June 19, 2019

Private Offerings: SEC’s “Concept Release” Looks to Harmonize Exemptions

Yesterday, the SEC announced that it’s seeking input – via this 211-page concept release – on ways to “simplify, harmonize & improve the exempt offering framework.” While this sounds like a pretty low bar given the complicated interplay of all the federal & state exemptions, I don’t envy the staffers who might be tasked with crafting further changes that please everyone…and don’t cause more confusion. Among the many topics discussed in the concept release, the Commission is considering whether:

– The SEC’s exempt offering framework, as a whole, is consistent, accessible & effective – or whether the SEC should consider simplifications

– There should be any changes to streamline capital raising exemptions – especially Rule 506 of Reg D, Reg A, Rule 504 of Reg D, the intrastate offering exemption, and Regulation Crowdfunding

– There may be gaps in the SEC’s framework that make it difficult for small companies to raise capital at critical stages of their business cycle

– The limitations on who can invest in exempt offerings, or the amount they can invest, provide an appropriate level of investor protection – versus making offerings unduly difficult for companies and/or restricting investors’ access to investment opportunities (this includes a discussion of the “accredited investor” definition)

– The SEC can & should do more to allow companies to transition from one exempt offering to another – and ultimately to a registered public offering – without undue friction or delay

– The SEC should take steps to facilitate capital formation in exempt offerings through pooled investment funds – and whether retail investors should be allowed greater exposure to growth-stage companies through these funds

– The SEC should change exemptions for resales to improve secondary market liquidity

This Cooley blog notes that SEC Chair Jay Clayton & Corp Fin Director Bill Hinman have been laying the groundwork for this release in several speeches during the last year. And many of these ideas have been discussed (passionately) for years in securities law circles and at the SEC’s annual Small Business Forum – so no doubt we’ll see some pretty thorough comments over the next few months. The comment period ends in late September.

Over on Twitter, Professor Ann Lipton pointed out that the concept release has a great table of existing exemptions on pages 10-11 – and intel on how much money was raised last year under each type of offering. We’ll be posting memos in our “Private Placements” Practice Area

“Regulation Crowdfunding”: Not Drawing Much of a Crowd

Yesterday’s concept release on private offering exemptions includes a mandated Staff report on the impact of Regulation Crowdfunding on capital formation & investor protection. Here’s the quotable stat:

From May 2016 (when the rule became effective) through the end of last year, there were only 519 completed offerings – mostly conducted by companies in California & New York – which raised a total of $108 million. During the same time period, 12,700 companies raised a total of $4.5 billion under Reg D.

The SEC does think the Regulation has been attracting new companies to the exempt offering market (rather than encouraging currently participating companies to switch exemptions). But that’s not too surprising given all the downsides of the current rule compared to a more traditional fundraising approach. The concept release includes 13 multi-part questions about ways to make crowdfunding more of a crowd-pleaser.

Auditor Independence: SEC Refines “Debtor-Creditor” Analysis

Yesterday, the SEC issued this 77-page adopting release to amend the auditor independence requirements in Rule 2-01 of Regulation S-X. The amendments impact the analysis of auditor independence when the auditor has a lending relationship with a client or its shareholders. Here’s what the revised rule will do:

– Focus the analysis on beneficial ownership rather than on both record and beneficial ownership

– Replace the existing 10 percent bright-line shareholder ownership test with a “significant influence” test

– Add a “known through reasonable inquiry” standard with respect to identifying beneficial owners of the audit client’s equity securities

– Exclude from the definition of “audit client,” for a fund under audit, any other funds, that otherwise would be considered affiliates of the audit client under the rules for certain lending relationships

According to the SEC, the amendments will more effectively identify debtor-creditor relationships that could impair an auditor’s objectivity and impartiality – as opposed to more attenuated relationships that don’t pose threats & aren’t important to investors.

Liz Dunshee