Will the SEC Move to Restrict Private Offerings Under New Leadership?

The SEC rulemaking agenda includes rule proposals that could significantly impact the private offering market…

The Securities and Exchange Commission’s (SEC) rulemaking agenda includes rule proposals that could significantly impact the private offering market. Priorities for the new Democratic-majority Commission include exempt offering rules, the accredited investor definition, and required disclosures under Regulation D.

As discussed in a prior article, the SEC’s annual agenda was published as part of the Spring 2021 Unified Agenda of Regulatory and Deregulatory Actions, which was released by the Office of Information and Regulatory Affairs on June 11, 2021. The agenda includes both short-term and long-term actions that the agency plans to take.

With regard to private offerings, the Division of Corporation Finance is considering recommending that the SEC seek public comment on “ways to further update the Commission’s rules related to exempt offerings to more effectively promote investor protection, including updating the financial thresholds in the accredited investor definition, ensuring appropriate access to and enhancing the information available regarding Regulation D offerings, and amendments related to the integration framework for registered and exempt offerings.” The initiative is in the pre-rule stage, with the SEC planning to solicit public comments in April 2022.

Accredited Investor Definition

According to the SEC agenda, the rule proposal will address updating the financial thresholds for the accredited investor definition. The definition is important as it determines the pool of investors that companies can target when seeking to raise capital via private placements. Last year, the SEC expanded the definition to allow investors to qualify based on financial sophistication rather than just income or net worth. However, the amendments did not alter the financial threshold.

Currently, a natural person qualifies as an accredited investor if he or she has individual net worth – or joint net worth with a spouse – that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person. Alternatively, an investor satisfies the threshold if he or she has income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.

When the SEC amended the accreditor investor definition in 2020, Democratic Commissioners Allison Herren Lee and Caroline Crenshaw raised concerns that the definition was not also amended to reflect inflation. It appears this will now be up for discussion. In a speech before the North American Securities Administrators Association, Lee stated that the SEC should update the thresholds and index them for inflation going forward.

Regulation D

The SEC’s exempt offering rule proposal also plans to address “ensuring appropriate access to and enhancing the information available regarding Regulation D offerings.”

Under federal securities laws, all securities offerings must either be registered with the SEC or fall within one of the exemptions from the registration requirement that are available under the Securities Act of 1933 (‘33 Act). Many issuers rely on Regulation D under the ‘33 Act for private offerings. Under the JOBS Act, the SEC eased some of the existing restrictions on exempt offerings, most notably amending Reg D to eliminate the prohibition against general solicitation and general advertising, so long as the issuer takes reasonable steps to verify that all investors are accredited.

Regulation D offerings have increased significantly in the wake of the JOBS Act.

According to SEC data, $2.7 trillion was raised via private offerings in 2019, compared with $1.2 trillion in registered offerings. SEC Commissioner Lee supports Reg D reforms, stating in a recent speech that the Commission should re-visit a 2013 Regulation D proposal and “complete the work of enhancing our visibility into this market.”

Under the 2013 rule proposal, the SEC planned to consider conditioning the availability of the Rule 506(c) exemption on the filing of Form D; consider requiring the filing of Form D in advance of a Rule 506(c) offering and requiring a closing amendment for Rule 506(b) and (c) offerings; consider requiring additional information to be collected on Form D; and consider requiring the use of legends on Rule 506(c) written general solicitation materials and the filing of such materials with the Commission, among other reforms.

Republican Commissioners Object to Revisiting Exempt Offering Rules

On June 14, 2021, Republican SEC Commissioners Hester Peirce and Elad Roisman issued a Public Statement criticizing the SEC’s plan to revisit the agency’s exempt offering rules, noting that they just took effect last year. “As far as we can tell, the agency has received no new information which would warrant opening up any of these rules for further changes at this time,” the Commissioners wrote. “We are disappointed that the Commission would dedicate our scarce resources to rehashing newly completed rules.”

The Commissioners acknowledged that a change in administration generally means a change in priorities. However, they argued that the SEC should let the rules, which underwent significant public debate, take effect before starting the debate anew. They wrote:

A change in administration naturally brings changes in policy, and the Agenda reflects that shift in the form of new rulemakings, but reopening large swathes of work that was just completed without new evidence to warrant reopening is not normal practice. Past Commissions have generally refrained from engaging in a game of seesaw with our rulebook. The inclusion of these rules in the Agenda undermines the Commission’s reputation as a steady regulatory hand. While we will keep an open mind on each proposal, it is hard to see how the Commission could change course on such complex matters before the Commission’s latest actions have fully taken effect.

Key Takeaway

Now that Democrats have a 3-2 majority, it is likely that the SEC will revisit its oversight over the private offering market, with an eye towards increasing investor protections. We encourage investors and issuers to closely monitor legal developments in this area in the coming months.

If you have questions, please contact us

If you have questions or if you would like to discuss the matter further, please contact me, Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.