The Securities and Exchange Commission is seeking comments on the current securities exemption structure. In a release yesterday, the SEC asked the public to provide feedback on “ways to simplify, harmonize, and improve the exempt offering framework to expand investment opportunities while maintaining appropriate investor protections and to promote capital formation.”
In the US, there is an alphabet soup of securities exemptions, or methods for companies to raise capital, while remaining compliant under the law. The rules have been created over decades with tweaks and additions that have added to what can only be described as a mish-mash of convoluted rules.
For ordinary people, the structure is Byzantine at best. The only true beneficiaries are lawyers steeped in the acronym-speak of securities law. Issuers pay dearly for this knowledge.
For online capital formation, this publication frequently references Reg D506c, Reg A+ and Reg CF, even while recognizing the fact that most people find this confusing as they simply want to raise capital while being compliant.
Part of the equation and SEC consultation is the definition of an “accredited investor.” Long in use, the current rule is wealth based demanding individuals that qualify to earn over $200,000 a year or have a net worth of more than $1 million. While simple to apply, this metric has failed in recognizing investor sophistication. While common sense dictates that wisdom is not measured by cash in the bank, the current regime has disenfranchised tens of millions of investors. As private markets have become a preferred route for capital formation, the net effect has been to block the masses from some of the most promising investment opportunities in history. Meanwhile, the rich get wealthier.
Here’s your chance to comment on the accredited investor standard (among other topics): https://t.co/nMsk9jeyyE
— Hester Peirce (@HesterPeirce) June 18, 2019
The SEC has long discussed their project to review securities exemption harmonization. The common-sense initiative was launched by SEC Chair Jay Clayton who commented on the request for public feedback:
“We are taking a critical look at our exemptions from registration to ensure that our multifaceted private offering framework works for investors and entrepreneurs alike, no matter where they are located in the United States. Input from startups, entrepreneurs, and investors who have first-hand experience with our framework will be key to our efforts to analyze and improve the complex system we have today.”
While it is not clear if there will be an actionable outcome, the project is long overdue.
The concept release seeks input on whether changes should be made to improve the entire exemption ecosystem. The SEC is asking for feedback on the following topics:
- The limitations on who can invest in certain exempt offerings, or the amount they can invest, provide an appropriate level of investor protection or pose an undue obstacle to capital formation or investor access to investment opportunities
- The Commission should take steps to facilitate a company’s ability to transition from one offering to another or to a registered offering
- The Commission should expand companies’ ability to raise capital through pooled investment funds
- Retail investors should be allowed greater exposure to growth-stage companies through pooled investment funds such as interval funds and other closed-end funds
- The Commission should revise its exemptions governing the secondary trading of securities initially issued in exempt offerings
Crowdfund Insider asked Doug Ellenoff, Managing Director of Ellenoff Grossman & Schole and longtime advocate of financial innovation for his thoughts on harmonization. Ellenoff credited the SEC staff for pursuing a more rational approach to private offerings exemptions:
“In the aftermath of the JOBS Act of 2012, the rules have only become more arcane and I believe more confusing for the public to navigate these regulatory financing options. While I appreciate the need and history of each of the provisions, other than securities lawyers, what entrepreneur is able to properly process the range of currently available options (pros and cons; expenses etc.)–4(a)(2); 4(a)(6); Rule 504; Reg D– 506(b); 506(c); 3(a)(11), Rule 147 and Rule 147A; Reg A and Reg A+,” stated Ellenoff.
He said there is just no simple, common sense way to explain these provisions:
“I have spoken at hundreds of events to glazed over audiences trying to convey it in a digestible manner … and even seasoned securities lawyers are having trouble making sure their clients truly understand how to proceed legally and make the right judgment call,” Ellenoff stated. “So it’s timely in my judgment to clarify and meaningfully crowdsource responses to the SEC’s list of dozens of questions. I encourage everyone’s participation. This is a significant challenge but a magnificent chance to make a meaningful impact on capital formation for entrepreneurs to effect securities law policy.”
