and Other Technical Amendments under Titles I and III of the JOBS Act (Technical Amendments; Interpretation), Release No. 33-10332 (Mar. 31, 2017) [82 FR 17545 (Apr. 12, 2017)].

4. Rule 147 and Rule 147A

Rule 147 is considered a “safe harbor” under Section 3(a)(11) of the Securities Act and provides objective standards that an issuer can rely on to meet the

requirements of that exemption.

The Rule 147 safe harbor was intended to provide assurances that the intrastate offering exemption would be used for the purpose Congress intended in enacting Section 3(a)(11), namely the local financing of issuers by investors within the issuer's state or territory.

Under Rule 147, states retain the flexibility to adopt requirements that are consistent with their respective interests in facilitating capital formation and protecting their resident investors in intrastate securities offerings, including the authority to impose additional disclosure requirements for offers and sales made to persons within their state or territory, and the authority to limit the ability of certain bad actors to rely on applicable state exemptions.

See

Definitions and Clarification of Certain Conditions Regarding Intrastate Offering Exemption, Release No. 33-5450 (Jan. 7, 1974) [39 FR 2353 (Jan. 21, 1974)] (“Rule 147 Adopting Release”).

See also

“Part of an Issue,” “Person Resident,” and “Doing Business Within,” Release No. 33-5349 (Jan. 8, 1973) [38 FR 2468 (Jan. 26, 1973)].

See

Rule 147 Adopting Release.

See also

Intrastate and Regional Offerings Release.

See

Intrastate and Regional Offerings Release, at Section I.

Rule 147A is an intrastate offering exemption adopted by the Commission in 2016 that seeks to accommodate modern business practices and communications technology and provide an alternative means for smaller issuers to raise capital locally, including through offerings relying on intrastate crowdfunding provisions.

Rule 147A was adopted pursuant to the Commission's general exemptive authority under Section 28 of the Securities Act and therefore is not subject to the statutory limitations of Section 3(a)(11). Accordingly, Rule 147A has no restriction on offers, but requires that all sales be made only to residents of the issuer's state or territory to ensure the intrastate nature of the exemption. Rule 147A also does not require issuers to be incorporated or organized in the same state or territory where the offering occurs so long as issuers can demonstrate the in-state nature of their business. Consistent with Rule 147, states retain the flexibility to adopt requirements that are consistent with their respective interests in facilitating capital formation and protecting their resident investors in intrastate securities offerings, including the authority to impose additional disclosure requirements for offers and sales made to persons within their state or territory, or the authority to limit the ability of certain bad actors to rely on applicable state exemptions.

See

Intrastate and Regional Offerings Release.

Table 4 broadly summarizes the Commission requirements for each rule. We refer to “in-state” as the state or territory in which the issuer is resident and doing business at the time of the sale of the security.

Table 4—Overview of Rule 147 and Rule 147A Requirements

Requirements of

Rule 147

(safe harbor under

Section 3(a)(11))

Requirements of

Rule 147A

The issuer is organized in-state. (Rule 147(c)(1)(i))

✓

The officers, partners, or managers of the issuer primarily direct, control and coordinate the issuer's activities (“principal place of business”) in-state. (Rule 147(c)(1); and Rule 147A(c)(1))

✓

The issuer satisfies at least one of the “doing business” requirements. (Rule 147(c)(2); and Rule 147A(c)(2))

✓

Offers are limited to in-state residents or persons whom the issuer reasonably believes are in-state residents. (Rule 147(d))

✓

Sales are limited to in-state residents or persons whom the issuer reasonably believes are in-state residents. (Rule 147(d); and Rule 147A(d))

✓

The issuer obtains a written representation from each purchaser as to residency. (Rule 147(f)(1)(iii); and Rule 147A(f)(1)(iii))

✓

II. Discussion of Proposed Amendments

The proposed amendments are intended to address gaps and complexities in the exempt offering framework that may impede access to capital for issuers and thereby limit investment opportunities. More specifically, the amendments would:

• Address, in one broadly applicable rule, the ability of issuers to move from one exemption to another, and ultimately to a registered offering, providing more certainty to issuers raising capital;

• Provide greater certainty to issuers and protect investors by setting clear and consistent rules governing offering communications between investors and issuers;

• Address potential gaps and inconsistencies in our rules by increasing offering and investment limits based on our experience with the rules, marketplace practices, capital raising trends, and comments received; and

• Harmonize certain disclosure requirements and bad actor disqualification provisions to reduce differences between exemptions, while preserving or increasing investor protections.

A. Integration

We are proposing to modernize and simplify the Securities Act integration framework for registered and exempt offerings. This framework currently consists of a mixture of rules and Commission guidance for determining whether multiple securities transactions should be considered part of the same offering. As the number of exemptions from registration available to issuers has evolved over time through Commission rules and legislative changes, the integration framework has grown more complex. This complexity has allowed for regulatory uncertainty to develop, especially as issuers grow, and transition between utilizing types of exempt and registered offerings. The proposed amendments, discussed in Table 5 below, seek to improve the integration framework to allow an efficient path to capital formation, while preserving the investor protections in the exemptions from registration.

The Commission first articulated the integration concept in 1933 and further developed it in two interpretive releases issued in the 1960s.

The interpretive releases state that determining whether a particular securities offering should be integrated with another offering requires an analysis of the specific facts and circumstances of the offerings. The Commission identified five factors to consider in determining whether the offerings should be integrated. The five factors are whether: (1) The different offerings are part of a single plan of financing, (2) the offerings involve issuance of the same class of security, (3) the offerings are made at or about the same time, (4) the same type of consideration is to be received, and (5) the offerings are made for the same general purpose.

A common critique of this five factor analysis is that the Commission did not assign any specific weights to any of the five factors, nor indicate how many of the factors need to be present in order for there to be integration.

See

SEC Release No. 33-97 (Dec. 28, 1933); Section 3(a)(11) Exemption for Local Offerings, Release No. 33-4434 (Dec. 6, 1961) [26 FR 11896 (Dec, 13, 1961)] (“Section 3(a)(11) Release”); and Non-Public Offering Exemption, Release No. 33-4552 (Nov. 6, 1962) [27 FR 11316 (Nov. 16, 1962)] (“Non-Public Offering Exemption Release”).

See

Rule 502(a); Section 3(a)(11) Release; and Non-Public Offering Exemption Release.

See

Stanley Keller, Integration of Private and Public Offerings 2019 (March 2019) at page 6 (“The five factor test has not brought certainty to the area because its application is subjective and the staff has not provided definitive guidance as to what weight to give to the various factors or indeed how many of them have to be met.”).

See also

ABA Task Force Report on “Integration of Securities Offerings,” 41 Bus. Law. 595 (1986) (proposing an integration safe harbor rule to provide increased certainty).

In 1982, the Commission relied on the five factor test in establishing the framework used to determine whether two offerings that fall outside of the Rule 502(a) safe harbor should be integrated and treated as one offering.

Rule 506(b) of Regulation D is by far the most commonly used exemption from registration. As a result, application of the integration framework in Rule 502(a) tends to be the predominant means to analyze whether two offerings should be integrated if the exemption relied upon does not have its own specific integration provision. Notwithstanding the fact that Rule 502(a) only applies to Regulation D offerings, the integration framework in Rule 502(a) is often referred to when considering integration issues arising in other exempt offerings which do not have their own integration guidelines, such as Section 4(a)(2).

See

Regulation D Adopting Release.

In 2007 guidance, the Commission set forth a framework other than the five factor test for analyzing the integration of simultaneous registered and private offerings.

The Commission noted that the determination as to whether the filing of a registration statement should be considered to be a general solicitation or general advertising that would affect the availability of the Section 4(a)(2) exemption for a concurrent private placement should be based on a consideration of whether the investors in the private placement were solicited by the registration statement or through some other means that would not foreclose the availability of the Section 4(a)(2) exemption.

The Commission stated that issuers should analyze whether the offering is exempt under Section 4(a)(2) “on its own,” including whether securities were offered and sold to the private placement investors through the means of a general solicitation in the form of the registration statement.

See

Revisions of Limited Offering Exemptions in Regulation D, Release No. 33-8828 (Aug. 3, 2007) [72 FR 45116 (Aug. 10, 2007)] (“Regulation D Proposing Release”), at Section II.C.1.

Id.

The Commission provided the following examples: If an issuer files a registration statement and then seeks to offer and sell securities without registration to an investor who became interested in the purportedly private placement offering by means of the registration statement, then the Section 4(a)(2) exemption would not be available for that offering. If the prospective private placement investor became interested in the concurrent private placement through some means other than the registration statement that was consistent with Section 4(a)(2), such as through a substantive, pre-existing relationship with the issuer or direct contact by the issuer or its agents outside of the public offering effort, then the filing of the registration statement generally would not impact the potential availability of the Section 4(a)(2) exemption for that private placement and the private placement could be conducted while the registration statement for the public offering was on file with the Commission. Similarly, if the issuer is able to solicit interest in a concurrent private placement by contacting prospective investors who (1) were not identified or contacted through the marketing of the public offering and (2) did not independently contact the issuer as a result of the general solicitation by means of the registration statement, then the private placement could be conducted in accordance with Section 4(a)(2) while the registration statement for a separate public offering was pending.

More recently, in connection with the Regulation A and Regulation Crowdfunding rulemakings in 2015 and the Rule 147 and Rule 147A rulemaking in 2016, the Commission set forth a facts and circumstances integration framework in the context of concurrent exempt offerings. The facts and circumstances integration framework includes situations where one offering permits general solicitation and the other does not, as well as situations where both offerings rely on exemptions permitting general solicitation.

Under this analysis, where an integration safe harbor is not available, integration of concurrent or subsequent offers and sales of securities with any offering conducted under Regulation A, Regulation Crowdfunding, Rule 147, or Rule 147A will depend on the particular facts and circumstances, including whether each offering complies with the requirements of the exemption that is being relied on for the particular offering.

