In June of this year, the SEC issued a concept release that reviews the framework for exempt offerings, including several exemptions from registration under the Securities Act of 1933 that facilitate capital raising. The concept release seeks comment on possible ways to simplify, harmonize and improve this exempt offering framework to expand investment opportunities while maintaining appropriate investor protections and promote capital formation.

To date, approximately 161 commentators have submitted letters to the SEC, and the SEC has posted memos related to seven meetings between SEC officials and outside parties concerning the rulemaking. As a former Staffer that did a stint in the Office of Rulemaking, I can appreciate the hard work that is involved in summarizing all these letters and meetings. (I actually had the job of summarizing comment letters in connection with a rulemaking I was involved with while on Staff. It is actually very beneficial for the Staff to hear various viewpoints and expertise on any rulemaking, but it is also a tedious task that takes a lot of Staff hours and, for me at least, a very large spreadsheet!)

ABA Letter Recommends Changes to Current Private Offerings Process

As we await the SEC’s next step in the rulemaking process (likely a proposed rule), I wanted to draw your attention to the letter submitted on behalf of the Federal Regulation of Securities Committee of the Business Law Section of the American Bar Association (ABA). The ABA’s letters are always thoughtfully written and summarize the viewpoints of many of the leading securities lawyers.

The letter begins by stating, “The Committee commends the efforts of the Securities and Exchange Commission (the “Commission”) to simplify, harmonize and improve the current exempt offering framework, which has evolved over time and may benefit from a comprehensive review, and we thank the Commission for this opportunity to comment. While the Commission may ultimately develop a comprehensive revision and harmonization of offering exemptions as a result of those efforts, the Committee believes that it can most usefully contribute at this stage by suggesting various incremental changes to the existing rules.”

Part I of the ABA letter outlines the contours of two possible new exemptions intended to combine the best aspects of various existing exemptions. With respect to the first proposed exemption, the Committee states in Section A of Part I, “This exemption, which would be aimed primarily at the institutional market, would define a set of eligible purchasers deemed able to fend for themselves.” The other new exemption proposed by the Committee in Section B of Part I would replace Rule 506(b) and accommodate retail investors.

Part C in the letter discusses one approach to harmonize the conditions across the various offering exemptions through an “eligible issuers” concept. An excerpt from the letter is repeated below:

A common thread running through the most commonly used exemptions is the focus on the offeree or purchaser of the security, with only a minimal focus on the quality of, and risk associated with, the securities being sold by the issuer. However, in the public registration context, the quality of and risk associated with, the securities being sold, demonstrated by factors such as market capitalization of the issuer, timely reporting, financial condition (e.g., revenues), and governance features (with respect to exchange-listed securities), are often taken into account in determining the ability of the registrant to conduct a particular offering or list its securities on a national securities exchange. As a result, the Committee encourages the Commission to consider whether certain offering and investment restrictions found in commonly used exemptions could be removed for an issuer that qualifies as an “eligible issuer,” as defined by the Commission in a new rule.

By way of example, an “eligible issuer” could include requirements such as revenues and net income in the last three years in excess of a certain dollar threshold, governance features, including a minimum number of independent directors, “bad actor” disqualifications, or other characteristics that the Commission’s Division of Economic and Risk Analysis determine are indicia of higher quality (less risky) securities. The new rule could specify that if the issuer qualifies as an “eligible issuer” as defined by the rule, then certain restrictive provisions within the various commonly used exemptions would no longer apply. Examples of restrictions that could be removed include (i) prohibitions on general solicitation, (ii) limitations on the participation of non-accredited investor purchasers, (iii) investment limitations, (iv) investor verification requirements, and (v) requirements to include audited financial statements.

In Part II of the letter, the ABA Committee sets forth specific comments regarding a number of specific topics raised by the Commission in the concept release, and Part III of the letter discusses pooled investment funds.

As previously mentioned, the next step in the rulemaking process is likely a proposed rule. We look forward to seeing the direction proposed by the SEC, as this is an area that impacts capital formation for all companies, public and private.