Signaling an interest in potentially overhauling its current securities offering exemption structure, the SEC has published a Concept Release, seeking public comments on a broad host of topics centering around the Commission’s current registration exemption regime. Clearly, the impetus for these potential changes comes from SEC Chairman Jay Clayton, who has declared the rationalization and democratization of capital formation to be a major goal of his tenure at the SEC.
A “Concept Release” is an infrequently-used administrative proceeding that enables the SEC to potentially commence the process of regulatory reform by first soliciting opinions from interested parties. In announcing the publication of its new Concept Release, the SEC aims to “simplify, harmonize, and improve” its current exemption regime in an effort to balance the goals of promoting capital formation and protecting investors.
While this Concept Release may, in fact, prompt significant regulatory changes in the upcoming years, there is no certainty at this time as to either the nature or scope of any eventual changes. We applaud the Commission for taking this first step toward regulatory reform, as there is a fairly solid consensus that the SEC’s current offering exemptions are a confusing patchwork of regulatory provisions developed over multiple decades that can often bewilder the entrepreneur seeking startup or growth company capital. In that regard, we are encouraged by any attempt to “simplify, harmonize, and improve” the capital formation process as the SEC proposes.
The Concept Release is indeed sweeping in the breadth and depth of the questions posed for public comment. Specifically, the Concept Release requests comment through 138 numbered questions—most with sub-parts—grouped into 11 sections, each dealing with a specific existing exemption (such as Reg D and Reg A) or material feature of the current exemption structure. The SEC also requests comment on 19 numbered queries that attempt to encapsulate the “broader themes” articulated throughout the overarching Concept Release. We provide a summary of these broader-themed queries below:
- Are there any capital-raising needs specific to certain issuers—such as start-ups, growth companies, issuers in a particular industry or region, or minority-owned issuers—that are not being met by the current exemptions?
- Does the existing exemption regime adequately satisfy both capital formation and investor protection requirements, and if so, should that regime be retained as is?
- Alternatively, is the existing exemption regime too complex? Should the SEC reduce or simplify the number of available exemptions?
- Is the substance of the exemptions, as currently articulated, simply too complex; so much so, that many issuers cannot understand and select the optimal exemption for their particular situation? Is this especially problematic for small businesses and the entrepreneurial class?
- Should the SEC focus more on investor protection at the time of a sale rather than at the time of an offer; and if so, should offers be de-regulated altogether?
- What metrics should be used in evaluating the impact of specific exemptions on the Commission’s stated goals of capital formation and investor protection?
- Given the transformation of information technology that has occurred since the SEC’s exemption rules were first adopted many decades ago, should the SEC consider rule changes to reflect this technology transformation?
- What potential rule changes might act to facilitate an issuer’s migration from one exempt offering to another as the issuer’s business matures?
- Would potential rule changes to the exempt offering framework have unintended effects on the registered public market? For example, might such changes encourage issuers to remain private longer or forgo registered offerings entirely, thereby resulting in less capital being raised in the public market? What changes to the current exempt offering regime might help issuers migrate to a public offering “without undue friction or delay”?
- Which conditions or requirements in existing exemptions—ostensibly designed for investor protection—are least effective in protecting investors, and, in turn, should be eliminated?
- Should the SEC consider rule changes that will help make exempt offerings more accessible to a broader group of retail investors, beyond those who currently qualify as accredited investors?
- Should the offering and investment limits stated in the SEC’s exemptions be subject to periodic inflation adjustment? If so, what is the best inflation metric, and how often should any adjustments be made?
- Should the SEC harmonize the disclosure requirements of its various exemptions?
- Should the availability of the SEC’s registration exemptions be conditioned on the participation of an intermediary, such as a registered broker-dealer or funding portal, particularly where the offering is open to retail investors?
- Should the availability of registration exemptions be conditioned on particular characteristics of the issuer or a lead investor?
- Should the SEC continue to tailor its exempt offering framework to the types of investors permitted to invest and the size of the offering?
- Should the SEC consider rule changes that would allow non-accredited investors to participate, subject to conditions, in all types of exempt offerings?
- Should the SEC consider consolidating exemptions into a single rule or regulation, as is the case now with the Rule 504, 506(b), and 506(c) exemptions under Reg D?
- Is the SEC effectively communicating information about its exempt offering framework, including the requirements of each exemption, to issuers and investors?
We will eagerly follow developments in this proceeding and comment on those as they materialize. Public comments have already begun to accrue and may be viewed on the SEC website as soon as they are received. The deadline for comment submission is September 24, 2019.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our attorneys assist start-up and growth-stage companies with capital raising activities, primarily by the structuring of exempt securities offerings. Please visit our Private Placements practice area page for more information.