See

2015 Regulation A Release, at Section II.B.5; Crowdfunding Adopting Release, at Section II.A.1.c; and Intrastate and Regional Offerings Release, at Section II.B.5.

Commenters on the Concept Release generally supported clarifying and modernizing the existing integration standards.

One commenter suggested that the current approach to integration using the five factor test is “unnecessarily complex, and both issuers and investors would benefit from more clarity as to the scope of the integration doctrine, particularly in the context of Regulation D.”

Some commenters supported using the approach to integration in the Commission's recent rulemakings as the basis for a more comprehensive, general integration rule.

One of these

commenters explained that the approach to analyzing integration issues reflected in these recent rulemakings also “preserves the investor protections of each exemption” while providing issuers with more certainty in planning their offerings under “changing circumstances, markets and environments.”

Other commenters, as well as the 2016, 2017, and 2018 Government-Business Forums on Small Business Capital Formation (“Small Business Forums”), also recommended that the Commission provide additional clarity about the integration of exempt offerings in which general solicitation is permitted—such as Rule 506(c) offerings.

See, e.g.,

letter from Davis Polk & Wardwell LLP dated September 24, 2019 (“Davis Polk Letter”); letter from Dechert LLP dated September 24, 2019 (“Dechert Letter”); CrowdCheck Letter; letter from Securities Industry and Financial Markets Association dated September 24, 2019 (“SIFMA Letter”); and 2019 Small Business Advisory Committee Recommendation on the Exemptive Offering Framework (stating “Integration should be revised so that the exemptions can be better utilized.”).

But see

letter from Public Investors Advocate Bar Association dated September 24, 2019 (“PIABA Letter”) (positing that shortening the six month period in Rule 502(a) would “serve to promote” Ponzi schemes); and letter from North American Securities Administrators Association dated October 11, 2019 (“NASAA Letter”) (positing that “loosening” integration safe harbors would “increase the likelihood of regulatory arbitrage or create gaps in the investor protection landscape”).

See

letter from Center for Capital Markets Competitiveness dated September 24, 2019 (“CCMC Letter”) (indicating that the uncertainty surrounding the current integration doctrine creates a “barrier to companies seeking to raise capital”).

See, e.g.,

Davis Polk Letter (generally “welcom[ing] harmonizing exempt offerings with more bright-line rules,” while noting that “as long as each Exempt Offering complies with its applicable rules, effective deregulation should result in each offering standing on its own”); Dechert Letter; letter from Committee on Securities Regulation of the Business Law Section of the New York State Bar Association dated October 16, 2019 (“NYSBA Letter”); CrowdCheck Letter; letter from Federal Regulation of Securities Committee of the Business Law Section of the American Bar Association dated October 16, 2019 (“ABA Letter”); and CCMC Letter (supporting one integration doctrine along the lines of the analysis articulated in connection with Regulation A and Rules 147 and 147A.).

See

Dechert Letter.

See, e.g.,

Davis Polk Letter (noting that “the current language of Rule 152 does not provide an integration safe harbor for an issuer that conducts a Rule 506(c) offering and then subsequently engages in a registered offering”); Dechert Letter (suggesting that Rule 152 be amended to account for Rule 506(c)); and ABA Letter (supporting broadening Rule 152 so that it applies to offerings under Rule 506(b) and Rule 506(c)).

See also

Final Report of the 2016 SEC Government-Business Forum on Small Business Capital Formation (March 2017),

available at https://www.sec.gov/info/smallbus/gbfor35.pdf

(“2016 Forum Report”); Final Report of the 2017 SEC Government-Business Forum on Small Business Capital Formation (March 2018),

available at https://www.sec.gov/files/gbfor36.pdf

(“2017 Forum Report”); and Final Report of the 2018 SEC Government-Business Forum on Small Business Capital Formation (June 2019),

available at https://www.sec.gov/info/smallbus/gbfor37.pdf

(“2018 Forum Report”) (all three forums recommending that the Commission clarify that Rule 152 applies to a Rule 506(c) offering so that an issuer using Rule 506(c) may subsequently engage in a registered public offering without adversely affecting the Rule 506(c) offering exemption).

We believe that statutory and regulatory changes to the Securities Act exemptive scheme, including those arising from the JOBS Act, developments in the capital markets, and the evolution of communications technology compel a further examination of the integration framework and its application throughout the Securities Act rules. The proposed rules would build upon the approach to integration in the Commission's recent rulemakings and provide comprehensive rules applicable to all securities offerings under the Securities Act, including registered and exempt offerings.

Providing additional clarity on how securities offerings interrelate, including the relationship between exempt and registered offerings and when two or more securities offerings will be considered integrated as one offering, should reduce uncertainty and perceived risk among issuers when considering and planning possible capital raising alternatives, while preserving investor protections built into the respective offering exemptions. We also believe that providing greater certainty to issuers on how securities offerings interrelate and the flexibility to choose between types of offerings may encourage issuers to raise more capital in the securities markets, including in registered offerings.

See, e.g.,

CCMC Letter.

We are proposing to amend the current integration framework to better facilitate the determination as to whether separate sales of securities are part of the same offering (

i.e.,

are considered integrated).

Our proposed integration framework provides a general principle of integration that looks to the particular facts and circumstances of the offering, and focuses the analysis on whether the issuer can establish that each offering either complies with the registration requirements of the Securities Act, or that an exemption from registration is available for the particular offering. To assist in the application of the general principle, we are proposing provisions applying this general principle to specific fact patterns. To provide additional clarity, we are proposing four non-exclusive safe harbor integration provisions. The following tables provide an overview of the proposed general integration principle and safe harbors discussed in this section.

The focus of this release is on several exemptions from registration under the Securities Act that facilitate capital raising. We are not proposing to extend these rules to business combination transactions, for which we have already adopted rules or provided guidance that will continue to apply.

See, e.g.,

Rule 165 [17 CFR 230.165].

Table 5—Overview of the Proposed General Integration Principle and Safe Harbors

Integration Principle

General Principle of Integration

For all offerings not covered by a safe harbor, offers and sales would not be integrated if, based on the particular facts and circumstances, the issuer can establish that each offering either complies with the registration requirements of the Securities Act, or that an exemption from registration is available for the particular offering.

Application of the General Principle to exempt offerings where general solicitation is not permitted

The issuer must have a reasonable belief, based on the facts and circumstances, that: (1) The purchasers in each exempt offering were not solicited through the use of general solicitation; or (2) the purchasers in each exempt offering established a substantive relationship with the issuer (or person acting on the issuer's behalf) prior to the commencement of the offering not permitting general solicitation.

Application of the General Principle to concurrent exempt offerings that each allow general solicitation

If an exempt offering permitting general solicitation includes information about the material terms of a concurrent offering under another exemption also permitting general solicitation, the offering materials must include the necessary legends for, and otherwise comply with, the requirements of each exemption.

Non-Exclusive Integration Safe Harbors

Safe Harbor 1

Any offering made more than 30 calendar days before the commencement of any other offering, or more than 30 calendar days after the termination or completion of any other offering, would not be integrated; provided that, for an exempt offering for which general solicitation is not permitted, the purchasers either were not solicited through the use of general solicitation, or established a substantive relationship with the issuer prior to the commencement of the offering for which general solicitation is not permitted.

Safe Harbor 2

Offers and sales made in compliance with Rule 701, pursuant to an employee benefit plan, or in compliance with Regulation S would not be integrated with other offerings.

Safe Harbor 3

An offering for which a Securities Act registration statement has been filed would not be integrated if made subsequent to: (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 and made only to qualified institutional buyers (“QIBs”)

and institutional accredited investors (“IAIs”);

or (iii) an offering for which general solicitation is permitted that terminated or completed more than 30 calendar days prior to the commencement of the registered offering.

Safe Harbor 4

Offers and sales made in reliance on an exemption for which general solicitation is permitted would not be integrated if made subsequent to any prior terminated or completed offering.

The

proposed integration framework and safe harbor provisions would be set forth in new Rule 152, which would replace current Rules 152 and 155 concerning the integration of non-public and public offerings.

Consistent with current Rule 155, proposed Rule 152 would specify that the safe harbors are not available to any issuer for any transaction or series of transactions that, although in technical compliance with the rule, is part of a plan or scheme to evade the registration requirements of the Securities Act. Finally, to ensure consistency in the application of the integration framework across exemptions, we are proposing to replace the integration provisions of Regulation D, Regulation A, Regulation Crowdfunding, and Rules 147 and 147A with references to proposed Rule 152.

See

17 CFR 230.144(a)(1) (defining “qualified institutional buyer”).

See

Rule 501(a)(1), (2), (3), (7) and (8) (listing entities that are considered “institutional accredited investors”).

As a result of the proposed changes, we are proposing to remove and reserve Rule 155.

1. Integration Principles

We are proposing to establish a general principle of integration that would require an issuer to consider the particular facts and circumstances of each offering, including whether the issuer can establish that each offering either complies with the registration requirements of the Securities Act, or that an exemption from registration is available for the particular offering. We also are proposing two provisions applying this general principle to specific fact patterns.

a. General Principle of Integration

Based on our review of the existing integration framework and after consideration of comments, we are proposing to revise Rule 152 to provide a general principle of integration based upon a facts and circumstances analysis that codifies Commission guidance on integration originally provided in 2007. The general principle of integration, as set forth in proposed paragraph (a) of Rule 152 would apply to all offers and sales of securities not covered by one of the four safe harbors set forth in proposed paragraph (b) of Rule 152, which we describe below. Specifically, our proposed general principle of integration provides that offers and sales will not be integrated if, based on the particular facts and circumstances, the issuer can establish that each offering either complies with the registration requirements of the Securities Act, or that an exemption from registration is available for the particular offering. This proposed facts and circumstances analysis of integration would replace the traditional five factor test first articulated by the Commission in 1962.

b. Application of the General Principle of Integration

We also propose to include two provisions applying the general integration principles that would supplement and provide greater specificity to the facts and circumstances analysis:

• For an exempt offering for which general solicitation is not permitted, offers and sales will not be integrated with other offerings if the issuer has a reasonable belief, based on the facts and circumstances, that (i) the purchasers in each exempt offering were not solicited through the use of general solicitation, or (ii) the purchasers in each exempt offering established a substantive relationship with the issuer (or person acting on the issuer's behalf) prior to the commencement of the offering not permitting general solicitation; and

• For an exempt offering permitting general solicitation that includes information about the material terms of a concurrent offering under another exemption also permitting general solicitation, the offering materials must include the necessary legends for, and otherwise comply with, the requirements of each exemption.

