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The SEC’s capital formation amendments are almost here: a digest for startups and founders

March 11, 2021 | By Patrick T. McCloskey

Startups and founders should mark March 15, 2021 on their calendars. On that date, the SEC’s rule amendments to facilitate capital formation and harmonize the “patchwork” of federal registration exemptions will become effective.1 These amendments, approved by a 3-2 vote of the SEC the day before Election Day (November 2, 2020), should help early-stage companies raise equity capital in exempt transactions during a challenging economic climate.

Here is a digest of the amendments that should be of the greatest interest to startups and founders.

Test-the-waters communications—Rule 241

Under a new Rule 241 under the 1933 Act, issuers will be able to “test-the-waters” for a proposed private offering before deciding which federal exemption they will rely on. This is significant because the SEC has historically tried to muzzle issuers seeking to condition the private market without adhering to specific exemption requirements. Assuming startups and founders can navigate applicable state securities laws and regulations (see below), Rule 241 will allow them to gauge interest before incurring the significant expenses necessary to launch an offering in accordance with the requirements of a particular exemption.

Under Rule 241(a), an issuer (or a person authorized by the issuer) will be allowed to communicate with prospective investors orally or in writing to determine whether there is interest, but (a) no solicitation of funds will be permitted and (b) no binding commitment can be accepted unless (i) a determination is made regarding the applicable federal exemption and (ii) the issuer commences the offering in accordance with the requirements of that exemption.

Under Rule 241(c), a written Rule 241 communication2  can include a means for a prospective investor to indicate interest and such written communication can even require the inclusion of a responding investor’s contact information in a response form. However, any Rule 241 communication (written or oral), must include the following disclaimers:

Importantly, Rule 241 communications will be deemed to be offers for federal antifraud purposes and Rule 241 will not preempt state (i.e., blue sky) registration or qualification of such offers, where applicable.

Rule 241 only exempts the applicable communication, not any subsequent offer or sale. The SEC alerted prospective issuers that, depending on the method of dissemination, a Rule 241 communication may constitute a general solicitation, in which case the issuer would need to navigate the exempt offering framework carefully, including applicable integration principles.3

If an offering is launched under Regulation Crowdfunding (“Reg CF”) or Regulation A within 30 calendar days of a Rule 241 communication, then the issuer must file the written communication or broadcast script (as applicable) as an exhibit to the Form C or Form 1-A filed with the SEC. If a Rule 241 communication is followed by a Rule 506(b) offering and any securities are sold to a non-accredited purchaser within 30 calendar days, then the written communication or broadcast script (as applicable) must be provided to such non-accredited purchaser a reasonable period of time before the sale.

Rule 241 should not be confused with the new Rule 206 adopted under Reg CF, which will permit test-the-waters communications after an issuer has decided to rely upon Reg CF but before the issuer’s filing of a Form C. When an issuer relies on Rule 206 of Reg CF, the applicable test-the-waters communication (hereinafter, a
Rule 206 CF communication”) must be included as an exhibit to the Form C even if it was disseminated more than 30 calendar days before the filing. The requirements for Rule 206 of Reg CF are described further below.

Safe harbor for demo days—new Rule 148

The new Rule 148 under the 1933 Act is a safe harbor that is meant to help demo day sponsors and participants avoid a general solicitation in connection with such events. The rule provides that communications in connection with a seminar or meeting in which more than one issuer participates and is sponsored by “a college, university, or other institution of higher education, state or local government or instrumentality thereof, nonprofit organization, or angel investor group, incubator or accelerator” will not be deemed to constitute a general solicitation, subject to the satisfaction of four (4) conditions set forth in Rule 148(a)(1)-(4).

Under Rule 148(a)(1), no advertising for the event can reference any issuer’s securities offering.

Rule 148(a)(2) provides that the sponsor of the event may not:

Under Rule 148(a)(3), information about a securities offering communicated or distributed by or on behalf of the issuer in connection with the event is limited to: (i) a notification that the issuer is in the process of offering or planning an offering; (ii) the type and amount of securities being offered; (iii) the intended use of proceeds; and (iv) the unsubscribed amount.