Maxwell Rich, a securities attorney and Chief Compliance Officer of leading crowdfunding platform Republic had this to say:
“Republic supports the Commission’s efforts in studying ways that the various registration exemptions used to raise capital in the United States can be simplified, harmonized and improved. While regulation crowdfunding is a nascent and emerging capital formation framework, its interactions with other exemptions such as Reg D and Reg A+ lack synergy and symmetry, which causes investor and issuer confusion.”
Rich said they hope this study will provide “common sense and actionable recommendations” for expanding investment and capital raising opportunities while maintaining appropriate investor protections.
Youngro Lee, founder and CEO of NextSeed and Chair of the Association of Online Investment Platforms, added his voice of support for the SEC’s harmonization initiative.
“This is a very positive development for the future of small business capital formation laws. The original JOBS Act was instrumental in launching a new industry seeking to provide opportunities for small businesses and everyday investors, but there were real challenges presented by the legal limitations. Thoughtful harmonization of the various confusing securities offering exemptions could truly accelerate the adoption of new capital formation laws for the benefit of everyone.”
By requesting the public’s feedback on regulatory harmonization we can expect a diversity of opinion on the matter. But in the end, it is what the SEC does with the information. And whether they are willing to act, or alternatively, they feel a need to pass the buck over to Congress.
Regardless, it is painfully obvious action is needed.
The public comment period for the concept release will remain open for 90 days following publication of the release in the Federal Register.
FACT SHEET
CONCEPT RELEASE ON HARMONIZATION OF SECURITIES OFFERING EXEMPTIONS
The Commission issued a concept release that reviews the framework for exempt offerings, including several exemptions from registration under the Securities Act of 1933 that facilitate capital raising. The concept release seeks comment on possible ways to simplify, harmonize, and improve this exempt offering framework to expand investment opportunities while maintaining appropriate investor protections and promote capital formation.
Background
Over the years, and particularly since the Jumpstart Our Business Startups Act of 2012, several exemptions from registration have been introduced, expanded, or otherwise revised. As a result, the overall exempt offering framework has changed significantly. Our capital markets would benefit from a comprehensive review of the design and scope of the Commission’s exempt offering framework.
Highlights
| The concept release requests comment on: |
| The Exempt Offering Framework | Whether the Commission’s exempt offering framework, as a whole, is consistent, accessible, and effective for both companies and investors or whether the Commission should consider changes to simplify, improve, or harmonize the exempt offering framework. |
| The Capital Raising Exemptions within the Framework | Whether there should be any changes to improve, harmonize, or streamline any of the capital raising exemptions, specifically: the private placement exemption and Rule 506 of Regulation D, Regulation A, Rule 504 of Regulation D, the intrastate offering exemptions, and Regulation Crowdfunding. |
| Potential Gaps in the Framework | Whether there may be gaps in the Commission’s framework that may make it difficult, especially for smaller companies, to rely on an exemption from registration to raise capital at key stages of their business cycle. |
| Investor Limitations | Whether the limitations on who can invest in certain exempt offerings, or the amount they can invest, provide an appropriate level of investor protection (i.e., whether the current levels of investor protection are insufficient, appropriate, or excessive) or pose an undue obstacle to capital formation or investor access to investment opportunities, including a discussion of the persons and companies that fall within the “accredited investor” definition. |
| Integration | Whether the Commission can and should do more to allow companies to transition from one exempt offering to another and, ultimately, to a registered public offering, if desired, without undue friction or delay. |
| Pooled Investment Funds | Whether the Commission should take steps to facilitate capital formation in exempt offerings through pooled investment funds, including interval funds and other closed-end funds, and whether retail investors should be allowed greater exposure to growth-stage companies through pooled investment funds in light of the potential advantages and risks of investing through such funds. |
| Secondary Trading | Whether the Commission should revise its rules governing exemptions for resales of securities to facilitate capital formation and to promote investor protection by improving secondary market liquidity. |
What’s Next?
The Commission welcomes all feedback and encourages interested parties to submit comments on any or all topics of interest and to respond to one, multiple, or all questions asked in this release.
The concept release will be published on the Commission’s website and in the Federal Register. The comment period will remain open for 90 days from publication in the Federal Register.