SEC Provides Guidance On Integration Under Reg D
In November, the Securities and Exchange Commission’s (SEC’s) Division of Corporation Finance issued new Compliance & Disclosure Interpretations (C&DIs) that addressed, among other things, integration of securities offerings under Regulation D of the Securities Act of 1933.
Under the Securities Act, an offer to sell securities must be registered with the SEC unless its meets an exemption. Regulation D contains three rules providing such exemptions, allowing some companies to raise capital by selling debt or equity securities without having to register the securities with the SEC.
The most widely used exemption under Regulation D is Rule 506. There are actually two distinct exemptions that fall under Rule 506: Rule 506(b) and Rule 506(c). Under the former, companies cannot use general solicitation to market securities. Issuers who choose to use 506(c) are permitted to use general solicitation, but must contend with heightened accredited investor verification requirements (c.f. 506(b) where the issuer can generally rely on representations from investors regarding their accredited investor status without any independent verification requirement).
Integration of offerings happens when multiple offerings are collapsed to determine if a safe harbor or exception still applies. Where issues can arise is when the SEC integrates a supposed Rule 506(b) offering that includes non-accredited investors with a supposed Rule 506(c) offering that included general solicitation of investors.
Corp Fin CDI
Under Securities Act Rule 152, a securities transaction that at the time involves a private offering will not lose that status even if the issuer subsequently decides to make a public offering or files a registration statement.
In a Nov. 17 CDI, the Corp Fin staff used similar logic in connection with potential integration of private offerings under Rules 506(b) and 506(c) of Regulation D. The CDI involved a situation where an issuer had been conducting a private offering under Rule 506(b), but then within six months after the most recent sale in that offering, decided to generally solicit investors in reliance on Rule 506(c).
In these circumstances, the staff clarified that offers and sales of securities made in reliance on Rule 506(b) prior to the general solicitation would not be integrated with subsequent offers and sales of securities pursuant to Rule 506(c). So long as all applicable requirements of Rule 506(b) were met for offers and sales that occurred prior to the general solicitation, the issuer would be exempt from registration, and would be able to make offers and sales pursuant to Rule 506(c), Corp Fin staff wrote.
Of course, the staff said, the issuer would then have to satisfy the applicable requirements of Rule 506(c) for the subsequent offers and sales. This includes a requirement that it take reasonable steps to verify the accredited investor status of all subsequent purchasers.