Rule 148(a)(4), a condition added by the SEC after virtual meetings became standard practice due to Covid-19, imposes restrictions on virtual attendees. If a demo day event permits virtual attendance (which almost all will for the foreseeable future), online participation is limited to: (i) members of the sponsor organization or individuals associated with the sponsor organization; (ii) individuals the sponsor reasonably believes are accredited investors; or (iii) individuals invited based on industry or investment-related experience reasonably selected by the sponsor in good faith and disclosed in the public communications about the event.

The only eligible sponsor that is defined in the new Rule 148 is “angel investor group.” This definition disqualifies an angel investor group from being a Rule 148 demo day sponsor if it is associated or affiliated with a broker, dealer, or investment adviser. The terms “incubator” and “accelerator” are not defined in the rule, so it is unclear whether any association or affiliation between an incubator or accelerator, on the one hand, and any broker, dealer, or investment adviser, on the other hand, would disqualify the incubator or accelerator from sponsoring a demo day event in compliance with Rule 148. Based upon the context, it seems that it would.4

On a related issue, the SEC declined an invitation to prohibit a sponsor’s affiliation with a demo day participant, instead adding a requirement that there be at least two issuer participants for an event to qualify under Rule 148.

Since the new rule is a safe harbor, the SEC has clarified that issuers and sponsors may, in lieu of following the requirements of Rule 148, opt to rely on previously issued guidance to avoid a general solicitation in connection with a demo day “if the organizer of the event has limited participation . . . to individuals or groups of individuals with whom the issuer or organizer has a pre-existing substantive relationship or that have been contacted through an informal, personal network of experienced, financially sophisticated individuals.”

Rule 506

Rule 506 under the 1933 Act continues to be the most popular exemption from federal registration, particularly Rule 506(b), which prohibits a general solicitation and contains special requirements when there are non-accredited purchasers. Rule 506(c) permits a general solicitation, but all purchasers must be accredited investors and the issuer must take reasonable steps to verify their accredited investor status. The SEC’s capital formation rule amendments did not include any drastic modifications to these exemptions, but there were some changes that startups and founders should take note of.

Rule 506(b)—90-day period for the 35 non-accredited investor limit

As mentioned elsewhere in this post, the amendments will streamline the rules governing the potential integration of separate offerings for 1933 Act exemption purposes. For the most part, exempt offerings that are more than 30 calendar days apart will not be integrated.5 In light of the 30-day integration safe harbor, Rule 506(b) is being amended so that the limit on 35 non-accredited purchasers will be changed from a per offering limit to a per 90-day limit. The purpose of this update is to prevent issuers from conducting “serial 506(b) offerings” with 35 non-accredited purchasers every 31 days. This will be yet another complexity when securities are sold to non-accredited investors in a Rule 506(b) offering.6

Rule 502(b)—financial disclosure to non-accredited investors

The inclusion of one or more non-accredited investors in a Rule 506(b) offering triggers a disclosure requirement that would not otherwise exist.7 With respect to the financial information that must be provided by private companies in these situations, the requirement is being modified so that it is aligned with Regulation A. The practical effect of this change is that it will relieve private Rule 506(b) issuers raising $20 million or less from the obligation to provide audited financial statements to non-accredited investors (if any).8

The SEC’s rationale for this change is that “additional issuers may be willing to include non-accredited investors in their offerings pursuant to Rule 506(b), which would expand investment opportunities for those investors.” Since a specific disclosure requirement will still be triggered by including non-accredited investors, it remains to be seen whether this change will result in a meaningful increase in Rule 506(b) issuers selling to non-accredited investors.

