Regulation Crowdfunding
The amendments to Regulation Crowdfunding, which provides an exemption from registration for certain securities offerings that solicit relatively small individual investments or contributions from a large number of investors, include:[2]
Maximum Offering Amount of $5 Million. A company issuing securities in reliance on Regulation Crowdfunding is permitted under Rule 100(a)(1) to raise a maximum aggregate amount of $5 million in a 12-month period (before the amendments, the limit was $1.07 million).
Investment Limits. Before the amendments to Rule 100(a)(2), all individual investors were limited in the amounts they were allowed to invest in all Regulation Crowdfunding offerings over the course of a 12-month period. The amendments to Rule 100(a)(2) remove these investment limits for accredited investors.
The amendments also change the calculation method for the investment limits for non-accredited investors to allow them to rely on the greater of their annual income or net worth. For non-accredited investors, if either of an investor’s annual income or net worth is less than $107,000, then the investor’s investment limit is the greater of:
- $2,200 or
- 5 percent of the greater of the investor’s annual income or net worth.
If both the non-accredited investor’s annual income and net worth are equal to or more than $107,000, then the investor’s limit is 10 percent of the greater of their annual income or net worth, not to exceed $107,000.
Advertising Rules. Under Rule 204 of Regulation Crowdfunding, an issuer may not advertise the terms of a Regulation Crowdfunding offering except in a notice that directs investors to the intermediary’s platform and includes no more than the information specified in that rule. The amendments revised Rule 204 to clarify that oral communications with prospective crowdfunding investors are permitted once the Form C is filed, so long as the communications comply with the requirements of Rule 204. The amendments also permit an issuer to provide information about the terms of an offering under Regulation Crowdfunding in the offering materials for a concurrent offering without violating Rule 204.
In addition, the definition of the “terms of the offering” is expanded so that it now includes:
- the amount of securities offered;
- the nature of the securities;
- the price of the securities;
- the closing date of the offering period;
- the planned use of proceeds; and
- the issuer’s progress toward meeting its funding target.
Testing the Waters. The amendments add new Rule 206 of Regulation Crowdfunding to allow issuers to “test the waters,” or solicit interest in a potential offering from the general public, orally or in writing prior to filing a Form C, provided that the solicitation materials used include the legends required by rule. The issuer is required to include any Rule 206 solicitation materials with the Form C that is filed with the Commission. Once the Form C is filed, any offering communications are required to comply with the terms of Regulation Crowdfunding, including the Rule 204 advertising restrictions.
Bad Actor Disqualification. Rule 503 of Regulation Crowdfunding includes “bad actor” disqualification provisions that disqualify offerings if the issuer or other “covered persons,” such as the issuer’s officers, directors, or promoters, have experienced a disqualifying event. Disqualifying events include, among other things, being convicted of, or subject to court or administrative sanctions for, securities fraud or other violations of specified laws. The amendments harmonize the disqualification provisions in Regulation Crowdfunding with the corresponding provision in Rule 506(d) of Regulation D by requiring the issuer to determine whether a covered person is disqualified both at the time of filing of the offering document and the time of sale.
Special Purpose Vehicles. The amendments permit the use of certain special purpose vehicles (SPVs) in Regulation Crowdfunding. New Investment Company Act Rule 3a-9 includes conditions for crowdfunding SPVs that are designed to ensure that the SPV acts solely as a conduit for investments in a crowdfunding issuer. The conditions, among other things, seek to provide investors in the crowdfunding SPV with the same economic exposure, voting power, and Regulation Crowdfunding disclosures as if the investors had invested directly in the crowdfunding issuer.
Under the final rules, the crowdfunding issuer and the crowdfunding vehicle are co-issuers under the Securities Act and are required to jointly file a Form C, providing all of the required Form C disclosure with respect to the offer and sale of the crowdfunding issuer’s securities to the crowdfunding vehicle and the offer and sale of the crowdfunding vehicle’s securities to investors.
Regulation D
Regulation D is a series of Securities Act rules that set forth three exemptions from the registration requirements of the Securities Act. The final rules amended Regulation D as follows:
Rule 504 Offering Limit. The aggregate amount of securities that may be offered and sold under Rule 504 of Regulation D is increased from $5 million to $10 million.
Rule 506(b) Disclosure. When non-accredited investors are participating in an offering under Rule 506(b), the issuer conducting the offering must furnish the information required by Rule 502(b), including specified financial statement information, to such non-accredited investors a reasonable time prior to the sale of the securities. The final rules amend the financial information requirements in Rule 502(b)(2) to align with the financial information that issuers must provide investors in Regulation A offerings. Specifically, for Regulation D offerings of $20 million or less, an issuer will provide disclosure as required by paragraph (b) of part F/S of Form 1-A, which applies to Tier 1 Regulation A offerings. For offerings of greater than $20 million, an issuer will provide disclosure as required by paragraph (c) of part F/S of Form 1-A, which applies to Tier 2 Regulation A offerings.
