November 2nd, 2020, was a historic day for the nation and more so people who derive their livelihoods from securities. For the longest time, the U.S. Securities and Exchange Commission (SEC) has had a long and frankly tedious process for the exempt offering rules. These complexities made it incredibly difficult for small and medium-sized enterprises to be profitable and also protect their investors in the process.
Since private offering exemptions is one of the most popular ways startups leverage to get seed capital, there was a growing need to address the red tape involved. The proposed changes are geared to harmonizing, simplifying, and improving the current overly complex structure. This means that companies will be able to raise funds they need for expansions while still keeping the investor safe. To raise the funds’ businesses need today, they have to navigate a series of safe harbors and multiple exemptions. Each one with its own different set of requirements to qualify. Although individually, these protocols make sense. But as a whole, they are largely inadequate and can benefit from improvement. Several amendments have been proposed, which can help businesses. They include:
The SEC voted to raise the maximum offering under Tier 2 of Regulation A from a standard $50 million to a whopping $75 million on the part of initial sales, which is where most token offerings are classified in. Secondary sales also get a boost from the traditional $15 million to $22.5 million. Sales falling under the Regulation D framework also double their maximum allocations from $5million to $10 million.
The SEC also voted to amend its regulation crowdfunding guidelines. They removed investment limits for accredited investors. Also, they raised the limit for crowdfunding from the initial $1.07 million to a cool $5 million. The commission further voted to extend the temporary measures put in place in May by 18 more months. This is to help cushion businesses against the economic crisis brought on by the coronavirus pandemic. This means that firms can now raise to a quarter of a million dollars over 12 months and get an exemption.
Initially, a company showcasing its securities offerings to prospective clients was deemed as general advertising and, in some cases, a solicitation. With the new modifications, regulation crowdfunding issuers are allowed to present their different offerings to various prospective clients. Furthermore, the commission has given the issuers the freedom to test the waters with them to help figure out the best exemption to be used for sales. Not only does this provide companies with wiggle room, but it also helps them explore the different avenues and choose which one works best for them.
Harmonizing disclosures and bad actor disqualifications
There are several methods used to verify an accredited investor. However, every time one such investor attempts to put money into a company, they must always prove that they are an accredited investor. According to the new rules, investors with the “accredited” status can invest again without going through the verification process because their information has not changed since the last time. Non-reporting issuers also have the reprieve of not providing so much financial information as they did before. Also, in an attempt to harmonize the entire process, the qualifications for a “bad actor” have the same look-back element as provided for in Regulation A, Regulation D, and Regulation Crowdfunding. These steps should go a long way in helping companies protect themselves and their investors from malicious persons.
These amendments will take effect 60 days post-publication in the Federal Register. However, the temporary Regulation Crowdfunding provisions will take effect immediately upon the publication of the document in the Federal Register. These new regulations not only make life easier for small companies, but they also keep investors’ funds safe.