Announcements and analysis of key fintech, regulatory and compliance issues as they unfold.
Regulatory Update: SEC Risk Alert – Environmental, Social, and Governance (“ESG”) Investing
The SEC Division of Examinations has issues a Risk Alert – SEC Risk Alert – Environmental, Social, and Governance (“ESG”) Investing:
“The Risk Alert provides observations of deficiencies and internal control weaknesses from examinations of investment advisers and funds regarding ESG investing. It also provides observations of effective practices from such examinations. The Risk Alert is intended to highlight risk areas and assist firms in developing and enhancing their compliance practices. In addition, the staff seeks to provide transparency regarding the Division’s focus areas during examinations on this topic observed that firms approach ESG investing in various ways. In making investment decisions, some advisers and funds consider ESG factors alongside many other factors, such as macroeconomic trends or company-specific factors like a price-to-earnings ratio, to seek to enhance performance and manage investment risks. Others focus on ESG practices because they believe investments with favorable ESG profiles may provide higher returns or result in better ESG-related outcomes.”
View it here: https://www.sec.gov/files/esg-risk-alert.pdf
Regulatory Update: FINRA Supervision Frequently Asked Questions (FAQ)
FINRA has updated it’s FAQs on supervision. It has added the following Q&A:
https://www.finra.org/rules-guidance/key-topics/supervision/faq?utm_source=MM&utm_medium=email&utm_campaign=O%5FWeekly%5FUpdate%5F040721%5FFINAL#3-7
“7. How can member firms change the date on which their Rule 3130 annual certification is due?”
“8. What is the difference between the FINRA Rule 3120 report and the FINRA Rule 3130 report? Updated”
“10. What are the timetables for the FINRA Rules 3120 and 3130 reports and the Rule 3130 certification? Updated”
Visit here for the answers:
https://www.finra.org/rules-guidance/key-topics/supervision/faq?utm_source=MM&utm_medium=email&utm_campaign=O%5FWeekly%5FUpdate%5F040721%5FFINAL#3-7
Regulatory Update: SEC Broker-Dealer Risk Alert Regarding AML Suspicious Activity Monitoring and Reporting
The SEC’s Division of Examinations (“EXAMS”) has issued a Risk Alert regarding their compliance findings related to anti-money laundering (“AML”) requirements. In sharing its observations from these examinations of broker-dealers, EXAMS is seeking to remind firms of their obligations under AML rules and regulations and to assist broker-dealers in reviewing and enhancing their AML programs, in particular their monitoring for and reporting of suspicious activity to law enforcement and financial regulators. Mutual funds also may benefit from the examination observations discussed here. The Risk Alert states the following and notes the following areas that need enhancement at broker-dealers.
AML Policies and Procedures and Internal Controls
Suspicious Activity Monitoring and Reporting
The Bank Secrecy Act (“BSA”) and implementing regulations establish the basic framework for AML obligations imposed on financial institutions.2 The Financial Crimes Enforcement Network (“FinCEN”), a bureau of the Department of Treasury, adopted the “AML Program Rule” and the “SAR Rule” to implement AML programs and suspicious activity monitoring and reporting requirements for broker-dealers Rule 17a-8 under the Securities Exchange Act of 1934 (“Exchange Act”) requires broker-dealers to comply with the reporting, recordkeeping, and record retention requirements of the BSA, including those regarding Suspicious Activity Reports (“SARs”).
See the full alert here: https://www.sec.gov/files/aml-risk-alert.pdf
Regulatory Update: SEC Reg CF and NEW Form C Filing FAQ
In light of the Reg CF rule amendment that became effective on March 15, 2021, the SEC released an Announcement regarding new Form C guidance in an FAQ format. Below is a link to the SEC Announcement and referenced Reg CF Rule Amendment. The FAQ guidance addresses the following questions:
Is a crowdfunding vehicle required to file its own Form C, separate from the Form C filed by the crowdfunding issuer?
Does the crowdfunding vehicle need to have its own filer identification number (called a “Central Index Key” or “CIK” number) and EDGAR access codes?
What information about the crowdfunding vehicle is required to be provided in the XML-based portion of the Form C?
The crowdfunding vehicle and its principal executive officer or officers, its principal financial officer, its controller or principal accounting officer and at least a majority of the board of directors or persons performing similar functions are required to sign the Form C. How should those signatures be provided?