Integration With Exempt Offering for Which General Solicitation Is Not Permitted

Proposed Rule 152(a)(1) would codify Commission guidance first issued in 2007 in the context of setting forth a framework for analyzing how an issuer can conduct simultaneous registered and private offerings.

In that guidance, the Commission noted that the determination as to whether the filing of a registration statement should be considered to be a general solicitation or general advertising that would affect the availability of the Section 4(a)(2) exemption for a concurrent private placement should be based on a consideration of whether the investors in the private placement were solicited by the registration statement or through some other means that would not foreclose the availability of the Section 4(a)(2) exemption.

In 2015 and 2016, the Commission provided additional guidance and indicated that, for example, an issuer conducting a concurrent exempt offering for which general solicitation is not permitted will need to be satisfied that purchasers in that offering were not solicited by means of an offering made in reliance on Regulation A, Regulation Crowdfunding, Rule 147, or Rule 147A.

See

Regulation D Proposing Release.

Id.

For a concurrent offering under Rule 506(b), purchasers in the Rule 506(b) offering could not be solicited by means of a general solicitation under Regulation A (including any “testing-the-waters” communications), Regulation Crowdfunding, or Rule 147 or 147A. The issuer would need an alternative means of establishing how purchasers in the Rule 506(b) offering were solicited. For example, the issuer may have had a pre-existing substantive relationship with such purchasers.

See

2015 Regulation A Release, at Section II.B.5; Crowdfunding Adopting Release, at Section II.A.1.c; and Intrastate and Regional Offerings Release, at Section II.B.5.

Commenters supported allowing concurrent exempt offerings, where one offering permits general solicitation such as Rule 506(c), and the other prohibits general solicitation, such as Rule 506(b).

Proposed Rule 152(a)(1) would codify the position that an issuer may conduct such concurrent offerings without integration concerns, provided that for an offering prohibiting general solicitation the issuer has a reasonable belief, based on the facts and circumstances, that the purchasers in each exempt offering were not solicited through the use of general solicitation or the purchasers in each exempt offering established a substantive relationship with the issuer (or person acting on the issuer's behalf) prior to the commencement of the offering not permitting general solicitation. The most common scenario entails an issuer conducting a registered offering while also soliciting investors for a concurrent Rule 506(b) or Section 4(a)(2) offering. For example, an issuer filing a Securities Act registration statement with the Commission would be able to conduct a concurrent Rule 506(b) offering if it reasonably believes that the

investors in the Rule 506(b) offering were not solicited by the registration statement nor became interested in the concurrent offering through the use of general solicitation in connection with the registered offering.

See, e.g.,

Davis-Polk Letter, and letter from CoinList dated September 26, 2019 (“CoinList Letter”);

See also

Proposed Revisions of Certain Exemptions from the Registration Provisions of the Securities Act of 1933 for Transactions Involving Limited Offers and Sales, Release No. 33-6339 (Aug. 7, 1981) [46 FR 41791 (Aug. 18, 1981)], at Section V.C.1 (referring to uniform six month safe harbor provisions in now rescinded Rules 146(b)(1) and 242(b)).

In order to provide clarity with respect to use of the 30-day safe harbor where an offering under an exemption that does not permit general solicitation, such as Rule 506(b), follows the filing of a registration statement for a registered offering or an exempt offering that permits general solicitation, such as Rule 506(c), proposed Rule 152(b)(1) would provide that the purchasers in the offering for which general solicitation is not permitted (i) must not have been solicited through the use of general solicitation, or (ii) must have established a substantive relationship with the issuer prior to the commencement of the offering for which general solicitation is not permitted. This is consistent with the Commission's current guidance and proposed Rule 152(a)(1), but we believe it is appropriate to address this in proposed Rule 152(b)(1) to avoid any uncertainty as to the application of the 30-day safe harbor in this situation.

A 30-day safe harbor time period is consistent with several current integration provisions that also require 30-day minimum waiting periods between offerings. For example, in conjunction with certain other requirements, Rule 155 requires an issuer to wait at least 30 days between an abandoned private offering and a subsequently registered offering,

or an

abandoned registered offering followed by a subsequent private offering.

Similarly, Rule 255(e), Rule 147, and Rule 147A currently provide safe harbors from integration, if an issuer waits at least 30 days between the last solicitation of interest in a subsequently abandoned Regulation A offering, or the last offer made pursuant to Rule 147 or Rule 147A, and the filing of a subsequent registered offering.

See

Rule 155(b). Rule 155(b) currently provides a safe harbor that a private offering of securities will not be considered part of an offering for which the issuer later files a registration statement if: (1) No securities were sold in the private offering; (2) the issuer and any person acting on its behalf terminate all offering activity in the private offering before the issuer files the registration statement; (3) the preliminary and final prospectuses used in the registered offering disclose specified information about the abandoned private offering (including: The size and nature of the private offering; the date on which the issuer abandoned the private offering; that any offers to buy or indications of interest given in the private offering were rejected or otherwise not accepted; and that the prospectus delivered in the registered offering supersedes any offering materials used in the private offering); and (4) the issuer does not file the registration statement until at least 30 calendar days after termination of all offering activity in the private offering, unless

the issuer and any person acting on its behalf offered securities in the private offering only to persons who were (or who the issuer reasonably believes were) accredited investors or satisfy the knowledge and experience standard of Rule 506(b)(2)(ii).

See

Rule 155(c). Rule 155(c) currently provides that an offering for which the issuer filed a registration statement will not be considered part of a later commenced private offering if: (1) No securities were sold in the registered offering; (2) the issuer withdraws the registration statement under 17 CFR 230.477 (“Rule 477”); (3) neither the issuer nor any person acting on the issuer's behalf commences the private offering earlier than 30 calendar days after the effective date of withdrawal of the registration statement under Rule 477; (4) the issuer provides specified information about the private offering to each offeree in the private offering; and (5) any disclosure document used in the private offering discloses any changes in the issuer's business or financial condition that occurred after the issuer filed the registration statement that are material to the investment decision in the private offering.

Rule 255(e) provides a safe harbor to issuers that file a registered offering after an abandoned Regulation A offering. Specifically, for solicitations of interest made in reliance on Regulation A to persons other than QIBs or IAIs, Rule 255(e) provides that an abandoned Regulation A offering will not be subject to integration with a subsequently filed registered offering, if the issuer waits at least 30 days between the last such solicitation of interest in the Regulation A offering and the filing of the registration statement with the Commission.

Rules 147(h) and 147A(h) provide safe harbors to issuers from integration with any subsequent registered offerings, if issuers make offers pursuant to these rules to persons other than QIBs and IAIs and the issuers or their agents wait at least 30 days between the last such offer made in reliance on these rules and the filing of the registration statement with the Commission.

As discussed below, we are proposing to replace the integration provisions of several Securities Act exemptions with references to proposed Rule 152. Solicitations of interest or offers made to persons other than QIBs or IAIs currently covered by the Rule 255(e), Rule 147(h) and Rule 147A(h) safe harbors would be covered by this proposed 30-day safe harbor, and solicitations of interest or offers limited to QIBs or IAIs currently covered by the Rule 255(e), Rule 147(h), and Rule 147A(h) safe harbors would be covered by proposed Rule 152(b)(3).

Commenters on the Concept Release

and others

have been generally supportive of shortening the six month time period in Rule 502(a) and expressed concern that the six-month integration safe harbor could inhibit issuers from meeting their capital needs.

Several of these commenters explicitly supported a 30-day safe harbor time period, while others supported other shortened time periods.

One commenter alternatively suggested that changes to the six-month time period in Rule 502(a) would be unnecessary if the integration analysis universally used the standards in Regulation A and Rules 147 and 147A.

In contrast, two commenters were opposed to changing the integration standards,

with one of those commenters expressly stating its opposition to shortening the six-month period in Rule 502(a).

See

CCMC Letter; SIFMA Letter (suggesting that a 30-day period would allow issuers to raise capital as expeditiously as is required in today's market); and Dechert Letter (“Due to the very real and substantial impact of ceasing offering activities for any period of time, we believe that 30 days is sufficient to ensure that issuers do not abuse their ability to conduct separate offerings.”).

See

Final Report of the Advisory Committee on Smaller Public Companies to the United States Securities and Exchange Commission (Apr. 23, 2006),

available at http://www.sec.gov/info/smallbus/acspc/acspcfinalreport.pdf

(“Final Report of the Advisory Committee on Smaller Public Companies”), at 94 (recommending that the Commission shorten the integration safe harbor from six months to 30 days).

See also

Regulation D Proposing Release, at Section II.C.

See

CCMC Letter; SIFMA Letter; Dechert Letter; Davis Polk Letter; letter from EquityZen Inc. dated September 30, 2019 (“EquityZen Letter”); and NYSBA Letter.

See

Davis Polk Letter (suggesting 90 days is appropriate, as it would provide additional flexibility, permitting issuers to rely on the safe harbor once every fiscal quarter, while still requiring issuers to wait a sufficient period of time before initiating a substantially similar offering in reliance on the safe harbor); EquityZen Letter (suggesting a 90-day period generally, and a 30-day period for inadvertent general solicitation activity); letter from Silicon Prairie Portal & Exchange, LLC dated September 24, 2019 (“Silicon Prairie Letter”) (suggesting a 90-day period); ABA Letter (suggesting a 90-day period); and NYSBA Letter (recommending a shorter period generally, and specifically suggesting a 45-day period in situations of inadvertent general solicitation activity).

