More SEC Changes Seen for How Small Companies Can (Legally) Raise Money

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The U.S. Securities and Exchange Commission (SEC) has made tweaks to how small companies can raise capital. It has become vastly easier for companies raising cash to do so with new rules, but the field remains quite complex and can be confusing and perhaps even intimidating to entrepreneurs who do not know if they are compliant or outside of compliance on the capital raising regulations.

On October 26, the SEC adopted final rules that modernize how companies can raise money to fund their businesses. This pertains to funding their business through intrastate and small offerings, and the SEC is aiming to maintain investor protections in the final rules.

What is harder to grasp are the effective dates in many cases, and some of these rules and regulations are still likely to be rather confusing to some of the entrepreneurs who will want to raise capital to fund their dreams or their next million-dollar and billion-dollar ideas.

These new rules and regulations are rather important. They will set the term for individuals and small companies who want to raise capital. This is often seed-stage or early-stage venture capital, but it may range from individuals to groups of angel investors to broader venture capital firms.

SEC Chair Mary Jo White said in the latest SEC bulletin:

These final rules, while continuing to provide investor protections, update and expand the capital raising avenues for smaller companies, allowing them to more fully take advantage of changes in technology and business practices.

Below are certain changes made, but you might need an attorney or you might need to understand “legalese” to get through each rule individually:

  • The final rules amend Securities Act Rule 147 to modernize the safe harbor under Section 3(a)(11) of the Securities Act, so issuers may continue to use state law exemptions that are conditioned upon compliance with both Section 3(a)(11) and Rule 147.
  • The final rules also establish a new intrastate offering exemption, Securities Act Rule 147A, that further accommodates offers accessible to out-of-state residents and companies that are incorporated or organized out-of-state.
  • To facilitate capital formation through regional offerings, the final rules amend Rule 504 of Regulation D under the Securities Act to increase the aggregate amount of securities that may be offered and sold from $1 million to $5 million.
  • The rules also apply bad actor disqualifications to Rule 504 offerings to provide additional investor protection, consistent with other rules in Regulation D.
  • In light of the changes to Rule 504, the final rules repeal Rule 505 of Regulation D.

The effective dates were shown as follows:

  • Amended Rule 147 and new Rule 147A will be effective 150 days after publication in the Federal Register.
  • Amended Rule 504 will be effective 60 days after publication in the Federal Register.
  • The repeal of Rule 505 will be effective 180 days after publication in the Federal Register.

See the full details in the SEC press release.

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