On November 2, 2020, the Securities and Exchange Commission adopted new rules under the title “Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets.”
SAF supports the Commission’s new rules to reduce and simplify the regulatory and compliance burdens that were placed on small and medium-sized businesses. These rules will promote capital formation in private markets and allow private businesses to continue to grow without being forced to enter public markets as a condition of seeking additional financing. The previous patchwork of regulations was inconsistently applied and resulted in costs associated with heightened disclosure and paperwork compliance to entertain new investments.
The final rule will:
- Raise offering limits allowing businesses to raise more capital without increasing the regulatory burden.
- Regulation A allows smaller companies in earlier stages of development to offer and sell securities to the public, including non-accredited investors. The final rule increased Regulation A’s Tier 2 offering limit to $75 million in a 12-month period, from $50 million. This will allow for smaller companies to raise more capital without undertaking the regulatory burden of a registered public offering.
- Rule 504 of Regulation D is an exemption that allows businesses to offer and sell securities without having to register their offering with the SEC. The amendment raises the offering limit from $5 million in any 12-month period to $10 million in a 12-month period. This change should allow businesses from primarily outside Silicon Valley with limited venture capital footprints to raise money more easily from friends, supporters, and local investors.
- The threshold for Regulation Crowdfunding, where small businesses can raise funds through small investments or contributions from many people without having to register the offering with the SEC, was increased from $1.07 million to $5 million. Crowdfunding has served as a lifeline for many small businesses during the healthcare crisis. Increasing the funding threshold supports entrepreneurs and consumers who are willing to purchase or support a business even before its products are available for consumption.
- Exempt qualifying “demo day” communications from the current ban on general solicitation and advertising. Demo days provide start-ups with valuable opportunities to present their business in front of potential investors. Under the previous rules, discussing a security offering at a demo day may be considered a general solicitation, which would be an SEC violation without proper filings with the Commission.
- Expand “testing the waters” accommodation by allowing an issuer to communicate orally and in writing to gauge investor interest for Regulation Crowdfunding. This allows small businesses and entrepreneurs with limited fundraising requirements to gauge local investor interest without formally filing paperwork with the SEC. Given the increased use-case for crowdfunding over the past several years, this expansion of “testing the waters” is in line with the SEC’s goals of eliminating complexity and facilitating access to capital.
By simplifying the current framework for private offerings under the Securities Act of 1933, the SEC will allow more capital from accredited investors and institutions to flow to entrepreneurs still in the early stages of developing their products and services.
These rules will help smaller businesses conduct more frequent private offerings, funding rounds, demo days, and “testing the waters” with fewer restrictions. SAF submitted comments to the SEC in June supporting the SEC’s rule proposals. We are pleased to see Chairman Jay Clayton’s leadership on this issue.