On August 3, the Securities and Exchange Commission proposed revisions to Regulation D to provide additional flexibility to issuers and to clarify and improve the application of the underlying rules by creating a new exemption for offers and sales to a new class of investors called “large accredited investors,” revising the current definition of accredited investor, to shorten the time period for the integration safe harbor and to apply uniform disqualification provisions to all Regulation D offerings. The proposed changes are intended to build on the recommendations of the Advisory Committee on Smaller Public Companies to make it easier for smaller public companies to raise capital.
Large Accredited Investor Exemption
The SEC has proposed Rule 507 to Regulation D which would provide a new exemption from the registration provisions of the Securities Act of 1933, as amended, for offers and sales of securities to “large accredited investors.” The exemption would permit publication of a prescribed form of written announcement of a proposed exempt offering where each purchaser meets the definition of “large accredited investor,” but does not eliminate the prohibition on general solicitation and general advertising from the conditions of the exemption for other Regulation D offerings. The proposed definition of large accredited investor would be based on the “accredited investor” definition, but with higher and somewhat different dollar-amount thresholds.
Legal entities that are considered accredited investors if their assets exceed $5 million would be required to have $10 million in investments to qualify as large accredited investors. Individuals generally would be required to own $2.5 million in investments or have annual income of $400,000 (or $600,000 with one’s spouse) to qualify as large accredited investors. Legal entities that are not subject to dollar-amount thresholds to qualify as accredited investors, generally government-regulated entities, would not be subject to dollar-amount thresholds to qualify as large accredited investors. Large accredited investors who participate in these exempt offerings would be considered “qualified purchasers” under Section 18(b)(3) of the Securities Act, thereby providing “covered security” status and the resulting preemption of certain state securities regulation. Issuers in Rule 507 transactions would not be allowed to sell securities to any investor who does not qualify as a large accredited investor.
Proposed Revisions to Definition of “Accredited Investor”
The SEC also proposed changes to the term “accredited investor” to clarify the definition and reflect developments since its adoption. The SEC has proposed to add an alternative “investments-owned” standard for determining accredited investor and large accredited investor status. This standard would include definitions of “investments” and “joint investments” similar to those proposed by the SEC in December 2006 in the Private Pooled Investment Vehicles Release, part of the SEC’s initiative to revise Regulation D as it relates to investments by individuals in certain private pooled investment vehicles relying on Rule 506.
For legal entities required to satisfy the $5 million assets test, the proposed amendment would add an alternative investments standard of $5 million. For individuals and spouses, the proposed amendment would provide a new alternative standard of $750,000 in investments that could be used instead of the current net worth standard of $1 million or annual income standard of $200,000 (or $300,000 with one’s spouse). Further, the SEC has proposed a mechanism to adjust the dollar-amount thresholds in the definition of “accredited investor” to adjust for inflation starting on July 1, 2012 and every five years thereafter, to reflect any changes in the value of the Personal Consumption Expenditures Chain-Type Price Index. The SEC has also proposed to add several categories of permitted entities to the list of accredited and large accredited investors with the goals of reducing uncertainty and legal costs and promoting more efficient private capital formation. Proposed Revisions to General Conditions to Regulation D.
The SEC has proposed to shorten the timing required by the integration safe harbor from six months to 90 days to help provide flexibility to issuers and relieve the burden, particularly on smaller companies, of the long delay in meeting their capital needs. Also, the SEC has proposed to apply uniform “bad actor” disqualification provisions to all offerings seeking to rely on Regulation D in order to prevent reliance on Regulation D if the issuer itself is disqualified or the presence of any of the enumerated persons disqualifies the issuer. Currently only Rule 505 provides such a disqualification. http://sec.gov/rules/proposed/2007/33-8828.pdf .