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The SEC Rebuilds the Integration Principles Guiding Concurrent Private and Public Offerings of Securities

The SEC’s new release amends the rules governing “integration” permitting private placements and registered public offerings to occur shortly before, after or at the same time with each other. The amendments replace the SEC’s prior five-factor test with practical updates for today’s markets that particularly benefit smaller publicly traded companies.

On November 2, 2020, the U.S. Securities and Exchange Commission (SEC) published amendments to Rule 152 creating four new, broad safe harbors from integration of related offerings of securities under the Securities Act of 1933. By shortening to 30 days from six months the time issuers must wait between offerings and removing any waiting period when highly sophisticated investors are involved, the need for exhausting facts-and-circumstances analysis of whether offerings should be integrated with another, based on Rule 502’s five-factor test and age-old SEC no-action letters, is reduced.

The integration amendments are part of the SEC’s larger release, Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets (Release Nos. 33-10884; 34-90300; File No. S7-05-20). The release reflects the SEC’s overall effort in recent years to make the disclosure rules more accommodating for issuers seeking to raise capital.

Traditionally, integration analysis focused on the interplay of conducting a private placement and a registered public offering occurring shortly before, after or at the same time with each other, potentially requiring registration of the private placement if the offerings are considered part of the same offering (or “integrated”). With the advent of generally solicited non-registered offerings such as Regulation Crowdfunding, Regulation A and Rule 506(c) with blended features of both, the customary analysis became out-of-date and impaired capital formation. The integration amendments offer the greatest benefits to smaller and emerging companies that typically lack an established accredited investor network to support committed ongoing financing.

The Four Integration Safe Harbors

The new rule amendments provide for the following four non-exclusive safe harbors from integration, which should prove sufficient breadth for issuers in planning concurrent or consecutive financing transactions, without having to rely on general integration principles.

Safe Harbor Rule 152(b)(1): Any offering made more than 30 calendar days before the commencement1 of any other offering, or more than 30 calendar days after the termination or completion2 of any other offering, will not be integrated with the other offering; provided that:

• in the case where an exempt offering for which general solicitation is prohibited follows by 30 calendar days or more an offering that allows general solicitation, the issuer has a reasonable belief with respect to each purchaser in the exempt offering prohibiting general solicitation, that the issuer either (i) did not solicit such purchaser through general solicitation or (ii) established a substantive relationship with such purchaser prior to the commencement of the exempt offering prohibiting general solicitation.

SEC Rationale: The 30-day period in the first safe harbor is designed to minimize possible overlaps in the solicitation of non-accredited investors between an earlier public offering or exempt offering allowing general solicitation and a subsequently commenced private placement offering with fewer investor protections. It also provides issuers with greater flexibility to adjust their financing strategy due to evolving circumstances.

If an issuer conducts more than one Rule 506(b) offering, the number of non-accredited investors purchasing in all such offerings within 90 calendar days of each other may not exceed 35. This requirement should address concerns that failure to integrate multiple Rule 506(b) offerings could result in sales to a large number of non-accredited investors.

Safe Harbor Rule 152(b)(2): Offers and sales made in compliance with Rule 701, pursuant to an employee benefit plan, or in compliance with Regulation S will not be integrated with other offerings.

SEC Rationale: Because offers and sales pursuant to Rule 701 are limited to employees, consultants and advisors, with whom the issuer has written compensation plans or agreements, these offerings would not likely raise meaningful investor protection concerns. The amendments also codify a long-standing SEC position with respect to integration of offshore transactions made in compliance with Regulation S with registered or exempt from registration domestic offerings.

Safe Harbor Rule 152(b)(3): An offering for which a Securities Act registration statement has been filed will not be integrated if it is made subsequent to:

• a terminated or completed offering for which general solicitation is not permitted;
• a terminated or completed offering for which general solicitation is permitted that was made only to qualified institutional buyers and institutional accredited investors; or
• an offering for which general solicitation is permitted that terminated or was completed more than 30 calendar days prior to the commencement of the registered offering.

SEC Rationale: The third safe harbor provides that a public offering will not be integrated if it is made subsequent to a terminated or completed private placement for which general solicitation is not permitted. Because private placements would continue to restrict general solicitation, the impact on investors in the private placement with the financial sophistication and ability to sustain the risk of loss of investment or fend for themselves is likely to be minimal. In turn, because these private placements do not permit general solicitation, and because the extensive registration requirements apply to the registered offering, it is unlikely to have any impact on investors in the registered offering.