See

CrowdCheck Letter.

See

PIABA Letter; and NASAA Letter.

See

PIABA Letter.

Having considered these comments, we believe that the current six-month safe harbor time period in Rules 502(a), 251(c), 147(g), and 147A(g) may be longer than necessary to protect investors and could inhibit issuers, particularly smaller issuers, from meeting their capital raising needs.

In our view, issuers seeking to register offerings under the Securities Act should be encouraged to do so, and we are mindful of the risk that offers made pursuant to an exemption shortly before a registration statement is filed could be viewed as conditioning the market for that registered offering. Accordingly, we are proposing to shorten the current six-month time frame in these rules to 30 days. We are not aware of issuers abusing the similar 30-day waiting periods in the current provisions of Rule 255(e) and Rules 147(h) and 147A(h). As a result, we believe that a 30-day waiting period or separation between offerings would be sufficient to prevent issuers from using a generally solicited exempt offering, such as an offering made in reliance on Rule 506(c), for the purposes of conditioning the market for a later registered offering. We further note that waiting less than 30 days before filing a subsequent registered offering would not necessarily result in integration or be considered as conditioning the market for the subsequent registered offering. Instead, such a determination would depend on the particular facts and circumstances surrounding the offerings.

See

Rule 255(e) of Regulation A; Rule 147(h); Rule 147A(h); Regulation D Proposing Release; and Final Report of the Advisory Committee on Smaller Public Companies. Smaller issuers may face capital raising challenges because they are seeking relatively small amounts of capital.

See e.g.,

Transcript of SEC Small Business Capital Formation Advisory Committee (Nov. 12, 2019),

available at https://www.sec.gov/info/smallbus/acsec/sbcfac-transcript-111219.pdf,

at 15-62 (discussing the fact that transaction costs make raising amounts under $750,000 “not worth it”); and Transcript of SEC Small and Emerging Companies Advisory Committee (Feb. 15, 2017),

available at https://www.sec.gov/info/smallbus/acsec/acsec-transcript-021517.pdf,

at 144-145 (indicating that it is easier for issuers to access $100 million of capital than amounts under $10 million).

See, e.g.,

2015 Regulation A Release, at text accompanying note 178 (waiting less than the 30 days before a registered offering, as required in Rule 255(e), would not necessarily result in integration with a Regulation A offering, but would instead depend on the particular facts and circumstances, as explained in the Note to Rule 251(c)).

We are mindful that issuers may seek to undertake serial Rule 506(b) offerings each month, selling to up to 35 unique non-accredited investors in each offering, potentially resulting in unregistered sales of securities to hundreds of non-accredited investors in a year.

While recent data may suggest that shortening the safe harbor to 30-days is not likely to result in a large increase in the number of non-accredited investors participating in Rule 506(b) offerings,

we are

proposing to amend Rule 506(b)(2)(i) to address this concern. Under the proposed rule, where an issuer conducts more than one offering under Rule 506(b), the number of non-accredited investors purchasing in all such offerings within 90 calendar days of each other would be limited to 35.

We preliminarily believe that this would protect against the possibility that an issuer could inappropriately make use of the proposed 30-day safe harbor to effectively conduct a public distribution of securities to non-accredited investors.

In 2007, the Commission expressed this concern that such sales could result in large numbers of non-accredited investors failing to receive the protections of Securities Act registration.

See

Regulation D Proposing Release, at text accompanying note 134.

Based on the analysis of Form D data on initial Form D filings, we estimate that in 2019, among all Rule 506(b) offerings by issuers other than pooled investment funds, approximately 4.45 percent of offerings included non-accredited investors. Among all Rule 506(b) offerings with non-accredited investors by issuers, other than pooled investment funds, the average (median) number of non-accredited investors was reported to be 6.7 (4.0), based on Form D filings in 2019. These estimates of the number of investors may represent a lower bound because they rely on available Form D filings, and because a final Form D upon the conclusion of an offering is not required to be filed.

Proposed Rule 506(b)(2)(i) provides that there are no more than, or the issuer reasonably believes that there are no more than, 35 purchasers of securities from the issuer in offerings under this section in any 90 calendar day period. Under Rule 501(e), only non-accredited investors are included in computing the number of “purchasers.”

In conjunction with our proposal to amend Rule 152 to include a 30-day integration safe harbor and to shorten the integration safe harbor time period throughout Rules 502(a), 251(c), 147(g), and 147A(g) from six months to 30 days, we are also proposing to remove and reserve Rule 155. As proposed Rule 152(b)(1) would supersede the specific requirements in Rule 155 relating to the integration of abandoned offerings with subsequent offerings, other than the 30-day waiting period between the termination of an abandoned offering and the commencement of a subsequent offering.

Specifically, Rule 155(b) provides that an abandoned private offering of securities will not be considered part of an offering for which the issuer later files a registration statement if the offering meets certain enumerated conditions, including a requirement that the issuer does not file the registration statement until at least 30 calendar days after termination of all offering activity in the private offering, unless the issuer and any person acting on its behalf offered securities in the private offering only to persons who were (or who the issuer reasonably believes were) accredited investors or who satisfy the knowledge and experience standard of Rule 506(b)(2)(ii).

Rule 155(c) provides a similar safe harbor for a registered offering followed by a private offering of securities subject to a similar set of enumerated conditions, including the requirement that neither the issuer nor any person acting on the issuer's behalf commences the private offering earlier than 30 calendar days after the effective date of withdrawal of the registration statement.

Rule 155(b) and (c) currently provide safe harbors for integration of abandoned offerings. 17 CFR 230.155(b) and (c).

See supra

note 81.

See supra

note 82.

We received comments on the Concept Release that were generally supportive of either eliminating or shortening the 30-day time period in Rule 155.

One of these commenters suggested that elimination of certain of Rule 155's conditions would increase the likelihood of registration.

100

Other than the required 30-day waiting period between an abandoned and subsequent offering, we believe the list of conditions in Rule 155(b) and (c) is no longer warranted and may be eliminated without compromising investor protections for the same reasons that support our proposal to reduce the integration safe harbors from six months to 30 days. As we believe a 30-day time period between offerings, including if one is abandoned, establishes a more workable standard, without significantly compromising investor protections, we are proposing to remove and reserve Rule 155.

See

ABA Letter; and NYSBA Letter.

100

See

ABA Letter.

To provide greater certainty to issuers as to the availability of all of our proposed safe harbors that require the prior offering to be “terminated or completed,”

101

we are proposing that:

101

See

proposed Rule 152(b)(1), (b)(3) and (b)(4).

• Offerings of securities made under Section 4(a)(2), Regulation D, or Rule 147 or 147A would be considered “terminated or completed,” on the later of the date: (i) The issuer entered into a binding commitment to sell securities under the offering (subject only to conditions outside of the investor's control); or (ii) the issuer and its agents ceased efforts to make further offers to sell the issuer's securities.

102

Efforts to sell securities through the offering include, but are not limited to, the distribution of any offering materials. For purposes of exemptions permitting the use of general solicitation, the cessation of selling efforts would require the removal of any publicly available general solicitation materials, to the extent possible.

• Offerings under Regulation A would be considered “terminated or completed” upon the: (i) Withdrawal of an offering statement under Rule 259(a) of Regulation A; (ii) filing of a Form 1-Z with respect to that offering; (iii) declaration by the Commission that the offering statement has been abandoned under Rule 259(b) of Regulation A; or (iv) third anniversary of the initial qualification date of the offering statement, in the case of continuous or delayed offerings.

• Offerings under Regulation Crowdfunding would be considered “terminated or completed” upon the deadline of the offering identified in the offering materials pursuant to Rule 201(g) of Regulation Crowdfunding, or indicated by the Regulation Crowdfunding intermediary in any notice to investors delivered under Rule 304(b) of Regulation Crowdfunding.

• Offerings for which a Securities Act registration statement has been filed will be considered, for purposes of the proposed safe harbors, “terminated or completed” upon the: (i) Withdrawal of the registration statement after the Commission grants such application under Rule 477; (ii) filing of an amendment or supplement to the registration statement indicating that the registered offering has been terminated or completed and the deregistering of any unsold securities if required by Item 512(a)(3) of Regulation S-K;

103

(iii) entry of an order by the Commission declaring that the registration statement has been abandoned under Rule 479; or (iv) as set forth in Rule 415(a)(5).

104

103

17 CFR 229.512(a)(3).

104

17 CFR 230.415(a)(5).

b. Rule 701, Employee Benefit Plans and Regulation S

We are proposing Rule 152(b)(2), which would provide a safe harbor for all offers and sales made in compliance with Rule 701, pursuant to an employee benefit plan, or made in compliance with Regulation S, regardless of when these offerings occur, including offers and sales made concurrently with other offerings.

105

Offers and sales pursuant to Rule 701

106

and employee benefit plans are limited to investors, such as employees, consultants and advisors, with whom the issuer has written compensation plans or agreements. Given the privity between these investors and the issuer, these offers and sales may not raise the same level of investor protection concerns as offerings to other investors.

105

The safe harbor integration provisions in current Rule 251(c) and Rules 147(g) and 147A(g) for these offers or sales do not cover offers or sales concurrent with another offering.

106

The Rule 701 exemption is only available to issuers that are not subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934.

See

Rule 701(b). This proposed safe harbor is in accord with Rule 701(f), which provides that an offering under Rule 701 will not be integrated with any other offering, as offers and sales exempt under Rule 701 are deemed to be a part of a single, discrete offering and are not subject to integration with any other offers or sales, whether registered under the Securities Act or otherwise exempt from the registration requirements of the Securities Act.