Rule 506(c)—additional method of accredited investor verification

As mentioned above, Rule 506(c) issuers must take reasonable steps to verify the accredited investor status of each purchaser. Rule 506(c)(2)(ii)(E) contains a list of non-exclusive, non-mandatory safe harbor methods to verify the accredited investor status of natural persons in satisfaction of the requirement. To address privacy and security risks associated with natural persons repeatedly transmitting sensitive financial information, a new “bring-down” representation method is being added for accredited investors whose status was verified within the preceding five (5) year period. If an issuer or its agent has verified the accredited investor status of a natural person in accordance with Rule 506(c)(2)(ii) within such time-period, such issuer or its agent may rely on a written representation from such natural person regarding his or her continued accredited investor status. So long as the issuer is not aware of any information to the contrary, such representation will suffice.

Understanding the list of verification methods contained in Rule 506(c)(2)(ii) is non-exclusive, non-mandatory and only applicable to natural persons, the SEC “reaffirmed and updated” its prior guidance with respect to the principles-based standard for verification and what may be considered “reasonable steps” under the particular facts and circumstances. Verification of accredited investor status is crucial for the Rule 506(c) exemption, and the failure to do so can lead to an enforcement action by the SEC.9

While the SEC acknowledged that, in some circumstances, the “reasonable steps to verify” standard under Rule 506(c) may not be substantially different from the “reasonable belief” under Rule 506(b), it reiterated that a signed, check-the-box self-certification, by itself without additional information about the prospective investor, would not satisfy the Rule 506(c) standard.

Regulation Crowdfunding

Many of the capital formation amendments involve updates to the rules governing the underutilized Reg CF exemption.10 For those unaware, Reg CF allows issuers to offer and sell securities to both accredited and non-accredited investors (the so-called crowd) through a qualified intermediary (i.e., a registered broker-dealer or funding portal). Although offers and sales under Reg CF are exempt from registration under the 1933 Act, they are not “private” because, among other things, issuers are required to file a Form C offering statement with the SEC. Form Cs are not subject to SEC review and comment, but there is strict liability for material misstatements or omissions, akin to the strict liability applicable to material misstatements or omissions in a 1933 Act registration statement.11

An entire blog post could be devoted to the tweaks to Reg CF, but here is a summary of the most significant changes.

12-month limit for Reg CF issuers

The 12-month dollar limit for sales under Reg CF is being increased almost five-fold—from $1.07 million to $5.0 million. To address a comment from the American Bar Association (ABA) questioning the preemption of state securities laws for Reg CF sales that exceed the current 12-month statutory limit of $1.07 million,12 the SEC is adding a new Rule 504 to Reg CF, which will clarify that any person to whom securities are offered or sold under Reg CF will be a “qualified purchaser” under Section 18(b)(3) of the 1933 Act, thereby rendering such securities “covered securities” for state preemption purposes.

12-month limits for Reg CF investors

The limits on the amount that a particular investor can invest in Reg CF offerings over a 12-month period are being relaxed. For accredited investors,13  the limits will cease to apply altogether. For non-accredited investors, the limits will be increased by replacing the less than components of the formulae with greater than standards. For a non-accredited investor whose annual income or net worth is less than $107,000, the 12-month investment limit will be the greater of (i) $2,200 or (ii) 5% of the greater of such non-accredited investor’s annual income or net worth. For a non-accredited investor whose annual income and net worth is $107,000 or more, the 12-month investment limit will be 10% of the greater of such non-accredited investor’s annual income or net worth, not to exceed $107,000.14

Temporary relief for certain financial disclosure

In a temporary change that has been effective since January 14, 2021, the SEC extended the relaxation of financial disclosure requirements for certain issuers raising between $107,000 and $250,000 under Reg CF (including sales over the preceding 12 months). Reg CF issuers in this category who satisfy the other criteria for the temporary relief15 may provide certified financial information in lieu of the more time-consuming and expensive financial statements reviewed by a certified public accountant (but only if audited or reviewed financial statements are not otherwise available). This temporary accommodation will continue to apply to qualified Reg CF offerings initiated through August 28, 2022.