SEC Announcement here: https://www.sec.gov/corpfin/announcement/staff-guidance-edgar-filing-form-c
Regulation Crowdfunding Amendment: Release No. 33-10884 https://www.sec.gov/rules/final/2020/33-10884.pdf
Regulatory Update: 2021 SEC Examination Priorities: Broker-Dealers and Municipal Advisors
The Securities and Exchange Commission’s Division of Examinations today announced its 2021 examination priorities, including greater focus on MUNICIPAL ADVISORS and BROKER-DEALERS. Areas of focus include the following:
Municipal Advisor Examinations:
The Division will examine, in light of the COVID-19 pandemic and its potential impact on municipal advisors and their clients, how municipal advisors may have adjusted their practices. The Division will also examine whether municipal advisors have met their fiduciary duty obligations to municipal entity clients, including the disclosing of and managing conflicts of interest and documentation of the scope of their client engagements.
Broker-Dealer Examinations:
Examination of broker-dealers will continue to focus on compliance with the Customer Protection Rule and the Net Capital Rule, including the adequacy of internal processes, procedures, controls, and compliance with requirements for borrowing securities from customers. Broker-dealer examinations will also focus on compliance with best execution in a zero commission environment, recently amended Rule 606 order routing disclosure rules, and market-maker compliance with Reg SHO.
Financial Technology (Fintech) and Innovation, Including Digital Assets – Among other areas, examinations will focus on evaluating whether registrants are operating consistently with their representations, whether firms are handling customer orders in accordance with their instructions, and review compliance around trade recommendations made in mobile applications. Examinations of market participants engaged with digital assets will continue to assess the following: whether investments are in the best interests of investors; portfolio management and trading practices; safety of client funds and assets; pricing and valuation; effectiveness of compliance programs and controls; and supervision of representatives’ outside business activities.
Anti-Money Laundering Programs – The Division will continue to review for compliance with applicable anti-money laundering (AML) requirements, including evaluating whether broker-dealers and registered investment companies have adequate policies and procedures in place that are reasonably designed to identify suspicious activity and illegal money-laundering activities.
Retail Investors, Including Seniors and Those Saving for Retirement, Through Reg. BI and Fiduciary Duty Compliance – The Division will focus on compliance with Regulation Best Interest, Form CRS, and whether registered investment advisers have fulfilled their fiduciary duties of care and loyalty. The Division will examine whether firms are appropriately mitigating conflicts of interest and, where necessary, providing disclosure of conflicts that is sufficient to enable informed consent by retail investors. With respect to those investments heavily used by retail investors or those that may present elevated risks, the Division will continue to prioritize these products, including mutual funds, exchange-traded funds (ETFs), municipal securities and other fixed income securities, variable annuities, private placements, and microcap securities.
You can read the SEC 2021 Exam Priorities Report here: https://www.sec.gov/files/2021-exam-priorities.pdf / https://www.sec.gov/files/2021-exam-priorities.pdf
Regulatory Update: 2021 FINRA Examination Priorities
FINRA issued its 2021 Report on FINRA’s Examination and Risk Monitoring Program
Report Combines and Replaces Annual Exam and Risk Monitoring Findings Report, Priorities Letter:
The Report identifies the applicable rule and key related considerations for member firm compliance programs, summarizes noteworthy findings from recent examinations, outlines effective practices that FINRA observed during its oversight, and provides additional resources that may be helpful to member firms in fulfilling their compliance obligations.
The Report addresses 18 regulatory areas organized into four categories: Firm Operations, Communications and Sales, Market Integrity and Financial Management. These topics include:
Firm Operations
Anti-Money Laundering
Cybersecurity and Technology Governance
Outside Business Activities and Private Securities Transactions
Books and Records
Regulatory Events Reporting
Fixed Income Mark-up Disclosure
Communications and Sales
Reg BI and Form CRS
Communications with the Public
Private Placements
Variable Annuities
Market Integrity
CAT
Best Execution
Large Trader Reporting
Market Access
Vendor Display Rule
Financial Management
Net Capital
Liquidity Management
Credit Risk Management
Segregation of Assets and Customer Protection
As in prior years, FINRA will also adapt the areas of focus for its Examinations and Risk Monitoring programs during 2021 to address emerging regulatory concerns and risks for investors that may arise throughout the year.
Read the Report here: https://www.finra.org/rules-guidance/guidance/reports/2021-finras-examination-and-risk-monitoring-program
News and Notes: 2020 Crowdfunding and Capital Formation Overview
Insightful information from The SEC’s Office of the Advocate for Small Business Capital Formation and the SEC Small Business Capital Formation Advisory Committee.
