The US Securities and Exchange Commission (SEC) issued a concept release on June 18 that seeks comment to "simplify, harmonize, and improve" regulations surrounding the sale of securities in nonpublic offerings, or private placements. The concept release seeks comments on a variety of topics relating to the existing exempt offering framework, including whether the current framework should be modified to address unique challenges, gaps, and complexities in capital formation within specified industries, geographical locations, demographics, and other factors. The 211-page concept release covers the accredited investor definition; exemptions for Regulation D, Regulation A, intrastate, and crowdfunding offerings; pooled investment funds; and secondary trading along with the concept of integration of exempt offerings.
"We are taking a critical look at our exemptions from registration to ensure that our multifaceted private offering framework works for investors and entrepreneurs alike, no matter where they are located in the United States," SEC Chairman Jay Clayton said in a statement. "Input from startups, entrepreneurs and investors who have first-hand experience with our framework will be key to our efforts to analyze and improve the complex system we have today."
The SEC has reformed its rules around exempt offering in recent years following mandates from Congress such as the Jumpstart Our Business Startups Act of 2012 (JOBS Act) and other measures. The SEC has also been directed by Congress to consider updating the accredited investor standard under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Under the current framework, only accredited and institutional investors have the opportunity to invest in startups and emerging growth companies that would allow them to receive significant upside after these companies go public, while “Main Street” investors have very little opportunity to make such investments. According to the concept release, in 2018, approximately $2.9 trillion was raised in the private markets, eclipsing the approximately $1.5 trillion raised on public exchanges.
"We also consider whether the limitations on who can invest in certain exempt offerings, or the amount they can invest, provide an appropriate level of investor protection (i.e., whether the current levels of investor protection are insufficient, appropriate, or excessive) or pose an undue obstacle to capital formation or investor access to investment opportunities," the release states. "For example, we explore whether we should revise our investor eligibility limitations to focus more particularly on the sophistication of the investor, the amount of the investment, or other criteria rather than just the income or the wealth of the individual investor."
Takeaways
During his tenure, SEC Chairman Jay Clayton has encouraged the SEC to extend access to the private market to “Main Street” investors so that they can provide much needed funding to startups and emerging growth companies. In our view, this concept release is an important step in the right direction. The comment period for the concept release will be open for 90 days following its publication in the Federal Register. After analyzing the public comments, the next step will be for the SEC to release a regulatory proposal.