by Joseph R. Soraghan
“We’re the SEC, and we’re here to make it easier for small businesses to raise capital...Really...we are...really...trust us.”
Unbelievable?? Yes, except for the past nine years. But its largesse arrived grudgingly under pressure from Congress in the JOBS Act of 2012, which in turn was due to pressure from the business and entrepreneurial community.
Since the adoption of the Securities Act in 1933, sales of investments by companies and entrepreneurs to investors to raise capital have required either registration with the SEC and states (a long expensive process that is not available to most new and/or small businesses), or qualification for an “exemption” from the requirement. The exemptions have historically been difficult and expensive to obtain and are also unavailable to many businesses.
But in the JOBS Act of 2012, Congress adopted two new exemptions: (1) Regulation Crowd Funding and an improved Regulation A (called “Regulation A+”); and, importantly, (2) a requirement for the SEC to modify many of the existing exemptions to significantly improve their availability. The SEC has since structured the two new exemptions, and on November 2, 2020 amended a number of the existing exemptions. The November 2 amendments became effective March 15, 2021. Some of the amendments are as follows.
- New Class of Accredited Investors. A two-generations-old requirement that most investors be “accredited” (i.e., (possess high income and/or net worth) has been eased by the addition of a new class of accredited persons which need not meet the wealth requirement to wit: securities brokers and other securities professionals:
- Increase of Allowed Amount of Funds Raised. The dollar amounts which may be raised have significantly increased under Rule 504, under the new Regulation A+, and under Regulation Crowdfunding. Perhaps the most important amendment, particularly for most truly small businesses, is the increase under Rule 504 from $5,000,000 to $10,000,000. It will help entrepreneurs significantly in raising money, because Rule 504 is the legally and practically most convenient exemption available.
- Integration of Two or More Similar Securities. The SEC has also amended the requirement that two or more securities offerings be ”integrated” if they are “similar” in objective and close in time. This is to determine whether as combined they exceed the numeric limits on number of investors and dollar amount of investment. The amendment clarifies and simplifies the concept of “integration.”
Historically, perhaps the most limiting restriction on offerings has been an almost total prohibition upon “general solicitation” (i.e., advertising the offering). In the two new offerings and the existing offerings, however, the amendments allow significant (though still somewhat restricted) general solicitation, including some use of the internet. The amendments also allow businesses to use generic solicitation of interest and materials to “test the waters” with initial promotion efforts to determine whether to even make an offering. They also provide that certain types of “demo day” communications will be allowed.
Joseph R. Soraghan, business attorney and mediator with Danna McKitrick, P.C., practices in legal matters pertaining to business operations and growth. He guides businesses in financing, contracts, acquisitions, mergers, and sales. Soraghan frequently resolves commercial disputes as an arbitrator or mediator or through litigation. He can be reached at 314.889.7121 or email@example.com.