The SEC Considers Rule Changes

Securities law is one of the fasted moving areas of the law. In fact, even lawyers who practice regularly in this area often have to check on items they may have completed even a week ago. 

For example, the SEC had numerous exemptions under regulation D. Exemption 505 was repealed, and as a result we have seen a significant increase in use of exemption 504 and 506. 

The Securities and Exchange Commission published a release earlier this week to solicit comment on several exemptions from registration under the Securities Act of 1933 that facilitate capital raising. Over the years, and particularly since the JOBS Act of 2012, several exemptions from registration have been introduced, expanded, or otherwise revised. As a result, the overall framework for exempt offerings has changed significantly. The SEC believes capital markets would benefit from a comprehensive review of the design and scope of our framework for offerings that are exempt from registration. More specifically, the commission also believes that issuers and investors could benefit from a framework that is more consistent and eliminates gaps and complexities. Therefore, the commission is seeking comment on possible ways to simplify, harmonize, and improve the exempt offering framework to promote capital formation and expand investment opportunities while maintaining appropriate investor protections. 

The SEC seeks to explore whether overlapping exemptions may create confusion for issuers trying to determine and navigate the most efficient path to raise capital. At the same time, they seek to identify gaps in our framework that may make it difficult, especially for smaller issuers, to rely on an exemption from registration to raise capital at key stages of their business cycle.

If you go back to 2011, there were approximately 1T in registered offerings. At that time there were about $1.6T in exempt offerings. In 2018, there were about $1.5T in registered offerings and nearly 3T in exempt offerings. 

There are a number of areas where the SEC is looking for input. Here is one of them. 

In light of the fact that some exemptions impose limited or no restrictions at the time of the offer, should the SEC revise our exemptions across the board to focus consistently on investor protections at the time of sale rather than at the time of offer? If exemptions focused on investor protections at the time of sale rather than at the time of offer, should offers be deregulated altogether? How would that affect capital formation in the exempt market and what investor protections would be necessary or beneficial in such a framework?

The questions they are asking are really great questions, and frankly are not what you typically expect from governments.

Which conditions or requirements are most or least effective at protecting investors in exempt offerings? Are there changes to these investor protections or additional measures we should implement to provide more effective investor protection in exempt offerings? Are there investor protection conditions that we should eliminate or modify because they are ineffective or unnecessary?

One of the main areas the SEC is looking at is to expand the definition of accredited investor beyond just a net worth test. The report also discussed whether individuals with certain professional degrees or licenses or financial experience, or who are advised by professionals, should be considered accredited investors. 

You can find out more about the process by visiting the SEC website. The link to the document is contained in the show notes for the podcast. 

https://www.sec.gov/rules/concept/2019/33-10649.pdf