We are proposing a similar safe harbor for all offers and sales made in compliance with Regulation S, regardless of when the Regulation S offering occurs in relation to another domestic registered or exempt offering in the United States. In adopting Regulation S, the Commission stated

that “[o]ffshore transactions made in compliance with Regulation S will not be integrated with registered domestic offerings or domestic offerings that satisfy the requirements for an exemption from registration under the Securities Act.”

107

Proposed Rule 152(b)(2) would codify this position. Specifically, concurrent offshore offerings that are conducted in compliance with Regulation S are not currently, and would not be, integrated with registered domestic offerings or domestic offerings that are conducted in compliance with any exemption. When determining the availability of this safe harbor, it would still be necessary to assess each transaction for compliance with Regulation S and the conditions of the other exemption.

107

See

Offshore Offers and Sales, Release No. 33-6863 (April 24, 1990) [55 FR 18306 (May 2, 1990)], at Section III.C.1. In addressing the offshore transaction component of the Regulation S safe harbor, the Commission stated, “Offers made in the United States in connection with contemporaneous registered offerings or offerings exempt from registration will not preclude reliance on the safe harbors.”

Id.

at note 36. Likewise, in addressing directed selling efforts, the Commission stated, “Offering activities in contemporaneous registered offerings or offerings exempt from registration will not preclude reliance on the safe harbors.”

Id.

at note 47.

See also

Rule 500(g) of Regulation D (formerly Preliminary Note No. 7 to Regulation D) (“Regulation S may be relied upon for such offers and sales even if coincident offers and sales are made in accordance with Regulation D inside the United States.”); and Note to Rule 502(a) (“Generally, transactions otherwise meeting the requirements of an exemption will not be integrated with simultaneous offerings being made outside the United States in compliance with Regulation S.”).

Although, as noted above, the Commission has provided guidance similar to the proposed safe harbor, we have become aware that there may be some uncertainty among market participants about whether it is possible to conduct concurrent Regulation S and Rule 506(c) offerings, particularly when the offerings are conducted using the internet, and if so, how to comply with the requirement that separate offering materials be used in each offering. Two commenters on the Concept Release suggested that the Commission clarify that general solicitation under Rule 506(c) would not constitute “directed selling efforts” for purposes of Regulation S,

108

which Rule 902(c) defines as any activity undertaken for the purpose of, or that could reasonably be expected to have the effect of, conditioning the market in the United States for securities offered in reliance on Regulation S.

109

108

See

CoinList Letter; and NYSBA Letter.

109

See

Rule 902(c)(1).

In light of these concerns, we are proposing amendments to Regulation S that would permit an issuer that is conducting an exempt offering that allows general solicitation, such as under Rule 506(c), and uses widely accessible internet or similar communications, to continue to be able to rely on Regulation S for a concurrent offshore offering even though the general solicitation activity would likely be deemed “directed selling efforts” under current Rule 902(c). Under the proposal, an issuer that engages in general solicitation activity under an exemption that allows general solicitation would not be considered to have engaged in “directed selling efforts” in connection with an offering under Regulation S, if the general solicitation activity is not undertaken for the purpose of conditioning the market in the United States for any of the securities being offered in reliance on Regulation S. The definition of “directed selling efforts” currently covers any activity undertaken for the purpose of, or that could reasonably be expected to have the effect of, conditioning the market in the United States for the Regulation S securities. Due to the nature of a widely accessible general solicitation communication, it is likely that the “reasonably be expected to have the effect of” provision would be implicated by such activity, even though the issuer may not have undertaken the activity “for the purpose of” conditioning the U.S. market. Under the proposal, this definition would be narrowed, only for the purposes of general solicitation activities undertaken in connection with offers and sales under an exemption from registration, such that general solicitation activity that may have the effect of conditioning the U.S. market but is not undertaken for the purpose of doing so would not be covered.

We are mindful that, regardless of the issuer's intent, such activities may increase the risk of flowback of the Regulation S securities to the United States when there is a concurrent exempt offering of the securities in the United States using general solicitation. Therefore, we are proposing new Rule 906 of Regulation S, applicable to securities offered and sold in a transaction subject to the conditions of Rule 901 or Rule 903, that would require an issuer that engages in general solicitation activity covered by the proposed exclusion from the definition of “directed selling efforts” to prohibit resales to U.S. persons (or for the account or benefit of a U.S. person) of the Regulation S securities for a period of six months from the date of sale except to QIBs or IAIs. We preliminarily believe that this restriction on resales would appropriately guard against potential flowback of such securities to the United States. We are proposing to limit resales during the six-month period to QIBs and IAIs, investors that the Commission has long recognized as having the ability to fend for themselves. This approach may help alleviate possible concerns about less-sophisticated investors not fully appreciating the distinctions between the securities sold in each of the offerings, and help guard against flowback to the United States by limiting the potential pool of investors who may purchase in the resale. This six-month limitation on resales would apply regardless of the Regulation S category applicable to the securities, and notwithstanding, and in addition to, any applicable distribution compliance period.

110

See

Rule 902(f).

c. Subsequent Registered Offerings

The safe harbor in proposed Rule 152(b)(3) would provide a safe harbor for certain offerings made prior to the commencement of an offering for which a Securities Act registration statement has been filed. Proposed Rule 152(b)(3)(i) would provide that an offering for which a Securities Act registration statement has been filed will not be integrated with terminated or completed offerings for which general solicitation is not permitted.

111

Proposed Rule 152(b)(3)(ii) would provide that an offering for which a Securities Act registration statement has been filed will not be integrated with a terminated or completed offering for which general solicitation is permitted made only to QIBs and IAIs.

112

Finally, Proposed Rule 152(b)(3)(iii) would make clear that an offering for which a registration statement under the Securities Act has been filed will not be integrated with any offering for which general solicitation is permitted that terminated or completed more than 30

calendar days prior to the registered offering.

113

111

Proposed Rule 152(b)(3)(i) builds on the Commission's existing integration guidance relating to offerings for which general solicitation is not permitted. Offers and sales preceding registered offerings that do not involve general solicitation are generally not the type of offerings that, when taken together, appear to be susceptible to concerns relating to the prior offers and sales conditioning the market for the registered offering.

112

Proposed Rule 152(b)(3)(ii) builds on current Rule 255(e) of Regulation A, and current Rules 147(h) and 147A(h), which provides that offerings limited to QIBs and IAIs are not integrated with a subsequently filed registered offering. Similarly, where an issuer has solicited interest in a contemplated, but subsequently abandoned Regulation A offering only to QIBs or IAIs, the abandoned Regulation A offering would not be subject to integration with a subsequently filed registered offering.

113

Proposed Rule 152(b)(3)(iii) would work in coordination with proposed Rule 152(b)(1) to clarify the application of the 30-day safe harbor to subsequent registered offerings.

Rule 152 currently provides that the phrase “transactions by an issuer not involving any public offering” in Section 4(a)(2) shall be deemed to apply to transactions that did not involve any public offering at the time of the unregistered offering even though the issuer decides subsequently to make a public offering and/or files a registration statement. In 2007, the Commission clarified that an issuer's contemplation of filing a Securities Act registration statement at the same time that it is conducting an unregistered offering under Section 4(a)(2) would not cause the Section 4(a)(2) exemption to be unavailable for that unregistered offering.

114

So long as all of the applicable requirements of the exemption prohibiting general solicitation were met for offers and sales that occurred prior to the general solicitation, those offers and sales would not be integrated with the subsequent registered offering.

115

Once the public offering is commenced or the registration statement is filed, the issuer must satisfy all of the applicable requirements for that subsequent offering.

114

See

Regulation D Proposing Release, at text accompanying note 124.

See also

Concept Release, at text accompanying note 499.

115

In these circumstances, companies should be careful to avoid any pre-filing communications regarding the contemplated public offering that could render the Section 4(a)(2) exemption unavailable for what would be an otherwise exempt private placement.

See

Regulation D Proposing Release, at note 124.

We continue to believe that capital raising around the time of a public offering, in particular an initial public offering, including immediately before the filing of a registration statement, often is critical if companies are to have sufficient funds to continue to operate while the public offering process is ongoing.

116

We believe that Rule 152 as currently written is unnecessarily restrictive, given the changing financial requirements and circumstances of issuers, particularly smaller issuers, immediately prior to a registered public offering and may be revised without compromising investor protections. A lengthy waiting period prior to a registered offering combined with a potentially uncertain registration process are particular concerns for smaller issuers contemplating a registered public offering, whose financing needs are often erratic and unpredictable, due in part to limited amounts of working capital, cash reserves, and access to credit.

117

For this reason, we are proposing Rule 152(b)(3), which would permit companies to conduct offerings shortly before the filing of a Securities Act registration statement without concern that the two offerings would be integrated.

116

Id.

at Section II.C.

117

See, e.g.,

Final Report of the Advisory Committee on Smaller Public Companies, at page 96.

See also

Regulation D Proposing Release, at note 116 and accompanying text.

d. Offers or Sales Preceding Exempt Offerings Permitting General Solicitation

Proposed Rule 152(b)(4) would provide a safe harbor for all offers and sales made in reliance on an exemption for which general solicitation is permitted that follow any other terminated or completed offering. Rule 251(c) of Regulation A, Rule 147(g), and Rule 147A(g) currently provide that offers and sales made in reliance on these exemptions will not be integrated with terminated or completed offers and sales made prior to the commencement of these exempt offerings.

118

We are proposing to establish a new safe harbor that would expand these current integration safe harbors in Regulation A and Rules 147 and 147A to also include offerings relying on: Regulation Crowdfunding; Rule 504(b)(1)(i), (ii) or (iii) that, depending upon state registration requirements, permit general solicitation; and Rule 506(c). The following table summarizes the types of offerings that would not be integrated under this proposed safe harbor:

118

These integration provisions also provide that offers and sales subsequent to these exempt offerings will not be integrated if they are: (1) Registered under the Securities Act; (2) exempt from registration under Rule 701; (3) made pursuant to an employee benefit plan; (4) exempt from registration under Regulation S; (5) exempt from registration under Section 4(a)(6) of the Securities Act; (6) made more than six months after completion of the offering; or (7) limited to QIBS and IAIs.