Testing the crowdfunding waters—Rule 206

A new Rule 206 under Reg CF will permit issuers that have decided to rely on Reg CF to test-the-waters orally or in writing before the filing of a Form C. As mentioned above, if a Form C is filed after a Rule 206 CF communication, the issuer must include the written communication or broadcast script (as applicable) as an exhibit, even if the Form C filing occurs more than 30 calendar days after the dissemination of the Rule 206 CF communication.16

Like a written Rule 241 communication, a written Rule 206 CF communication can include a means for a prospective investor to indicate interest and it can also require the inclusion of a responding investor’s contact information in a response form. As with Rule 241, there are specific disclaimers that must accompany any Rule 206 CF communication (oral or written), specifically that:

Importantly, Rule 206 CF communications are not required to be made through a crowdfunding intermediary, although they may be. This significant flexibility will allow prospective Reg CF issuers to gauge interest before engaging a broker-dealer or funding portal. Just like Rule 241, any Rule 206 CF communication will be deemed to be an offer for purposes of the antifraud provisions of the federal securities laws. Since state preemption applies to offers under Reg CF, Rule 206 CF communications will not be subject to blue-sky registration or qualification. However, since some states require a notice filing for a Reg CF offering, any company contemplating a Rule 206 CF communication should confer with counsel to ascertain whether any state notices are required in connection with the communication.17

Rule 204

Rule 204 of Reg CF, which governs the advertising of such offerings, is being modified in several respects. First, an exception to the rule is being added for Rule 206 CF communications. Second, the rule will now allow issuers (and persons acting on an issuer’s behalf) to communicate orally with prospective investors outside the applicable intermediary’s platform after the filing of a Form C, so long as the prospective investors are directed to the intermediary’s platform and the information provided is limited to that permitted by Rule 204(b).18 Third, the rule is being modified to clarify that only written statements must include a link to the intermediary’s platform. Fourth, the permissive disclosure for the “terms of the offering” under Rule 204(b) is being expanded to add (i) the planned used of proceeds and (ii) information about the issuer’s progress towards meeting its funding target. Fifth, a clarification is being added so that an issuer conducting concurrent offerings will not contravene the rule if it includes expanded disclosure about the Reg CF offering in the non-Reg CF offering document (such as a PPM for a Rule 506(c) offering), so long as Rule 204 is otherwise complied with.19

The changes to Rule 204 provide more latitude for advertising Reg CF offerings, but issuers and their principals should be mindful of the strict liability imposed under 1933 Act §§ 4A(c)(2) & (3).20

SPVs

Subject to the satisfaction of extensive conditions, a special purpose vehicle (SPV) will now be allowed to invest in a Reg CF offering. In SEC parlance under the amended rules, a “crowdfunding vehicle” will be able to act as a conduit so that a particular “crowdfunding issuer” can sell to a single investor for cap table purposes, while indirectly raising equity capital from crowdfunding purchasers who invest through the crowdfunding vehicle.

There are nine (9) specific conditions that a crowdfunding vehicle must satisfy, but the principal requirements are (i) that the crowdfunding vehicle be a co-issuer with the applicable crowdfunding issuer and (ii) there be a one-to-one equivalency between the number, denomination, type, and rights with respect to the securities sold by the crowdfunding issuer and the securities sold by the crowdfunding vehicle. Under the first principal requirement, both the offer and sale of the crowdfunding issuer’s securities and the offer and sale of the crowdfunding vehicle’s securities must comply with Section 4(a)(6) of the 1933 Act and Reg CF.21 Consistent with this condition, the crowdfunding issuer and the crowdfunding vehicle would need to be joint filers of the applicable Form C, which must include the required disclosures for both transactions.22 The second principal requirement is intended to assure that investors do not lose any material rights by investing through the crowdfunding vehicle. In the event the stockholders of the crowdfunding issuer are entitled to any rights (e.g., voting rights, tender or exchange offer rights etc.), the crowdfunding vehicle would be obligated to pass such rights along to the SPV investors with the applicable disclosures, as well as honor the instructions of such investors with respect to such rights. The other SPV conditions are designed to limit the crowdfunding vehicle’s activities as a mere conduit holding the securities of the crowdfunding issuer.

