The Shareholder Advocacy Forum has submitted a comment letter to The Securities and Exchange Commission encouraging the adoption of a group of amendments intended to simplify, harmonize, and improve the current framework for private offerings under the Securities Act of 1933. SEC Chairman Jay Clayton has aimed the amendments at small and medium companies that often struggle to access capital in U.S. markets because of complex and confusing regulations that force businesses to choose between remaining private or become public companies.
Raising capital in the private market operates through a system of exemptions, each of which has conditions that must be met before issuers are allowed to offer to investors. The goal of the amendments is to allow the capital to be freed from regulations and flow while still ensuring adequate investor protections. While large businesses often use the private market as a way to transition to the public market, small and medium businesses have valid considerations for maintaining status as a private company.
The current patchwork regulations is inconsistent and results in expensive compliance costs that hinder small and medium businesses from entering and competing robustly within the market. The SEC has recognized this disadvantage and the need to simplify regulations.
The proposed amendments will:
- Raise offering limits allowing business to access more capital without being forces to become public within a 12 month period for three regulations – Regulation A: Tier 2 from $50 million to $75 million; Rule 504 of Regulation D from $5 million to $10 million; and Regulation Crowdfunding Section 4(a)(66) from $1.07 million to $5 million
- Expand “test-the-waters” accommodation by allowing an issuer to solicit interest materials from perspective investors to determine which exemption to rely on and extend the accommodation to issuers exempt under Regulation Crowdfunding
- Propose a new rule to exempt qualifying “demo day” communications from the current ban on general solicitation and advertising
The letter also addresses some of Commissioner Hester Pierce’s additional questions posed in conjuncture with the proposed amendments. Such comments include a caution against complete reregulation of offerings substituted by a “time of sale” approach, opportunities to further unlock the potential of crowdfunding in the United States, and a rejection of holistically streamlining the offering framework by starting from scratch.
The proposed amendments represent a conscious effort by the SEC to help the private market function more efficiently and become more inclusive for retail investors and small business issuers. The SEC has also taken steps to ensure that investors are not left vulnerable through exempt offerings by maintaining anti-fraud liability. Small and medium business will have more affordable and simplified access to capital by harmonizing the current patchwork of regulations.
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