See

Rule 251(c); Rule 255(e); Rule 147(g) and (h); and Rule 147A(g) and (h).

Table 6—Summary of Types of Offerings Not Integrated Under the Safe Harbor

Offering 1

Offering 2

Exempt offering permitting general solicitation, including:

• Regulation A

• Regulation Crowdfunding

• Rule 147 or 147A

• Rule 504(b)(1)(i), (ii), or (iii)

• Rule 506(c)

Exempt offering prohibiting general solicitation, including:

• Regulation A

• Regulation Crowdfunding

• Rule 147 or 147A

• Rule 504(b)(1)(i), (ii), or (iii)

• Rule 506(c)

Exempt offering permitting general solicitation, including:

• Rule 504(b)(1)

• Rule 506(b)

• Section 4(a)(2)

Securities Act registered offering.

Offers and sales preceding exempt offerings that permit general solicitation are generally not the type of offerings that, when taken together, appear to be susceptible to concerns relating to the prior offers and sales conditioning the market for the subsequent exempt offering. We do not believe integrating any type of offers or sales with a subsequent exempt offering permitting general solicitation, such as an offering pursuant to Regulation A, Rule 147, Rule 147A, Rule 504(b)(1)(i), (ii) or (iii), Rule 506(c) or Regulation Crowdfunding, is necessary to further investor protection. For example, a subsequent Regulation A or Regulation Crowdfunding offering would provide investors in these offerings with an offering document and ongoing disclosures to provide them with material information about the offering prior to making their investment decision. Similarly, intrastate offerings pursuant to Rule 147 and Rule 147A, as well as regional multi-state offerings under Rule 504(b)(1)(i), (ii) and (iii), are all subject to state registration requirements which generally require the delivery of a disclosure document prior to sale. Finally, Rule 506(c) requires issuers to take reasonable steps to verify that all investors in the offering are accredited investors who are deemed to be sophisticated investors who do not need the protections of Securities Act registration.

3. Conforming Amendments to Securities Act Exemptions

As part of our effort to modernize and harmonize the integration framework for registered and exempt offerings, we are also proposing to replace the integration provisions of several Securities Act exemptions with references to proposed Rule 152. Specifically, we are proposing to amend current Rule 502(a), Rule 251(c), Rule 147(g), and Rule 147A(g) to provide cross-references to the new facts and circumstances analysis and safe harbors for integration in Rule 152. We are additionally proposing to eliminate Rule 255(e), Rule 147(h), and Rule 147A(h) since the relief provided by these rules would be provided by

proposed Rule 152(b)(3). All of these existing integration provisions currently refer to a facts and circumstances analysis when their enumerated safe harbors do not apply, and the proposed Rule 152(b) safe harbors are generally consistent with the current safe harbors in the individual rules.

Although Regulation Crowdfunding has no codified integration provision, in the 2015 adopting release, the Commission provided guidance on integration using the same facts and circumstances analysis set forth in the Commission's 2015 amendments to Regulation A and 2016 amendments to Rule 147 and adoption of new Rule 147A.

119

Market participants conducting crowdfunding offerings have requested guidance on the integration of crowdfunding offerings with other exempt offerings under the Securities Act.

120

In response, we are proposing to amend Rule 100 of Regulation Crowdfunding to codify this integration guidance, and further harmonize how offerings under Regulation Crowdfunding interrelate with other offerings under the Securities Act by cross-referencing the proposed Rule 152(b) safe harbors. We believe codifying the Commission's guidance on integration by adding the cross-reference to proposed Rule 152 in a new provision in Rule 100 of Regulation Crowdfunding would provide greater certainty to issuers contemplating a Regulation Crowdfunding offering who may also be considering other offerings under the Securities Act.

119

Securities Act Section 4A(g) states that “[n]othing in the exemption shall be construed as preventing an issuer from raising capital through means other than [S]ection 4(a)(6).” Given this statutory language, the Commission provided guidance in the Crowdfunding Adopting Release that an offering made in reliance on Section 4(a)(6) is not required to be integrated with another exempt offering made by the issuer to the extent that each offering complies with the requirements of the applicable exemption that is being relied on for that particular offering.

See

Crowdfunding Adopting Release, at text accompanying notes 1343-1344.

120

See, e.g.,

2018 Forum Report.

Request for Comment

1. Should we adopt a comprehensive integration framework for registered and exempt offerings, as proposed? Is the proposed general principle of integration, which requires an issuer to consider the particular facts and circumstances of each offering, appropriate? Should the framework also include provisions applying this general principle to particular fact patterns? If so, are the proposed provisions appropriate? Are there other provisions applying the general principle to specific fact patterns that we should include? In light of the proposed provisions, should the rules define the terms “pre-existing” and “substantive relationship”? Should we instead eliminate the concept of integration altogether and rely on general anti-evasion principles to prohibit the use of multiple closely-timed offerings to evade the securities laws?

2. Should we replace the five factor test of integration, currently set forth in Rule 502(a), with the more recent approach to integration adopted in rulemakings involving Regulation A, Regulation Crowdfunding, and Rules 147 and 147A, as proposed? Is there another integration principle that should apply in this context? Are there situations in which the five factor test should continue to apply? If so, should the current factors be revised, such as by adding new factors, or should we provide guidance with respect to the relative importance of the factors to the analysis? Are there uses of the five factor test for purposes other than the integration of offerings?

3. Should we adopt specific safe harbors as part of the proposed integration framework? If so, are the proposed safe harbors appropriate? Are there additional or different safe harbors we should codify? What effect, if any, would the proposed safe harbors have on investor protection or on issuers' ability to raise capital in the exempt offering markets? Should any of the integration provisions in proposed Rule 152(a) be reframed as safe harbors in proposed Rule 152(b)? Similarly, should any of the safe harbors in proposed Rule 152(b) be reframed as principles of integration in proposed Rule 152(a)?

4. Do the proposed rules make clear the interaction between the integration provisions set forth in proposed Rule 152(a) and the non-exclusive safe harbors set forth in proposed Rule 152(b)?

5. Should we include an integration safe harbor that would apply to any offering made more than 30 calendar days prior to, or more than 30 calendar days after, another offering, as proposed? Is this time period too short? Would a longer time period such as 45, 90, or 120 days be more appropriate? Would this proposal raise any investor protection concerns?

6. Should we, as proposed, amend Rule 506(b) to provide that where an issuer conducts more than one offering under Rule 506(b), the number of non-accredited investors purchasing in all such offerings within 90 calendar days of each other would be limited to 35? If so, is the proposed timeframe (90 days) and number of purchasers (35) appropriate, or should these be revised? Should we instead, if we consider 35 non-accredited investors over a 90-day period to be an appropriate limitation, set the safe harbor at 90 days to simplify compliance? Do the risks of sales to large numbers of non-accredited investors in multiple offerings by the same issuer in reliance on Rule 506(b) warrant such limits on the number of non-accredited investors participating in these offerings? Should this limitation apply in all cases in which an issuer conducts more than one offering under Rule 506(b), or should we only require such limit on the number of non-accredited investors if the Rule 506(b) offerings are of the same class of securities, or part of the same plan of financing? Should we only require such limit on the number of non-accredited investors if the Rule 506(b) offerings would be integrated if the five factor test were applied? Alternatively, instead of amending Rule 506(b), should we include this requirement as a condition to reliance on the proposed 30-day safe harbor when an issuer conducts two or more Rule 506(b) offerings?

7. Should we, as proposed, condition the availability of the 30-day safe harbor on the requirement that, for an exempt offering for which general solicitation is not permitted, the purchasers in such offering were not solicited through the use of general solicitation or that the purchasers established a substantive relationship with the issuer prior to commencement of the offering for which general solicitation is not permitted? Alternatively, is a provision similar to that in proposed Rule 152(b)(1) more appropriate in Rule 502(c) of Regulation D concerning purchasers in offerings for which general solicitation is not permitted? Should the provision be included in both proposed Rule 152(b)(1), as well as in Rule 502?

8. Should we adopt an integration safe harbor for all offerings made in compliance with Rule 701, pursuant to an employee benefit plan, or in compliance with Regulation S, as proposed?

9. Is it necessary to reference Rule 701 in proposed Rule 152(b)(2), given the integration provision in Rule 701(f)?

10. Should general solicitation in the United States in connection with an exempt, U.S. offering constitute directed selling efforts under Rule 902(c)(1) of Regulation S for purposes of the offshore transaction? Should we, as proposed, amend the definition of “directed selling efforts” to permit issuers to make concurrent offers under Regulation S and an exemption from registration that permits general solicitation? Should we expand the

definition of “directed selling efforts” to also exclude activities that would be “reasonably expected to” condition the U.S. market, regardless of the intent of those activities? Would an issuer be able to demonstrate the intent underlying general solicitation activities under the proposed amendment? Would the proposed amendments provide sufficient clarity to issuers using social media to make concurrent U.S. and non-U.S. offerings? In such situations, would an issuer have difficulty separately complying with Regulation S and other exemptions? Do the proposed amendments to Regulation S raise investor protection concerns for offshore investors? Should we expand the proposed exclusion from “directed selling efforts” to apply not only to concurrent exempt offerings that permit general solicitation, but also to domestic registered offerings?

11. Should we require the resale restrictions of proposed Rule 906? Will proposed Rule 906 help prevent flowback of securities to the United States? Is the proposed six-month time period appropriate, or should we consider a longer or shorter time period for the resale restriction to apply? Should the time period during which resales are restricted instead correspond to the distribution compliance period for Category 2 or Category 3 offerings under Regulation S, as applicable? Should we permit resales to QIBs and IAIs during this six-month period, as proposed? We expect that issuers would consider implementing measures similar to the “offering restrictions” defined in Rule 902(g) to comply with the proposed Rule 906 resale restriction, but should we specify measures an issuer must take to comply with the proposed resale restrictions? If so, what type of measures would be appropriate? Are the proposed definition of “directed selling efforts” and new Rule 906 in keeping with the territorial approach taken in Regulation S?

