Recently the SEC updated its rules to simplify the patchwork of regulations and help companies in fundraising mode. This is important to cannabis companies of all kinds, especially those looking to take advantage of the available federal exemptions in their securities offerings. In the SEC’s own words, “These changes will encourage capital formation and expand investment opportunities while maintaining or enhancing key investor protections.” For hemp and marijuana companies, these changes mean they have access to a larger pool of potential investors. These changes will take effect 60 days after publication in the Federal Register.
The SEC is making really big strides this fall. I previously wrote about the SEC’s recent expansion of who and what can qualify as an Accredited Investor. We can assume that future improvements to SEC rules will provide more options for investors searching for opportunity and more guidance for companies looking for safe havens from legal troubles when dealing with investors.
The recently updated rules are designed to help startups and more experienced SMEs that have a proof of concept in their business models and are in their first or fifth round of donations. Here are a few highlights.
Increased offer limits for offers according to Regulation A (Reg A), Regulation Crowdfunding (Reg CF) and Rule 504 (Reg D).
In accordance with Tier 2 of Regulation A, the maximum bid amount was increased from $ 50 million to $ 75 million and the maximum bid for secondary sales was increased from $ 15 million to $ 22.5 million.
As part of the crowdfunding regulation, the offer limit has been increased from $ 1.07 million to $ 5 million, making this option more attractive to some companies where the crowdfunding model makes sense for their business plan. Accredited investors are no longer limited to the amount they can invest in a crowdfunding offering and non-accredited investors can now use the higher of their annual income or net assets when calculating their investment limits. The year-end review requirement has been temporarily extended for 18 months if bids bring in $ 250,000 or less over a 12 month period.
Offers using Reg D’s Rule 504 can now raise up to $ 10M out of $ 5M, increasing usage of these already popular offerings.
Clarified rules for communication with investment offers.
Everyone loves demo day except companies that either need to have their securities attorney at the table or CEOs who have to keep winking and nodding when they say they are not there to sell an investment opportunity in business. The rule updates mean that issuers can generally speak openly about investment opportunities to “test the water” without these communications being viewed as “general publicity” or “general publicity” that securities attorneys (and some CEOs) will sweat in their sleep bring.
The ability of the issuer to switch from one exception to the next has been clarified: avoid offering integration.
Boards of directors and executives rarely think about which exemption we qualify for when setting the criteria for their capital raising. Generally, they study the company’s needs based on the CFO’s analysis, the availability of capital from interested investors, and the CEO’s discussions with existing and potential investors.
These rule changes fit better with these reality scenarios – sometimes a company’s offer may qualify for one or two different exceptions – and the company may have to change lanes during the offering process. This is often noted long after the company began communicating with potential investors, soliciting bids, and likely after the company first sold the bid. Sometimes companies don’t think about their supply parameters until long after they have received their first investor funds.
Based on a “facts and circumstances” review, the SEC will generally consider offers to be distinct from one another if there is a 30 calendar day window between them. This is often important when one offer uses the “general publicity” of potential investors while the follow-up offer does not.
Offers in connection with employee benefit plans (Rule 701) or offers from international companies (Reg S) or companies with a registered offer (as opposed to an exempted offer) are not integrated into other offers under certain criteria.
Use of Special Purpose Vehicles (SPVs).
One reason crowdfunding is not on the rise in hemp and marijuana businesses is because no decent management team of a company would want to trade with hundreds or thousands of investors in exchange for an investment of $ 100 or even $ 1,500 from each of the investors . They are just not worth the effort. However, the new rule changes allow certain SPVs to be used for Reg CF and Reg A offerings. This is a boon for cannabis companies, and we may see more crowdfunding offers from cannabis companies willing to deal with a single SPV investment company as long as someone else deals with the SPV’s investors.
2020 has been a banner year for the SEC, even if the rest of the world falters or collapses. We can expect further improvements from the SEC as the definition of “discerning investor” and what it means to “protect” them continues to shift.
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