Small Business Capital Formation Advisory Committee May 8, 2020 - PowerPoint PPT Presentation

1 Office of the Advocate for Small Business Capital Formation Virtual Meeting of the SEC’s Small Business Capital Formation Advisory Committee May 8, 2020 U.S. Securities and Exchange Commission | Small Business Capital Formation Advisory Committee

2 WebEx Reminders Please remain on mute unless speaking. • To offer a comment or ask a question, please use • the chat function to notify the moderator you would like to speak. When you speak, please first state your name. • U.S. Securities and Exchange Commission | Small Business Capital Formation Advisory Committee

3 Disclaimer The views expressed today are the speakers’ own and do not necessarily reflect those of the Commission, Commissioners, or Commission Staff. U.S. Securities and Exchange Commission | Small Business Capital Formation Advisory Committee

4 Commissioner Opening Remarks U.S. Securities and Exchange Commission | Small Business Capital Formation Advisory Committee

5 COVID-19 Crowdfunding Relief  Intended to expedite the offering process for established companies (at least 6 months of operations)  Process Changes: – Offers permitted after filing Form C, with financial statements initially omitted – Investment commitments only after filing Form C updated with financial statements – Investment commitments may be cancelled for 48 hours from the time given or if there is a material change to the offering – Sales permitted as soon as target offering amount reached, with rolling closings thereafter  Offers up to $250,000 are exempt from requirement that financial statements be reviewed by an independent public accountant (up from $107,000 threshold)  Effective for offerings initiated between May 4, 2020 and August 31, 2020  Clear, prominent disclosure to investors required * See Press Release 2020-101 (May 4, 2020) U.S. Securities and Exchange Commission | Small Business Capital Formation Advisory Committee

6 Discussion of COVID-19 Observations U.S. Securities and Exchange Commission | Small Business Capital Formation Advisory Committee

7 Capital Formation Proposal The Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets proposal was published on March 4, 2020 and includes amendments to simplify, harmonize, and improve certain aspects of the exempt offering framework to promote capital formation while preserving or enhancing important investor protections. U.S. Securities and Exchange Commission | Small Business Capital Formation Advisory Committee

8 Summary video at: https://www.sec.gov/page/oasb-videos U.S. Securities and Exchange Commission | Small Business Capital Formation Advisory Committee

9 The Office of the Advocate for Small Business Capital Formation prepared an overview chart highlighting several of the proposed changes to the Download at: www.sec.gov/oasb exemptions. U.S. Securities and Exchange Commission | Small Business Capital Formation Advisory Committee

1 0 Overview of Amounts Raised in Exempt Markets in 2019 Reg A Tier 2 Tier 1 $998M Rule 506(c) $44M of Reg D $66 billion Reg Crowdfunding Rule 506(b) Other Exempt Rule 504 $62M of Reg D Offerings of Reg D $1.492 trillion $1.167 trillion $228M * See Capital Formation Proposal, Table 1 U.S. Securities and Exchange Commission | Small Business Capital Formation Advisory Committee U.S. Securities and Exchange Commission | Small Business Capital Formation Advisory Committee

1 1 The following slides are meant to provide only a very high-level summary of certain proposed amendments to facilitate discussion. Please review the release for more details, available online at: https://www.sec.gov/rules/proposed/2020/33-10763.pdf U.S. Securities and Exchange Commission | Small Business Capital Formation Advisory Committee

1 2 Increases to Annual Offering Limits Current Rules Proposed Rules Regulation $1.07 million $5 million Crowdfunding Rule 504 of $5 million $10 million Regulation D Regulation A: $20 million No change Tier 1 Regulation A: $50 million $75 million Tier 2 * See Capital Formation Proposal, Table 9 U.S. Securities and Exchange Commission | Small Business Capital Formation Advisory Committee

1 3 General Solicitation: Demo Days and Test-the-Waters Communications Current Rules Proposed Rules New Rule 148: “Demo day” communications No specific rules regulating Demo communications at demo would not be deemed general solicitation or Days days general advertising Two additional types of “test -the- waters”: • Issuer could use generic solicitation of Issuers can only interest materials to “test -the- waters” for an test-the-waters in Test-the- exempt offer prior to determining which registered and Reg A exemption it will use for the sale Waters offerings (no other • Reg Crowdfunding issuers could “test -the- exemptions) waters” prior to filing an offering document with the SEC in a manner similar to Reg A * See Capital Formation Proposal, Section II.B.1 and II.B.2 U.S. Securities and Exchange Commission | Small Business Capital Formation Advisory Committee

1 4 Financial Disclosure Requirements for Non-Accredited Investors Current Rules Proposed Rules Rule 506(b) of Furnish specified information Align with Reg A, based Regulation D similar to a registered offering on offering amount Furnish specified information, Regulation A No change** based on offering Tier Furnish specified information, Regulation No change Crowdfunding tiered to offering amount * See Capital Formation Proposal, Section II.D ** For a discussion of the proposed amendments to simplify compliance w ith Reg A w ithout a reduction in available investor disclosures, see Capital Formation Proposal, Section II.D.3. U.S. Securities and Exchange Commission | Small Business Capital Formation Advisory Committee

1 5 Crowdfunding Individual Investment Limits Current Rules Proposed Rules Accredited investors: no limits All investors: limits based on the Regulation Non-Accredited Investors: limits lesser of an income or net worth Crowdfunding based on the greater of an standard income or net worth standard Regulation D No limits No change Reg A: Tier 1 No limits No change Accredited investors: no limits Non-Accredited Investors: limits Reg A: Tier 2 No change based on the greater of an income or net worth standard * See Capital Formation Proposal, Table 9 U.S. Securities and Exchange Commission | Small Business Capital Formation Advisory Committee

1 6 Crowdfunding and Regulation A Eligible Issuers Current Rules Proposed Rules Exclude special purpose Permit special purpose Regulation Crowdfunding vehicles crowdfunding vehicles Exclude issuers that have Exclude issuers that have not filed required reports not filed required reports in the two prior years Regulation A in the two prior years under Regulation A or under Regulation A Section 13 or 15(d) of the Exchange Act * See Capital Formation Proposal, Table 10 U.S. Securities and Exchange Commission | Small Business Capital Formation Advisory Committee

1 7 Crowdfunding Eligible Securities Current Rules Proposed Rules Regulation No limits on types of Align with Reg A Crowdfunding securities Securities limited to: • Equity securities • Debt securities • Securities convertible or Regulation A No change exchangeable for equity interests • Guarantees of any of the above-listed securities * See Capital Formation Proposal, Table 10 U.S. Securities and Exchange Commission | Small Business Capital Formation Advisory Committee

1 8 Integration: General Principle The general principle is a facts and circumstances test: no integration if the issuer establishes that each offering either complies with an exemption from registration or is registered. If applying the principle: To exempt offerings The issuer must have a reasonable belief that the purchasers: (1) were not solicited through general solicitation; or where general (2) established a substantive relationship with the issuer prior solicitation is not permitted: to the commencement of the offering not permitting general solicitation. If one of those offerings includes information about the material To concurrent exempt terms of the other concurrent offering  the offering materials offerings that each allow must include the necessary legends for, and otherwise comply general solicitation: with, the requirements of each exemption. * See Capital Formation Proposal, Table 5 U.S. Securities and Exchange Commission | Small Business Capital Formation Advisory Committee