12. Should we adopt the safe harbor in proposed Rule 152(b)(3) that applies to registered offerings subsequent to a terminated or completed offering for which general solicitation was not permitted, as proposed? Should we also, as proposed, include a safe harbor that applies to registered offerings subsequent to a terminated or completed offering limited to QIBs and IAIs? Should we additionally include a safe harbor that applies to registered offerings subsequent to offerings for which general solicitation is permitted that terminated or completed more than 30 days prior? Do the safe harbors, as proposed, sufficiently cover the relief provided by Rule 255(e) of Regulation A, Rule 147(h), and Rule 147A(h) so as to make them no longer necessary? Alternatively, should we omit the provision in this safe harbor concerning Rules 255(e), 147(h), and 147A(h), and retain these integration provisions as currently provided in Rules 255, 147, and 147A? Would this help simplify the safe harbor in proposed Rule 152(b)(3)? Would this make the integration provisions of Rules 255, 147, and 147A less clear? Does the 30 calendar day provision in proposed Rule 152(b)(3)(iii) for registered offerings appropriately coordinate with the more general provisions of proposed Rule 152(b)(1)? In addition to registered offerings, should we revise this safe harbor provision to cover exempt offerings permitting general solicitation, such as Rule 506(c), as well?

13. Should we adopt the safe harbor in proposed Rule 152(b)(4) that would apply to any offering in reliance on an exemption for which general solicitation is permitted made subsequent to an offering that has been terminated or completed?

14. Should we include any other safe harbors from integration in Rule 152? For example:

a. Should we include a safe harbor for all offers or sales to investors with whom the issuer has a pre-existing substantive relationship? Should this safe harbor be available for all such offers or sales, regardless of when they occur in relation to another offering (

i.e.,

whether prior to, concurrent with, or subsequent to another offering) and regardless of whether the other offering is exempt or registered? If we were to adopt such a safe harbor, would that make any of the proposed safe harbors unnecessary?

b. Should we include a safe harbor from integration for all offerings limited to QIBs and accredited investors? Should such a safe harbor include offers or sales preceding or concurrent with a registered offering? Alternatively should such a safe harbor apply only to QIBs and IAIs, regardless of whether the offer or sale was prior to, concurrent with, or subsequent to other offerings? Do offers and sales to such investors raise concerns with respect to conditioning the market for a subsequent registered offering of the issuer's securities?

c. Should we include a safe harbor available for offers or sales made in reliance on Rule 506(c) that are made concurrently with an exempt offering permitting general solicitation, such as in reliance on Regulation A, Regulation Crowdfunding or Rule 147A, provided that, if the general solicitation materials used in connection with the Rule 506(c) offering include the material terms of the other concurrent exempt offering permitting general solicitation, then the Rule 506(c) materials must conform to the legend and other requirements of the other exempt offering permitting general solicitation? In this regard, is our proposed Rule 152(a)(2) more appropriate as a safe harbor or as an integration principle?

15. Instead of our proposed approach to replace the current integration provisions in Securities Act exemptions with a cross-reference to proposed Rule 152, should we revise the current integration provisions to reflect the provisions of proposed Rule 152? Alternatively, should we revise the current safe harbor provisions in the Securities Act exemptions to reflect the safe harbor provisions of proposed Rule 152(b) and provide cross-references to Rule 152(a) for guidance on integration when these safe harbors are not applicable?

16. Should we codify in Regulation Crowdfunding the Commission's existing integration guidance providing that offers and sales made in reliance on Regulation Crowdfunding will not be integrated with other exempt offerings made by the issuer, provided that each offering complies with the requirements of the applicable exemption that is being relied upon for the particular offering in Rule 100 of Regulation Crowdfunding, as proposed?

17. Should we define the terms “terminated or completed,” as proposed? Should the analysis of whether an offering is “terminated or completed” be predicated on the issuer's entry into a binding commitment, subject only to conditions outside of the investor's control, to sell securities under the offering, as proposed, or should we consider an alternative such as the closing of the final sale of securities under the offering? Are there any administrative or logistical issues that would be raised if the “termination or completion” of an offering were determined based on the closing of the final sale of securities under the offering? Should anything else be considered “terminated or completed” with respect to offerings under Regulation A and Regulation Crowdfunding, and registered offerings?

18. Should we consider revisions to Regulation Crowdfunding that relate to intermediaries in light of the proposed integration safe harbors? For example, should we revise the portal requirements under Regulation Crowdfunding to permit concurrent Rule 506(c) offerings to be offered and sold via a portal's internet platform? What other Regulation Crowdfunding rules should be revised to facilitate Rule

506(c) offerings concurrent with Regulation Crowdfunding offerings? Should we provide guidance regarding issues that may arise when an intermediary seeks to host concurrent offerings? Should we expand any of our rules, for example, the rules under Regulation Crowdfunding, to permit certain entities to act as intermediaries for sales of securities to accredited investors in concurrent Rule 506(c) offerings?

B. General Solicitation and Offering Communications

Section 4(a)(2) of the Securities Act exempts from the registration requirements “transactions by an issuer not involving any public offering,”

121

but does not define the phrase. The precise limits of this statutory exemption are also not defined by rule. Whether a transaction is one not involving any public offering is essentially a question of fact and necessitates a consideration of the surrounding circumstances, including such factors as the relationship between the offerees and the issuer, and the nature, scope, size, type, and manner of the offering.

122

An issuer relying on Section 4(a)(2) is restricted in its ability to make public communications to attract investors to its offering because public advertising is incompatible with a claim of exemption under Section 4(a)(2).

123

121

15 U.S.C. 77d(a)(2).

122

See

Non-Public Offering Exemption Release. Section 4(a)(2) was traditionally viewed as a way to provide “an exemption from registration for bank loans, private placements of securities with institutions, and the promotion of a business venture by a few closely related persons.”

Id.

In 1962, prompted by increased use of the exemption for speculative offerings to unrelated and uninformed persons, the Commission clarified limitations on the exemption's availability.

See id.

123

See id.

The Commission adopted Rule 506 of Regulation D as a non-exclusive safe harbor under Section 4(a)(2), providing objective standards on which an issuer could rely to meet the requirements of the Section 4(a)(2) exemption.

124

This included a prohibition on the use of general solicitation or advertising to market the securities. In 2012, Section 201(a) of the JOBS Act directed the Commission to eliminate the prohibition on using general solicitation in offerings under Rule 506 where all purchasers of the securities are accredited investors and the issuer takes reasonable steps to verify that the purchasers are accredited investors.

125

To implement Section 201(a), the Commission adopted paragraph (c) of Rule 506, and retained the prior Rule 506 safe harbor as paragraph (b).

126

As a result, general solicitation or advertising continues to be prohibited in an offering under Rule 506(b).

124

See

Regulation D Adopting Release, at Section III.C. Attempted compliance with any rule in Regulation D does not preclude an issuer from claiming the availability of another applicable exemption. For example, an issuer's failure to satisfy all the terms and conditions of Rule 506(b) does not raise a presumption that the exemption provided by Section 4(a)(2) is not available.

See

Rule 500(c).

125

Sec. 201(a), Public Law 112-106, 126 Stat. 306 (Apr. 5, 2012).

126

See

Rule 506(c) Adopting Release.

1. Exemption From General Solicitation for “Demo Days” and Similar Events

The Securities Act defines, and the Commission has historically interpreted, the term “offer” broadly.

127

The Commission has explained that “the publication of information and publicity efforts, made in advance of a proposed financing which have the effect of conditioning the public mind or arousing public interest in the issuer or in its securities constitutes an offer.”

128

Although the terms “general solicitation” and “general advertising” are not defined in Regulation D, Rule 502(c) does provide examples of general solicitation and general advertising, including advertisements published in newspapers and magazines, communications broadcast over television and radio, and seminars where attendees have been invited by general solicitation or general advertising.

129

The Commission has stated that other uses of publicly available media, such as unrestricted websites, also constitute general solicitation and general advertising.

130

In this release, we refer to both general solicitation and general advertising as they relate to an offer of securities as “general solicitation.”

127

See

Securities Offering Reform, Release No. 33-8591 (July 19, 2005) [70 FR 44722 (Aug. 3, 2005)] (“Securities Offering Reform Release”), at note 88 (“The term `offer' has been interpreted broadly and goes beyond the common law concept of an offer.”) (

citing Diskin

Lomasney & Co.,

452 F.2d 871 (2d. Cir. 1971) and

SEC

Cavanaugh,

1 F. Supp. 2d 337 (S.D.N.Y. 1998)).

See also

Section 2(a)(3) of the Securities Act (noting that an offer includes every attempt to dispose of a security or interest in a security, for value; or any solicitation of an offer to buy a security or interest in a security).

128

See

Securities Offering Reform Release.

129

See

Rule 502(c).

130

See

Use of Electronic Media for Delivery Purposes, Release No. 33-7233 (Oct. 6, 1995) [60 FR 53458 (Oct. 13, 1995)], at Section II.A.D; and Use of Electronic Media Release, at Section II.C.2.

Commenters have raised questions about issuers that present to potential investors at “demo days” and similar events.

131

These 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. If the issuer's presentation at a “demo day” or similar event constitutes an offer of securities, the issuer would not be deemed to have engaged in general solicitation if the organizer of the event has limited participation in the event to individuals or groups of individuals with whom the issuer or the organizer has a pre-existing substantive relationship or that have been contacted through an informal, personal network of experienced, financially sophisticated individuals, such as angel investors.

