SEC Exemptions
Summary of SEC’s Final Rule for Reg CF, Reg A+, Reg D
Dec 01, 2020
On Monday, November 2, 2020, the U.S. Securities and Exchange Commission (SEC) voted 3-2 in favor of adopting proposed changes to the exempt offering framework. The updates include some much-anticipated Regulation Crowdfunding (Reg CF) and Regulation A+ (Reg A+) amendments that industry proponents expect will lead to a tipping point in the number of issuers who will make use of these niche fundraising exemptions.
While there were a few modifications to the adopted amendments compared to what was proposed (e.g. SAFEs will not be prohibited under Reg CF), most of the updates were adopted as originally proposed.
The SEC’s final rule can be found in all of its 388-pages-of-glory here.
But we assume that most of you won’t want (or be able) to take the time to read the entire document. So we read the entire document (yes, really) and have summarized the key points that equity crowdfunding investors and founders should be aware of below.
Summary of SEC’s 2020 Final Rule – Updates to Reg CF, Reg A+, and Reg D
The final rule, titled “Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets”, will mostly relax and streamline the current regulations in question.
According to Chairman Clayton’s public statement, the overhauled regulations accomplish three primary objectives:
In short – these changes are a big deal. Here they are.
Changes to Regulation Crowdfunding (Reg CF)
Of the most interest to equity crowdfunding investors and founders, there were some substantial changes that will go into effect in early 2021, including:
Increased offering limits
“As adopted, an issuer will not be deemed to have engaged in general solicitation if the communications are made in connection with a seminar or meeting sponsored by a college, university, or other institution of higher education, a State or local government or instrumentality of a State or local government, a nonprofit organization, or an angel investor group, incubator, or accelerator.”
The information that an issuer may provide under Rule 204 was also expanded to include 1) use of proceeds and 2) issuer’s progress toward meeting its funding goals.
Proposed changes that were NOT adopted include:
Potential regulatory issues that weren’t yet addressed include:
Need to consider state preemption of Blue Sky laws (i.e. not being subject to each state’s local securities regulations) with respect to testing-the-waters offers made under Rule 241 as well as secondary sales of Reg CF and Reg A Tier 2 securities.
Changes to Regulation A (Reg A+)
Increased offering limits
Changes to Regulation D
Other Exemption Updates
Overview of Capital Raising Exemptions
About Capital Engine®
Capital Engine® provides forward-thinking organizations with efficient and scalable private capital and investor management solutions, for both traditional and digital assets.
Built for high-performance capital raising, our technology helps leverage the opportunity to better originate and showcase a diverse selection of private investment deals and offer these to investors i.e. a deal’s potential viability can be better assessed, market appetite determined and transaction promptly closed.
Our clients include broker dealers, family offices, wealth managers, incubators, accelerators, social impact and real estate funds, in providing customized SaaS solutions to power private capital and alternative investment platforms, with a strong focus on investor management services.
Interested in raising capital
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While there were a few modifications to the adopted amendments compared to what was proposed (e.g. SAFEs will not be prohibited under Reg CF), most of the updates were adopted as originally proposed.
The SEC’s final rule can be found in all of its 388-pages-of-glory here.
But we assume that most of you won’t want (or be able) to take the time to read the entire document. So we read the entire document (yes, really) and have summarized the key points that equity crowdfunding investors and founders should be aware of below.
Summary of SEC’s 2020 Final Rule – Updates to Reg CF, Reg A+, and Reg D
The final rule, titled “Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets”, will mostly relax and streamline the current regulations in question.
According to Chairman Clayton’s public statement, the overhauled regulations accomplish three primary objectives:
- remaining true to proven principles for retrospective review and modernization, improving all three components of our mission: investor protection, capital formation and market integrity;
- addressing the substantial changes in our marketplace, including changes in communications technology and access to capital; and greatly reducing costs, particularly for smaller and medium-sized business as well their investors.
