A Forgettable Year for Small Business Ends with Memorable Changes to SEC Regs for Exempt Offerings
A Forgettable Year for Small Business Ends with Memorable Changes to SEC Regs for Exempt Offerings

In general, small businesses tend to be more vulnerable in an economic downturn because they lack the financial cushion many larger companies have. Since the creation of the Federal Reserve System in 1913, large businesses have benefited from a more favorable regulatory framework and from liquidity backstops that the Fed has used to fortify weakness in financial markets.

Over the years, small businesses also have had to navigate a set of Byzantine-like registration requirements in connection with the various exemption requirements that may have hindered their fundraising requirements for much-needed capital. But regulatory relief may be in sight.

On November 2, 2020, the U.S. Securities and Exchange Commission voted 3-2 to adopt amendments that may simplify the SEC's exempt offering framework to help meet evolving business needs. The press release can be found here.

The SEC noted that the amendments will promote capital formation and expand investment opportunities while preserving or improving important investor protections.

That’s good news for California entrepreneurs and the small businesses, which comprise more than 99% of the state’s overall economy.

“The SEC amendments are meant to help companies outside of the larger Fortune 500 companies, such as  the mom-and-pop businesses, to streamline their process when raising funds and making the necessary regulatory filings,” said Rachel E. Edwards, Esq., Attorney at Jacko Law Group. “It will make for a more user-friendly process and greatly expand the window of who, when, and how Jacko Law Group can assist companies in their fund raising endeavors. ” The final rule can be found here

California the Recognized Leader in U.S. Small Business

Data from the U.S. Small Business Association Office of Advocacy ranked California first in the country in 2018 with almost 4 million small businesses. Florida was second with 2.4 million. That same year, California led the nation with the opening of 47,000 small businesses and the creation of 137,000 related new jobs.[1]

But the state’s small businesses and entrepreneurs won’t have to wait much longer to potentially reap the benefits offered by the SEC’s amended framework for private offerings, which takes effect in January 2021.

“Normal, everyday businesses can now have the opportunity to raise money just like the big movers and shakers In the Industry, Edwards said.

Highlights of the SEC Amendments

  • New Rule 152(a) under the Securities Act provides a general principle of integration based on the particular facts and circumstances of each offering.
  • New Rule 152(b) further establishes four non-exclusive safe harbor rules from integration, subject to certain provisions and exceptions found in the Securities Act.

New amendments also:

  • Permit issuers to use materials to “test-the-waters” under new Rule 241, which may permit an issuer to use testing-the-waters materials for an offer of securities before making a determination as to the applicable exemption and undertaking the cost and expense of preparing and conducting a securities offering under such exemption;
  • Permit Regulation Crowdfunding issuers to have oral communications with prospective investors after filing the Form C, as long as the communications comply with the requirements of Rule 204;
  • Simplify methods to the non-exclusive list of methods of verifying accredited investor status in Rule 506(c);
  • Allow the use of certain limited-purpose crowdfunding vehicles that would be exempt from the Investment Company Act of 1940 to serve as a conduit for investors to invest in Regulation Crowdfunding offerings;
  • Simplify certain requirements for Regulation A offerings, such as permitting the redaction of certain confidential information in certain exhibits;
  • Harmonize the “bad actor” disqualification provisions in Regulation D, Regulation A, and Regulation Crowdfunding to align on a similar look-back provision; and
  • Revise offering limits and individual investment limits for Regulation A, Regulation Crowdfunding, and Rule 504 Offerings.

Don’t Wait Until January

Edwards cited that a number of the SEC changes, including those to the safe harbor rules, verification standards, and investment limits among other amendments may help California businesses once made effective in early 2021.

For example, “under certain regulations, you have to verify as an accredited investor to demonstrate that you meet certain standards,” Edwards said. “One of the proposed SEC amendments allows businesses to rely on past verifications and thus, simplifies the process for the business and for the required regulatory filings.

“Often times, regulations, such as those established by the SEC, are out of date and have not caught up to the current business market. The SEC’s proposed amendments to increase the amount of capital that can be raised Is a clear attempt by the SEC to modernize Its statue. Now, businesses of all sizes can expand their capital raising efforts."

Jacko Law Group’s team of experienced professionals has the knowledge and ability to assess how the new SEC amendments can help your business raise essential capital in these challenging times. Contact us at 619.298.2880 or info@jackolg.com to schedule a review of your company’s related needs and objectives.


 [1] See https://www.sba.gov/sites/default/files/advocacy/State-Small-Business-RankingsTop-10-2018.pdf

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