131

See

CCMC Letter (stating that “the SEC should clarify that startups and angel investors are permitted to participate in “demo days” or other publicity events in which companies serially present to audiences that may include potential investors but for which no specific investment solicitation is made”); and letter from Investment Adviser Association dated October 18, 2019 (“IAA Letter”) (suggesting that the Commission “should clarify that limited communications designed for consumption by a non-public audience (such as institutional publications or institutionally focused consultant databases), or participation in a `demo day' or similar event, would not be considered general solicitation or general advertising”).

However, we understand that in many cases it may not be practical for the organizer of the event to limit participation in this manner. As a result, we are proposing Rule 148, which would provide that certain “demo day” communications would not be deemed general solicitation or general advertising.

132

Specifically, as proposed, an issuer would not be deemed to have engaged in general solicitation if the communications are made in connection with a seminar or meeting by a college, university, or other institution of higher education, a local government, a nonprofit organization, or an angel investor group, incubator, or accelerator sponsoring the seminar or meeting.

133

132

Because communications that comply with proposed Rule 148 would not be deemed a general solicitation or general advertising, the limitations on the manner of offering in Rule 502(c) of Regulation D would be inapplicable.

133

A proposed Instruction to Rule 148 would provide that for purposes of the rules the term “angel investor group” means a group: (A) Of accredited investors; (B) that holds regular meetings and has written processes and procedures for making investment decisions, either individually or among the membership of the group as a whole; and (C) is neither associated nor affiliated with brokers, dealers, or investment advisers.

With respect to the organization and conduct of the event, the sponsor would not be permitted to make investment recommendations or provide investment advice to attendees of the event, nor would it be permitted to engage in any investment negotiations between the issuer and investors attending the event. The sponsor would not be permitted to

charge attendees of the event any fees, other than reasonable administrative fees, or receive any compensation for making introductions between attendees and issuers, or for investment negotiations between the parties. The sponsor also would not be permitted to receive any compensation with respect to the event that would require it to register as broker or dealer under the Exchange Act, or as an investment adviser under the Advisers Act.

In addition, the proposed rule would specify that the advertising for the event may not reference any specific offering of securities by the issuer and that the information conveyed at the event regarding the offering of securities by the issuer is limited to:

• Notification that the issuer is in the process of offering or planning to offer securities;

• The type and amount of securities being offered; and

• The intended use of the proceeds of the offering.

We believe that this tailored approach, which limits the types of organizations that may sponsor events and the scope of the sponsor's activities, coupled with the limitation on the information about a securities offering that an issuer is permitted to provide at the event, appropriately provides for investor protection while permitting issuers, particularly small and emerging issuers, and investors, the opportunity to more efficiently expand and grow their networks. For issuers that have been reported to have historically had less access to capital at start up, this approach may offer an opportunity to help bridge any funding gaps by allowing them to reach broader audiences.

134

For example, diverse founders, including women-owned and minority-owned businesses may have less access to start-up capital and venture capital (“VC”) funding.

See

Office of the Advocate for Small Business Capital Formation Annual Report for Fiscal Year 2019,

available at https://www.sec.gov/files/2019_OASB_Annual%20Report.pdf,

at 26 and 30.

See also

Presentation at Feb. 4, 2020 Small Business Capital Formation Advisory Committee meeting by James Gelfer, Senior Strategist, Lead Venture Analyst, PitchBook,

available at https://www.sec.gov/spotlight/sbcfac/2020-02-04-presentation-pitchbook-venture-climate.pdf,

at 13 (“Female-founded companies as a proportion of total US VC deal activity” (showing the proportion of total U.S. VC deals for companies that had at least one female founder (22.8 percent of VC deals and 14.2 percent of VC dollars) and for companies with all female founders (6.8 percent of VC deals and 2.7 percent of VC dollars)).

See also

Banerji, Devika & Reimer, Torsten,

Startup Founders and Their LinkedIn Connections: Are Well-Connected Entrepreneurs More Successful?

90 Computers in Hum. Behavior 46 (2019) (finding that social connectedness of founders was the best predictor of funds raised).

In light of recent developments in the capital markets, including the adoption of Rule 506(c), as well as developments in communications and technology, we considered, but are not proposing at this time, adding revised examples of general solicitation to our rules. Furthermore, several commenters on the Concept Release, as well as the SEC Small Business Capital Formation Advisory Committee, have suggested that further guidance and clarification as to the types of communications that classify as “general solicitation” and “general advertising” would be helpful.

135

See, e.g.,

NYSBA Letter; letter from Institute for Portfolio Alternatives dated September 24, 2019 (“IPA Letter”); CCMC Letter; Dechert Letter; IAA Letter; letter from Association for Corporate Growth dated September 24, 2019; ABA Letter; and Transcript of SEC Small Business Capital Formation Advisory Committee (Feb. 4, 2020),

available at https://www.sec.gov/info/smallbus/acsec/sbcfac-transcript-020420.pdf

(“2020 Transcript of Small Business Advisory Committee”), at 172-174 (discussing confusion surrounding general solicitation).

As a result, we considered whether to update and expand the current Rule 502(c) examples of general solicitation by adding examples to a new rule outside of Regulation D, deleting the current examples from Rule 502(c) and including a reference in Rule 502(c) to the new rule. For example, we considered stating in the new rule that an issuer would be considered to be engaging in general solicitation if, among other things, the issuer or any person acting on the issuer's behalf uses one or more of the following methods of communication to offer securities:

• Any advertisement, article, notice or other communication published on a publicly available website or mobile application, including social media, published in any newspaper, magazine, or similar media, or broadcast over television, radio or a similar medium;

• Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising, other than certain “demo day” activities covered by proposed Rule 148; or

• Any form of direct mail, telephone, email, text messaging, or similar method of communication, if the issuer (or any underwriter, broker, dealer, or agent acting on behalf of the issuer) does not have a pre-existing, substantive relationship with the offerees, or cannot otherwise demonstrate the absence of a general solicitation.

This approach would encompass present day communication methods that did not exist at the time of Rule 502(c)'s adoption, such as websites, social media, texts, and email, and would clarify that cold calling and other similar methods of communication that do not involve the use of mass media may still be considered general solicitation if the issuer or its agent does not have a pre-existing, substantive relationship with the offerees, or cannot otherwise demonstrate the absence of a general solicitation.

We note the existence of a pre-existing, substantive relationship is not the exclusive means of demonstrating the absence of a general solicitation. For example, an issuer may also demonstrate the absence of a general solicitation by limiting its communications to direct contact by the issuer or its agents outside of a public offering effort. In addition, groups of experienced, sophisticated investors, such as “angel investors,” may share information about offerings through their network and members who have a relationship with a particular issuer may introduce that issuer to other members. Issuers that contact one or more experienced, sophisticated members of the group through this type of referral may be able to establish a reasonable belief that other offerees in the network have the necessary financial experience and sophistication.

Request for Comment

19. Should we, as proposed, provide a specific exception for communications in connection with a “demo-day” or similar event so that it would not be considered general solicitation if certain conditions are met? Should we permit organizations other than those listed in proposed Rule 148 to act as sponsors of such events? An instruction to the proposed rule provides that the term “angel investor group” means a group that is composed of accredited investors that holds regular meetings and has written processes and procedures for making investment decisions, either individually or among the membership of the group as a whole, and is neither associated nor affiliated with brokers, dealers, or investment advisers. Does this definition appropriately cover the types of groups that sponsor such events, or are there changes that should be made to the definition? Should we include, as proposed, accelerators and incubators as organizations that may act as sponsors of these events? Should we define the terms “accelerator” and “incubator” for this purpose? Alternatively, should we specify only the types of groups that would be prohibited from acting as sponsors of these events, such as broker-dealers, investment advisers, or others? Are the proposed conditions to this exception, such as limitations on the sponsor's fees and the types of information an issuer may provide at the event appropriate? If

not, how should those conditions be revised? Are there additional conditions that we should specify with respect to this exception, such as a requirement that certain disclosures be provided to event attendees, or limitations on the characteristics of the entities that may avail themselves of this exception (

i.e.,

entities formed for the purposes of sponsoring events in order to engage in general solicitation)?

20. Should we provide a definition of “general solicitation” and “general advertising”? If so, how should those terms be defined? Should we instead eliminate all prohibitions on “general solicitation” and “general advertising” and focus investor protections at the time of sale rather than at the time of offer?

21. Should we move the existing list of examples provided in Rule 502(c) to a new rule? Do the current examples in Rule 502(c) pose any particular challenges we should consider in formulating a new rule? Are there different or additional examples that we should provide? For example, should we include any form of direct mail, telephone, email, text messaging, or similar method of communication, if the issuer (or any underwriter, broker, dealer, or agent acting on behalf of the issuer) does not have a pre-existing, substantive relationship with the offerees, or cannot otherwise demonstrate the absence of a general solicitation?

22. Should we define the term “pre-existing substantive relationship” in the rule? If so, should we define the term consistently with the guidance set forth in this release? If not, how should we define this term?

23. Would the proposed changes positively impact access to capital by counterbalancing social network effects for underrepresented founders, such as women, minorities, and entrepreneurs in rural areas?

2. Solicitations of Interest

The JOBS Act added Securities Act Section 5(d), permitting emerging growth companies (“EGCs”),

136

and persons authorized to act on their behalf, to engage in oral or written communications with potential investors that are QIBs or IAIs before or after filing a registration statement to gauge such investors' interest in a contemplated securities offering.

137

Securities Act Rule 163B, which the Commission adopted in September 2019, extended to all issuers the “test-the-waters” accommodation previously available only to EGCs.

138

Under the new rule, all issuers and those authorized to act on their behalf are allowed to gauge market interest in a registered securities offering through discussions with QIBs and IAIs prior to, or following, the filing of a registration statement.

136

See

17 CFR 230.405 (defining “emerging growth company”).

137

Sec. 105(c), Public Law 112-106, 126 Stat. 306 (2012).

138

See

Solicitations of Interest Prior to a Registered Public Offering, Release No. 33-10699 (Sep. 25, 2019) [84 FR 53011 (Oct. 4, 2019)] (“Solicitations of Interest

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