Rule 506(b) Non-Accredited Investor Limitation. In an offering under Rule 506(b), sales may be made only to accredited investors and up to 35 non-accredited investors who meet an investment sophistication standard. In connection with the adoption of the 30-day integration safe harbor (discussed above), the Commission amended Rule 506(b) to specify that where an issuer conducts more than one offering under Rule 506(b), the number of non-accredited investors purchasing in all such offerings in any 90-calendar-day-period would be limited to 35.
Rule 506(c) Reasonable Steps to Verify. Rule 506(c) permits issuers to generally solicit and advertise an unregistered offering, provided that all purchasers in the offering are accredited investors, the issuer takes reasonable steps to verify that purchasers are accredited investors, and certain other conditions in Regulation D are satisfied. Rule 506(c) provides a principles-based method for verification of accredited investor status as well as a non-exclusive list of verification methods.
The final rules add a new item to the non-exclusive list that allows an issuer to establish that an investor that the issuer previously took reasonable steps to verify as an accredited investor remains an accredited investor as of the time of a subsequent sale if the investor provides a written representation that the investor continues to qualify as an accredited investor and the issuer is not aware of information to the contrary. A written representation under this method of verification will satisfy the issuer’s obligation to verify the person’s accredited investor status for a period of five years from the date the person was previously verified as an accredited investor.
Demo Days
The amendments add Securities Act Rule 148 to provide that certain “demo day” communications (communications made in connection with an event sponsored by a group or entity that invites issuers to present their businesses to potential investors with the aim of securing investment) will not be deemed a general solicitation or general advertising. Under the new rule, an issuer will not be deemed to have engaged in general solicitation if the communications are made in connection with an event sponsored by a college, university, or other institution of higher education, a state or local government or instrumentality thereof, a nonprofit organization, or an angel investor group, incubator, or accelerator, provided certain conditions are satisfied, including limitations on the sponsor’s activities, a requirement that the advertising for the event not reference any specific offering of securities by the issuer, and limits on the information conveyed at the event regarding the offering of securities by or on behalf of the issuer. The new rule also includes additional limitations for events that permit virtual participation.
Regulation A
Regulation A establishes two tiers of offerings that are exempt from registration under the Securities Act. Issuers may elect to conduct a Regulation A offering pursuant to the requirements of either Tier 1 or Tier 2. The final rules amend several provisions of Regulation A, including:
Offering Limit. The final rules amend Rule 251(a) to increase the Tier 2 offering limit from $50 million in a 12-month period to $75 million in a 12-month period, including no more than $22.5 million offered on behalf of selling securityholders that are affiliates of the issuer (increased from $15 million). The Tier 1 offering limit was not amended and remains $20 million in a 12-month period, including no more than $6 million offered on behalf of selling securityholders that are affiliates of the issuer.
Filing Requirements. The amendments simplify certain Regulation A filing requirements to establish more consistency with registered offerings. These include:
- Permitting issuers to file redacted material contracts and plans of acquisition, reorganization, arrangement, liquidation, or succession as exhibits without applying for confidential treatment, if the issuer customarily and actually treats that information as private or confidential and if the omitted information is not material;
- Permitting issuers to redact information that would constitute a clearly unwarranted invasion of personal privacy in any of the exhibits listed in Item 17 of Form 1-A;
- Permitting issuers to make documents previously submitted for non-public review by the staff and related, non-public correspondence available to the public via EDGAR, instead of requiring such materials to be filed as exhibits to a publicly filed offering statement; and
- Permitting issuers to incorporate previously filed financial statements by reference into a Regulation A offering circular, subject to certain requirements set forth in General Instruction III(a)(2) of Form 1-A.
Eligibility Criteria. Regulation A is available only to companies organized in and with their principal place of business in the United States or Canada, and that meet certain other eligibility criteria set forth in Rule 251(b), such as having filed all reports required to be filed pursuant to Rule 257 (typically Tier 2 periodic and current reports) during the two years before the filing of a Regulation A offering statement (or for such shorter period that the issuer was required to file such reports). The final rules amend the eligibility criteria in Rule 251(b) to also require that Exchange Act reporting companies have filed all reports required by Section 13 or 15(d) of the Exchange Act in the two-year period preceding the filing of a Regulation A offering statement (or for such shorter period that the issuer was required to file such reports).
Bad Actor Disqualification. Like the amendment to Regulation Crowdfunding described above, the final rules amend Rule 262(a) to require an issuer to determine whether a covered person is disqualified both at the time of filing of the offering statement and the time of sale.
Confidential Standard for Exhibit Filing Requirements
Under rules adopted in 2019,[3] registrants are allowed to omit confidential information in material contracts and certain other exhibits pursuant to Items 601(b)(2) and 601(b)(10) of Regulation S-K, Item 1.01 of Form 8-K, Form 20-F, and investment company registration forms, as applicable, without submitting a confidential treatment request to the Commission, so long as certain requirements are met. The final rules replace the existing standard with one that permits information to be redacted from material contracts if it is the type of information that the issuer both customarily and actually treats as private and confidential, and which is also not material. As noted above, this standard will also apply in connection with the redaction of information from exhibits to Regulation A filings.
What are the compliance dates of the amendments?
The amendments are effective March 15, 2021, except for certain temporary regulatory relief for Regulation Crowdfunding issuers, which is effective from January 14, 2021 to March 1, 2023.