The third safe harbor also provides that a registered offering will not be integrated if made subsequent to a completed or terminated exempt offering, but that was either limited to qualified institutional buyers (QIBs) and institutional accredited investors (IAIs), or was terminated or completed more than 30 calendar days prior to commencement of the registered offering. Because of the extensive protections built into the registration requirements and the 30-day waiting period that would apply if a solicitation involved investors other than QIBs or IAIs, the SEC indicated that this safe harbor is unlikely to have adverse impacts on investors in the registered offering. When solicitation is limited to QIBs and IAIs, due to the sophistication of those investors, the SEC did not believe that the lack of a 30-day waiting period in the integration safe harbor meaningfully affects investor protection.

Safe Harbor Rule 152(b)(4): Offers and sales made in reliance on an exemption for which general solicitation is permitted will not be integrated if made subsequent to any terminated or completed offering.

SEC Rationale: The fourth safe harbor provides that offers and sales made in reliance on an exemption for which general solicitation is permitted will not be integrated if made subsequent to any prior terminated or completed offering. According to the SEC, the disclosure and substantive requirements of these exemptions should minimize potential costs to investors from not integrating these offerings with prior offers and sales.

Further, because the amendments contain prohibitive language if part of a plan or scheme to evade the registration requirements of the Securities Act and issuers must continue to meet the conditions of each exemption they are relying on, and because investor protection provisions of each exemption as well as general antifraud provisions continue to apply, the amendments should not have significant adverse effects on investor protection.

General Principles of Integration

If the non-exclusive safe harbors in Rule 152(b) do not apply, the SEC has set forth in subsection (a) of Rule 152 two general principles of integration to follow by default. Rule 152(a)(1) requires that for an exempt offering prohibiting general solicitation (i.e., Rule 506(b)) not to be integrated with another offering, the issuer must have a reasonable belief, based on the facts and circumstances, with respect to each purchaser in the exempt offering prohibiting general solicitation, that the issuer (or any person acting on the issuer’s behalf) either did not solicit the purchaser through the use of general solicitation, or established a substantive relationship with the purchaser prior to the commencement of the exempt offering prohibiting general solicitation.

Rule 152(a)(2) provides that where an issuer is conducting two or more concurrent exempt offerings permitting general solicitation (i.e., Rule 506(c) or Regulation A), in addition to satisfying the particular requirements of each exemption, general solicitation offering materials for one offering that include information about the material terms of a concurrent offering under another exemption may constitute an offer of the securities in the other offering. Therefore the offer must comply with all the requirements for, and restrictions on, offers under the exemption being relied on for the other offering, including any legend requirements and communications restrictions. According to the SEC, this requirement (including the placement of a required legend) strengthens investor protection by assuring that one exemption is not being improperly used to make offers under the second exemption, without being subject to the same offering restrictions.

With the SEC’s new amendments to Rule 152, an issuer may conduct contemporaneous public offerings and private placements, and concurrent private offerings, as long as the provisions of the individual offering rules are satisfied.

As of November 23, 2020, the new rule amendments have not been published in the Federal Register. The integration rules become effective 60 days after publication.

1 In determining whether an offering has “commenced,” Rule 152(c) lists the following examples, among others:

  • the date on which the issuer first makes a generic offer soliciting interest in a contemplated offering pursuant to “testing the waters” under Rule 241;
  • the date on which the issuer first makes an offer of securities in reliance on certain private placement exemptions, such as Section 4(a)(2) and Regulation D; and
  • the date on which the issuer first files a shelf registration statement for an offering that will commence on the date of the registration statement’s effectiveness or, for a “delayed” offering, the first date on which the issuer commences public efforts to offer and sell the securities (which could be evidenced by the first filing of a prospectus supplement describing the offering, or the issuance of a press release announcing the commencement of the offering).

2 In determining when an offering is deemed to be “terminated or completed,” Rule 152(d) lists the following examples, among others:

  • for most private placements, the later of (1) the date the issuer entered into a binding commitment to sell the securities in the offering (subject only to conditions outside the issuer’s control); or (2) the date the issuer and its agents ceased efforts to make further offers to sell the securities in the offering; and
  • in instances where a registration statement has been filed, upon (1) the withdrawal of the registration statement, (2) the filing of a prospectus supplement or amendment to the registration statement indicating that the offering has been terminated or completed, (3) entry of an order by the SEC declaring that the registration statement has been abandoned, (4) after the third anniversary of the effective date of a shelf registration statement, the date on which the issuer is prohibited from continuing to sell securities using the registration statement, or any earlier date on which the offering terminates by its terms, or (5) any other factors that indicate that the issuer has abandoned or ceased its public selling efforts in furtherance of the offering.
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