To the extent its investors are natural persons, a crowdfunding vehicle will be considered a single “holder of record” of the crowdfunding issuer’s securities for purposes of Section 12(g) of the 1934 Act (any investor that is a non-natural person will be added as an additional holder of record). This is significant because an issuer with total assets of more than $10 million and a class of equity securities held of record by 2,000 or more persons (or 500 or more non-accredited investors) as of the end of such issuer’s last fiscal year is required to register such class under the 1934 Act.23 Such registration triggers extensive and expensive SEC filing requirements.24

Multi-tier structures to invest in a Reg CF offering are prohibited, so the exception only applies to crowdfunding vehicles directly owning the securities of a crowdfunding issuer (i.e., an SPV could not be formed to invest in a crowdfunding vehicle).

Given the extensive technical requirements, it will be interesting to see how many Reg CF issuers opt to conduct an offering through a crowdfunding vehicle.

No ban on SAFEs

The SEC backed off its initial proposal to prohibit offerings of simple agreements for future equity (SAFEs) under Reg CF. SAFEs are convertible equity instruments popular with early-stage companies raising seed capital before a priced round. The SEC has expressed concerns with SAFEs because the holder does not have customary stockholder or creditor rights. Although startups will still be able to use Reg CF to offer and sell SAFEs, the SEC did remind such issuers of their Form C disclosure obligations with respect to “non-traditional securities.”25

Reg CF warning

During the public comment period for the capital formation amendments, several commenters expressed concerns over widespread of noncompliance with Reg CF. In response to these comments, the SEC issued a stern warning to Reg CF issuers and intermediaries:

We remind issuers of their obligation to comply with the terms, conditions and requirements of [Reg CF] and the serious consequences that may result from a failure to do so, such as the potential loss of the exemption and ensuing potential private rights of action for rescission for violations of Section 5 of the [1933 Act] and the loss of preemption for state securities law registration requirements. We also remind intermediaries of their obligation under [Rule 301(a)] to have a reasonable basis for believing that an issuer seeking to offer and sell securities in reliance on Section 4(a)(6) through the intermediary’s platform complies with the requirements in [1933 Act] Section 4A(b) and the related requirements in Reg CF. Commission staff will continue to work with FINRA to assess issuer and intermediary compliance with the requirements of Reg CF. (Footnotes omitted).26

While this passage may have been construed as lip service in the context of the broad adoption of leniency for Reg CF offerings, it appears that the SEC will be more focused on investor protections and enforcement during the Biden-Harris Administration. As an example, Acting Chair Commissioner Alison Herren Lee recently announced that the SEC’s Division of Enforcement will no longer recommend settlement offers to the SEC if they are conditioned on a waiver from the bad actor disqualification rules.27 These factors, combined with the strict liability, should incentivize issuers to be squeaky clean when it comes to Reg CF.

Rule 504—12-month limit increased to $10 million

Startups and founders should not overlook Rule 504, the exemption historically relied upon for so-called “friends and family” rounds.28 Rule 504 is unique in that there are no investor qualification requirements (i.e., investors can be non-accredited and even unsophisticated by Rule 506 standards) and there are no specific disclosure requirements.29 The drawbacks to Rule 504 are: (i) it generally prohibits a general solicitation; (ii) it does not preempt state registration or qualification of the applicable offering; and (iii) there is a 12-month limit on the amount that may be offered and sold. This last hitch will become less of an impediment because the SEC’s capital formation amendments are doubling the 12-month limit from $5 million to $10 million. It was not long ago (2016) that this 12-month limit was just $1 million, so the increase makes Rule 504 a more viable option for startups and founders, particularly when there are non-accredited, unsophisticated investors involved. On that point, an unsung benefit of this increase is the potential utility for private acquiring companies seeking to issue their shares as deal consideration in a merger, acquisition, or other business combination transaction. Since many early-stage targets have non-accredited employee stockholders who may not satisfy the Rule 506 sophistication requirement, Rule 504 may provide a meaningful opportunity to pay consideration in stock and preserve cash.

