SEC Opens Wider Access to Capital RaisingBy
The U.S. Securities & Exchange Commission (SEC) made numerous changes in its “exempt offering” regulations to make it easier for small and medium-sized companies to raise capital in the private markets.
These amendments, which went into effect in early January, will promote capital formation and broaden investment opportunities. “The changes brought about by the amendments are incremental, not revolutionary, but nonetheless important to both private companies and to public companies that rely on private placements as capital-raising alternatives,” said Anna Pinedo, a partner at Mayer Brown LLP and co-leader of the global Capital Markets practice.
The backdrop to this rule, according to the SEC, is the fact that the registration process required for raising money in the public market is mostly designed for larger companies with substantial resources. As a result, many entrepreneurs and emerging businesses raise capital by selling securities in reliance on an “offering exemption,” which allows them to access the private market.
“For many small and medium-sized businesses, our exempt offering framework is the only viable channel for raising capital,” said former SEC Chairman Jay Clayton when announcing the changes in November 2020. “These businesses and their prospective investors must navigate a system of multiple exemptions and safe harbors, each with different requirements.”
The new rules provide four, nonexclusive safe harbors from integration of separate exempt offerings, ease the determination of accredited investor status, and relax restrictions on communications made in connection with investor “demo days” and “testing the waters” for a contemplated private offering.