In short – these changes are a big deal. Here they are.
Changes to Regulation Crowdfunding (Reg CF)
Of the most interest to equity crowdfunding investors and founders, there were some substantial changes that will go into effect in early 2021, including:
Increased offering limits
- Increase the 12-month Reg CF offering limit from $1.07 million to $5 million
- Remove all investor limits for accredited investors
- Change the calculation of 12-month investor limits for non-accredited investors from using the “lesser of” net worth and income to the “greater of” net worth and income, allowing most investors to be able to invest more
- Current temporary relief crowdfunding measures will be in effect for an additional 18 months, with a new expiration date of August 28, 2022
- To allow for a single line item entry on cap tables, a new type of SPV called a “Crowdfunding Vehicle” was created to act as a conduit for investors to hold shares in a crowdfunding company without introducing cap table (particularly Section 12(g) of the Exchange Act) concerns for issuers.
- Similar to what’s already allowed under Reg A+, issuers intending to use Reg CF may now legally solicit investor interest, orally or in writing, prior to filing a Form C (or even prior to selecting which exemption will be used). This “testing the waters” will help issuers gauge investor interest before selecting an intermediary platform and prior to starting the Reg CF offering process.
- Testing the waters will not have to be done on an intermediary’s platform.
- Unlike Rule 255 of Reg A, Rule 206 for Reg CF will only permit issuers to test the waters before the Form C is filed.
- Note: State Blue Sky laws are not going to be preempted for these generic solicitations.
“As adopted, an issuer will not be deemed to have engaged in general solicitation if the communications are made in connection with a seminar or meeting sponsored by a college, university, or other institution of higher education, a State or local government or instrumentality of a State or local government, a nonprofit organization, or an angel investor group, incubator, or accelerator.”
The information that an issuer may provide under Rule 204 was also expanded to include 1) use of proceeds and 2) issuer’s progress toward meeting its funding goals.
Proposed changes that were NOT adopted include:
- Restricting the types of securities (e.g. SAFEs) that can be offered under Reg CF
- Aligning Reg CF securities with Reg A+ securities
Potential regulatory issues that weren’t yet addressed include:
Need to consider state preemption of Blue Sky laws (i.e. not being subject to each state’s local securities regulations) with respect to testing-the-waters offers made under Rule 241 as well as secondary sales of Reg CF and Reg A Tier 2 securities.
Changes to Regulation A (Reg A+)
Increased offering limits
- Increased Reg A+ Tier 2 offering limit from $50 million cap to $75 million cap
- Increased Reg A+ Tier 2 secondary sales limit from $15 million to $22.5 million
Changes to Regulation D
- Increased offering limits
- Increased Rule 504 maximum limit from $5 million to $10 million (for regional multi-state offerings)
- Rule 506(b) amendment to allow for no more than 35 non-accredited investors in a 506(b) offering within a 90-calendar-day-period
- Rule 506(c) accredited investor verification requirement clarifications
- Exemption from General Solicitation for “Demo Days” and Similar Events (same as Reg CF, above)
Other Exemption Updates
- Establishing an integration framework for serial (i.e. back-to-back) offerings
- Harmonization of Disclosure Requirements (Reg A and Reg D)
- Harmonization of Bad Actor Disqualification Provisions between Reg A, Reg CF, and Reg D
Overview of Capital Raising Exemptions
| Type of Offering | Offering Limit within 12-month Period |
General Solicitation | Issuer Requirements | Investor Requirements |
SEC Filing Requirements |
Restrictions on Resale |
Preemption of State Registration and Qualification |
| Section 4(a)(2) | None | No | None | Transactions by an issuer not involving any public offering. See SEC v. Ralston Purina Co. |
None | Yes. Restricted securities | No |
| 17 CFR 230.506(b) (“Rule 506(b)” of Regulation D) |
None | No | “Bad actor” disqualifications apply | Unlimited accredited investors Up to 35 sophisticated but non-accredited investors in a 90-day period | 17 CFR 239.500 (“Form D”) | Yes. Restricted securities | Yes |
