January 22, 2021
SEC Rule With Increased Limits For Reg A and Reg CF Now In Effect
On November 2nd, 2020, the SEC took a step to improve the opportunities for entrepreneurs, small businesses, and growing businesses to acquire initial funding for their goals. The SEC voted to reduce regulations and simplify the Reg A and Reg CF offerings’ significantly complex rules. While the new changes will increase opportunities, there are still protocols in place to protect investors.
The goals of these changes, according to Chairman Jay Clayton, are:
- “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.”
Here is a look at the major changes that have happened to Reg A and Reg CF offerings.
Reg A
The changes made to Reg A under Tier 2 offerings involve increasing the amount from $50 million to $75 million. Additionally, they have increased the maximum offering amount for secondary sales under Tier 2 from $15 million to $22.5 million.
The changes also affect some of the special purpose vehicles used for exposure. The rules create restrictions for Reg A issuers who are delinquent with any Exchange Act reporting obligations.
Reg CF
The changes made to Reg CF funding involve increasing the amount from $1.07 million to $5 million. The changes also remove investment limits for accredited investors. For non-accredited investors, the shift in the limits involves using the greater between their annual income or their net worth when calculating investment limits.
Additionally, the rules extend the existing temporary relief by 18 months from specific Reg CF financial statement review requirements. This is for issuers offering $250,000 or less of securities in reliance on the exemption in a 12 month period.
Additional Changes
The commission also developed an integration framework that will affect both Reg A and Reg CF offerings. When issuers use different private offering exemptions in a short timeframe, it is common to suggest integrating the offerings to check for compliance. However, different exemptions have different rules and regulations. Therefore, integrating various exemptions can lead to a failure to meet compliance.
The SEC included four additional provisions that will create an integration framework involving safe harbors from integration. The hope is that this will optimize compliance validation when analyzing integrated offerings. The four new provisions can be reviewed in the SEC’s press release.
The new provisions and rules took effect on January 14, 2021
One of the positive outcomes that will likely occur because of these new rules is that Reg CF will see both a higher quantity and higher quality of issuers. These rules will also reduce the cost of capital to issuers while also streamlining the integration process. The underlying goal is to improve business access to capital and eliminate a few of the inadvertent roadblocks created by government bureaucracy. Lastly, the rules are also intended to maintain and enhance investor protections.
The final rule can be viewed here.
For more information, consider contacting a knowledgeable lawyer from Polymath Legal PC by calling (833) 931-6418.