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This post is for general informational purposes only and does not constitute legal advice. No one should rely on the information in this blog post without seeking appropriate legal, accounting, tax or other appropriate advice from an attorney, accountant or other professional properly licensed in the applicable jurisdiction(s).

1Although concerns have been raised that the Biden-Harris Administration’s regulatory freeze memo could postpone the March 15, 2021 effective date, there have been no public statements by or on behalf of the SEC to that effect.

2Although the SEC’s adopting release refers to communications under Rule 241 as “generic solicitations of interest,” the use of this phrase is confusingly similar to “general solicitation,” a related but distinct concept that has fundamental consequences for 1933 Act exemption purposes. As a result, communications under Rule 241 are referred to herein as “Rule 241 communications.

3The SEC’s capital formation amendments will streamline the rules governing the potential integration of offerings for federal exemption purposes. For the most part, offerings that are more than 30 calendar days apart will not be integrated, but a Rule 241 communication that is disseminated via a general solicitation can lead to traps for the unwary.

4Commentary in the SEC’s adopting release suggests there is a prohibition on sponsor affiliation with a broker, dealer or investment adviser: “[w]e believe the tailored list of organizations eligible to act as event sponsors and the exclusion of brokers, dealers and investment advisers from the scope of the exemption will help limit the application of Rule 148 to events sponsored by organizations less likely to have a profit motive for their involvement or whose sole or primary purpose is to attract investors to private issuers.” (Italics added).

5See Note 3, supra..

6Among the other complexities: (1) each non-accredited investor or its purchaser representatives must be sophisticated within the meaning of Rule 506(b)(2)(ii); (2) a sale to even one non-accredited investor triggers a disclosure requirement that would not otherwise exist; and (3) as mentioned above, non-accredited investors must be provided with a Rule 241 communication if it was disseminated within 30 days of the sale to the non-accredited investor.

7See Rule 502(b)(2)(i) under the 1933 Act.

8Before giving effect to the amendments, non-reporting Rule 506(b) issuers selling to non-accredited investors generally needed to provide, at a minimum, an audited balance sheet.

9See, e.g., civil complaint in SEC v. Thunderbird Power Corp. et al., (S.D. Fla. July 14, 2020) (alleging that “[t]he Defendants did nothing to verify whether any of the investors — even the five who did not fill out the forms — were actually accredited.”)

10Offers and sales in compliance with Reg CF are exempt from registration under Section 4(a)(6) of the 1933 Act.

11See Section 4A(c)(2) of the 1933 Act. Startups and founders should understand there is a greater risk of liability for alleged material misstatements or omissions in a Reg CF offering than in a customary exempt offering. For example, in a Rule 506(b) offering, “scienter” is generally a required element, a plaintiff hurdle that does not exist when there is strict liability. In addition, directors and certain principal officers of a Reg CF issuer can potentially have personal liability in these situations. See 1933 Act § 4A(c)(3).

12The initial 12-month statutory limit for sales exempt under Section 4(a)(6) was $1.0 million, but that amount was increased to $1.07 million as a result of a CPI adjustment effectuated pursuant to Section 4A(h)(1) of the 1933 Act.

13The definition of “accredited investor” was recently broadened in amendments to Rule 501(a) under the 1933 Act. These amendments became effective on December 8, 2020.

14Interestingly, the outside limit of $107,000 for non-accredited investors whose annual income and net worth is $107,000 or more was not added in the amended limit for non-accredited investors whose annual income or net worth is less than $107,000. That was likely an oversight because the limit in this latter category is meant to be more stringent. In theory, a non-accredited investor in this latter category could have a limit greater than $107,000 (e.g., a non-accredited investor whose annual income is less than $107,000 but whose net worth is greater than $2.14 million (5% of $2,140,000 = $107,000)).

15These other criteria generally require the applicable Reg CF issuer to: (i) have at least six months of business operations; (ii) include cautionary disclosure in the applicable Form C; and (iii) if a prior Reg CF issuer, have complied with the filing requirements of Reg CF.

