Wednesday, June 10, 2020

House FSC ranking member calls on SEC to approve proposed changes to exempt offering framework

By Amanda Maine, J.D.

Echoing sentiments expressed in earlier correspondence to the SEC, House Financial Services Committee Ranking Member Patrick McHenry (R-NC), urged the Commission to move swiftly to adopt proposed amendments to SEC’s exempt offering framework. He also encouraged the SEC to relax restrictions on Regulation Crowdfunding. The comment period on the Commission’s proposal ended last week.

Proposal. The Commission voted 3-to-1 to propose the amendments for comment in March, with Commissioner Allison Herren Lee dissenting. The proposing release, which drew on input from commenters on an SEC concept release issued last year, stated that the amendments are intended to simplify, harmonize, and improve the SEC’s exempt offering framework to facilitate access to capital in private markets. The proposed amendments would change the offering and investment limits for Regulations A, D, and Crowdfunding; implement "test the waters" and "demo day" exceptions to the current rules on general solicitation; and ease the eligibility restrictions in Regulation Crowdfunding and Regulation A to permit the use of special purpose vehicles for certain Reg CF issuers. It would also provide four safe harbors for determining whether multiple offerings should be considered "integrated."

McHenry’s letter. Calling the proposed amendments long overdue, Rep. McHenry advised that relaxing the current regulations is critical to the country’s economic recovery from the impacts of the COVID-19 pandemic. The complexity of the current framework presents challenges to market participants, especially small businesses with limited resources, McHenry wrote.

McHenry reiterated comments he made regarding the Commission’s recent temporary changes to Regulation Crowdfunding in which he called the current regulation "overly burdensome" and expressed support for making the changes permanent. Permitting the use of special purpose vehicles and increasing offering limits will expand the number and scope of investors who will be able to invest in small businesses, McHenry wrote.

Support and opposition. The comment period on the proposal ended on June 1. The many organizations that have submitted comment letters include the Investment Adviser Association, the Securities Industry and Financial Markets Association, and Better Markets. Regarding the "demo day" proposed amendments, IAA urged the SEC to clarify more broadly that communications not intended for public consumption do not constitute "general solicitation" or "general advertising." IAA recommended that the proposed exemption under Rule 148 be broadened to include communications by sponsors of private funds that sponsor "demo days" and similar events. IAA also supports the proposed testing-the-waters communications exemption and recommends that it not be limited to materials directed to institutional accredited investors and qualified institutional buyers.

SIFMA expressed its support for reducing the six-month cooling off period in the existing integration safe harbors to 30 days. It also supports the testing the waters proposal but noted its concern regarding the requirement that an issuer cannot yet have chosen which exemption it will rely on in order to test the waters, calling the requirement unnecessarily restrictive and too subjective to enforce.

In its lengthy comment letter on the proposal, Better Markets outlined a number of its objections to the proposed amendments. Lamenting that the SEC "naively bought the hype peddled by intermediaries who stand to benefit from the rents in their role as middle-men or so-called entrepreneurs," Better Markets criticized what it called a lack of evidence showing a need for facilitating access to this financing or that retail investors who are not accredited investors even desire to invest in exempt offerings. The proposed amendments would weaken or even eviscerate the demarcations between sophisticated investors and those who look to the government for essential protections, Better Markets warned.

During a recent meeting of the Small Business Capital Formation Advisory Committee, whose membership is comprised of small business owners, their advisors, and officers and directors, the full committee endorsed the Commission’s proposed amendments.