| 17 CFR 230.506(c) (“Rule 506(c)”) of Regulation D | None | Yes | “Bad actor” disqualifications apply | Unlimited accredited investors Issuer must take reasonable steps to verify that all purchasers are accredited investors* | Form D | Yes. Restricted securities | Yes |
| Regulation A: Tier 1 | $20 million | Permitted; before qualification, testing the waters permitted before and after the offering statement is filed | U.S. or Canadian issuers Excludes blank check companies, registered investment companies, business development companies, issuers of certain securities, certain issuers subject to a Section 12(j) order, and Regulation A and Exchange Act reporting companies that have not filed certain required reports. “Bad actor” disqualifications apply* No asset-backed securities. |
None | Form 1-A, including two years of financial statements Exit report | No | No |
| Regulation A: Tier 2 | $75 million | Permitted; before qualification, testing the waters permitted before and after the offering statement is filed | U.S. or Canadian issuers Excludes blank check companies, registered investment companies, business development companies, issuers of certain securities, certain issuers subject to a Section 12(j) order, and Regulation A and Exchange Act reporting companies that have not filed certain required reports. “Bad actor” disqualifications apply* No asset-backed securities. |
Non-accredited investors are subject to investment limits based on the greater of annual income and net worth, unless securities will be listed on a national securities exchange |
Form 1-A, including two years of audited financial statements Annual, semi-annual, current, and exit reports | No | Yes |
| Rule 504 of Regulation D | $10 million | Permitted in limited circumstances | Excludes blank check companies, Exchange Act reporting companies, and investment companies “Bad actor” disqualifications apply | None | Form D | Yes. Restricted securities except in limited circumstances | No |
| Regulation Crowdfunding; Section 4(a)(6) | $5 million | Testing the waters permitted before Form C is filed Permitted with limits on advertising after Form C is filed Offering must be conducted on an internet platform through a registered intermediary | Excludes blank check companies, Exchange Act reporting companies, and investment companies “Bad actor” disqualifications apply | No investment limits for accredited investors Non-accredited investors are subject to investment limits based on the greater of annual income and net worth | Form C, including two years of financial statements that are certified, reviewed or audited, as required Progress and annual reports | 12-month resale limitations | Yes |
| Intrastate: Section 3(a)(11) | No Federal limit (generally, individual State limits between $1 and $5 million) | Offerees must be instate residents. | In-state residents “doing business” and incorporated in-state; excludes registered investment companies | Offerees and purchasers must be instate residents | None | Securities must come to rest with in-state residents | No |
| Intrastate: Rule 147 | No Federal limit (generally, individual State limits between $1 and $5 million) | Offerees must be instate residents. | In-state residents “doing business” and incorporated in-state; excludes registered investment companies | Offerees and purchasers must be instate residents | None | Yes. Resales must be within State for six months | No |
| Intrastate: Rule 147A | No Federal limit (generally, individual State limits between $1 and $5 million) | Yes | In-state residents and “doing business” instate; excludes registered investment companies | Purchasers must be instate residents | None | Yes. Resales must be within State for six months | No |
About Capital Engine®
Capital Engine® provides forward-thinking organizations with efficient and scalable private capital and investor management solutions, for both traditional and digital assets.
Built for high-performance capital raising, our technology helps leverage the opportunity to better originate and showcase a diverse selection of private investment deals and offer these to investors i.e. a deal’s potential viability can be better assessed, market appetite determined and transaction promptly closed.
Our clients include broker dealers, family offices, wealth managers, incubators, accelerators, social impact and real estate funds, in providing customized SaaS solutions to power private capital and alternative investment platforms, with a strong focus on investor management services.
Interested in raising capital
Request a Demo
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