16This is a subtle but important difference from Rule 241. If an issuer uses a Rule 241 communication and subsequently launches an offering under Reg CF, the written communication or broadcast script (as applicable) only needs to be included as an exhibit to the Form C if the filing is within 30 calendar days of the Rule 241 communication.

17Although most Reg CF state notice requirements are triggered upon the filing of a Form C, legal counsel should be consulted to confirm no state notices are required in connection with the dissemination of the Rule 206 CF communication.

18As amended, the information specified in Rule 204(b) of Reg CF is limited to: (1) a statement that the issuer is conducting an offering pursuant to Section 4(a)(6) of the Securities Act, the name of the intermediary through which the offering is being conducted, and information (including a link to any written communications) directing the potential investor to the intermediary’s platform; (2) the terms of the offering; and (3) factual information about the legal identity and business location of the issuer, limited to the name of the issuer of the security, the address, the phone number and Web site of the issuer, the e-mail address of a representative of the issuer and a brief description of the business of the issuer.

19If the non-Reg CF offering materials will be filed via EDGAR (e.g., a Form 1-A for a concurrent offering under Regulation A), the link to the intermediary’s platform may not be a live hyperlink. With respect to a concurrent Rule 506(c) offering conducted through a funding portal acting as intermediary for the Reg CF offering, the SEC has indicated that such an arrangement may contravene Rule 401 of Reg CF as well as the broker registration requirements of the 1934 Act.

20See Note 11, supra.

21For these purposes, the dollar limits and investor limits do not apply to the issuance of securities from the crowdfunding issuer to the crowdfunding vehicle.

22If a crowdfunding issuer were to sell its securities to both a crowdfunding vehicle and investors outside of the crowdfunding vehicle, then such crowdfunding issuer would need to file two separate Form Cs. One Form C would be a joint filing with the crowdfunding vehicle and the other Form C would be a single filing by the crowdfunding issuer for the offer and sale to the non-SPV investors.

23Aside from the capital formation amendments, securities sold under Reg CF may be excluded from the “holder of record” count so long as the applicable issuer: (i) is current in its ongoing annual reports under Reg CF; (ii) has total assets that do not exceed $25 million; and (iii) has engaged a transfer agent registered under Section 17A(c) of the 1934 Act. See Rule 12g-6(a) under the 1934 Act. In addition, for Section 12(g)(1) registration purposes, securities issued under an employee compensation plan in an exempt transaction may be excluded. See Rule 12g5-1(a)(8) under the 1934 Act.

24It is important to note that the Section 12(g) registration issue must be examined at both the crowdfunding issuer and the crowdfunding vehicle levels, since they are separate entities.

25See 17 CFR 227.201(m).

26The SEC supplemented this warning with a footnote indicating that it retains authority to bring enforcement actions for the failure to comply with Reg CF. (“While [Rule 502 of Reg CF] sets forth a safe harbor for insignificant deviations, [Rule 502(b) of Reg CF] makes it clear that such safe harbor does not preclude the Commission from bringing an enforcement action seeking appropriate relief for an issuer’s failure to comply with all applicable terms, conditions, and requirements of Regulation Crowdfunding.”)

27Coincidentally, the capital formation amendments also adjusted the lookback period for the disqualification of certain bad actors under Reg CF so that such periods will be measured both from the time of the filing of the Form C and the time of sale. This change does not apply to 20% stockholders, so the Reg CF lookback period for bad actors in this category will continue to be measured as of the time of the Form C filing only.

28Rule 504 is not available to public companies, investment companies or certain business development companies. See Rule 504(a) under the 1933 Act.

29See Rule 504(b)(1) under the 1933 Act. As with any securities offering, Rule 504 issuers need to provide sufficient disclosure to avoid antifraud liability under federal and applicable state securities laws. In addition, Rule 504 issuers are required to file a Form D. See Rule 503(a)(1) under the 1933 Act