The most notable change implemented by the SEC’s 2020 amendments simplifying private offering exemptions was the replacement of the SEC’s patchwork approach to determining when one offering will be integrated with another with a single, comprehensive rule addressing integration issues across a full range of possible settings. As Dave observed last year, that was a big relief for most issuers. However, a recent letter from Stan Keller and Richard Leisner to SEC Chairman Paul Atkins and Acting Corp Fin Director Cicely LaMothe raises a remaining area of concern under the new regime that they’d like to see addressed. This excerpt from their letter explains the problem:

Rule 152(a), as now in effect, provides a general principle for determining when, in the absence of a safe harbor under Rule 152(b), two or more offerings need not be integrated and treated as part of the same offering for purposes of qualifying for an exemption from registration. Clause (1) of Rule 152(a) requires that each purchaser in an exempt offering in which general solicitation is not allowed, in the absence of a substantive relationship with that purchaser established before the offering commenced, has not been solicited through the use of general solicitation.

There is no stated time limit on when that general solicitation may have taken place and therefore no cleansing period. Accordingly, if a purchaser was generally solicited some time ago (possibly a year or more before and likely in connection with a different offering), under the language of the rule they remain ineligible to participate in the current offering because that earlier general solicitation will be attributed to the current offering, thus making the exemption unavailable for the entire offering. This requirement also results in negating the availability of the safe harbor under Rule 152(b)(1) premised on a 30-day cooling off period.

The authors suggest that Rule 152(a)(l), like the safe harbor in Rule 152(b)(l), should provide for a cooling off period of an appropriate length in order to have objective certainty as to when a purchaser previously solicited is out of the penalty box.

Richie Leisner observed in an email message to me that this open-ended “penalty box” isn’t a big issue for lawyers with clients that use financial intermediaries in their transactions. However, he noted that “out here in the hinterlands, our clients in most cases are not attractive enough or wealthy enough to involve licensed financial intermediaries. In these circumstances Rule 152 continued to pose a trap for the unwary.”

The letter also asks the SEC to address similar concerns surrounding the provisions of Rule 144(i) that make Rule 144 unavailable for securities of shell companies and impose current information requirements as a condition to use of the rule by holders of securities of former shell companies without any time limitation.

– John Jenkins