2020 Capital Formation
• 504 = $171mill raised (median raise $100k)
• 506(b) = $1.4T raised (median raise $1.8mill)
• 506(c) = $69bill raised (median raise $900k)
• Reg A = $1.3bill raised (median raise $2.1mill)
• Ref CF = $88mill raised (median raise $100k)
• Other Exempt Offerings = $1.2T raised
• IPOs = $60B raised (median raise $150mill)
• Other Registered Offerings = $1.5T raised (median raise $9mill)
Capital raise statistics and by State and exemption. https://www.sec.gov/spotlight/sbcfac/overview-2020-oasb-annual-report.pdf
SEC Office of the Advocate for Small Business Formation Annual Report: https://www.sec.gov/files/2020-oasb-annual-report.pdf
Press Release – Small Business Capital Formation Advisory Committee Jan. 29 Meeting to Focus on Smaller Public Company Markets: https://www.sec.gov/news/press-release/2021-14
Regulatory Update: REG CF RULE AMENDMENTS – EFFECTIVE MARCH 15, 2021
Great News and a Big Day for the industry!
The rule amendments to Reg CF (and other SEC rules) have been filed in the Federal Register this morning!
As previously discussed, the amendments to Regulation CF will be effective 60 days from today, which makes the effective date March 15, 2021.
The Rule Effective Date is: 03/15/2021
Publication Date: 01/14/2021
Document Citation: 86 FR 3496
Agency/Docket Numbers:
Release Nos. 33-10884; 34-90300; IC-34082
File No. S7-05-20
RIN: 3235-AM27
Document Number:2020-24749
SUMMARY
This effects Reg A, Reg D, Reg CF and other rules related to capital raises. For Regulation Crowdfunding (Reg CF), the amendments include:
raising the offering limit in Regulation Crowdfunding from $1.07 million to $5 million;
amend the investment limits for investors in Regulation Crowdfunding offerings by:
removing investment limits for accredited investors; and
using the greater of their annual income or net worth when calculating the investment limits for non-accredited investors; and
extending for 18 months the existing temporary relief providing an exemption from certain Regulation Crowdfunding financial statement review requirements for issuers offering $250,000 or less of securities in reliance on the exemption within a 12-month period.
The following link provides a summary of the forthcoming amendments: https://www.sec.gov/news/press-release/2020-273
The final rule linked here details the amendments specifically: https://www.sec.gov/rules/final/2020/33-10844.pdf
Regulatory Update: SEC Guidance on Custody of Digital Asset Securities / (SEC Request for Comment)
On December 23, 2020, thehe SEC issued a statement (Custody of Digital Asset Securities by Special Purpose Broker-Dealers) outlining how broker-dealers must operate when acting as custodians of digital asset securities in order to avoid enforcement action. Ref: https://www.sec.gov/rules/policy/2020/34-90788.pdf
In July 2019, the SEC issued a joint staff statement with FINRA that highlighted the importance of compliance by broker-dealers custodying digital assets with Rule 15c3-3 of the Securities Exchange Act of 1934 (the Customer Protection Rule). The Joint Statement had emphasized how digital asset securities are susceptible to being lost due to cyberfraud, cybertheft, loss of a private key, or a faulty blockchain transaction. Ref: https://www.sec.gov/news/public-statement/joint-staff-statement-broker-dealer-custody-digital-asset-securities
SIFMA has previously critizized for lack of guidance. Review thier Paper here: (Current Regulatory and Operational Considerations for Broker-Dealers and a Look Towards the Future), RE: https://www.sifma.org/wp-content/uploads/2020/11/Securitytokens-Paper.pdf
Regulatory Update: FINRA Rule 3110 now effective granting Temporary Relief to Allow Remote Inspections for Calendar Year 2020 and 2021
Pursuant to SR-FINRA-2020-040, FINRA has adopted temporary Supplementary Material .17 (Temporary Relief to Allow Remote Inspections for Calendar Year 2020 and Calendar Year 2021) under FINRA Rule 3110 (Supervision) to provide member firms the option, subject to specified requirements under the supplementary material, to complete remotely their calendar year 2020 and calendar year 2021 inspection obligations under FINRA Rule 3110(c) (Internal Inspections), without an on-site visit to the office or location.
Financial Industry Regulatory Authority, Inc. (“FINRA”) is filing with the Securities and Exchange Commission (“SEC” or “Commission”) a proposed rule change to adopt temporary Supplementary Material .17 (Temporary Relief to Allow Remote Inspections for Calendar Year 2020 and Calendar Year 2021) under FINRA Rule 3110 (Supervision) to provide member firms the option, subject to specified requirements under the proposed supplementary material, to complete remotely their calendar year 2020 and calendar year 2021 inspection obligations under FINRA Rule 3110(c) (Internal Inspections), without an on-site visit to the office or location. The temporary rule change is necessitated by the compelling health and safety concerns and the operational challenges member firms are facing due to the sustained COVID-19 pandemic.
Regulatory Update: SEC Investment Advisor Compliance Program RISK ALERT
The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) issued this Risk Alert provides an overview of notable compliance issues related to Rule 206(4)-7 (the “Compliance Rule”) under the Investment Advisers Act of 1940 (“Advisers Act”). Below are examples of notable deficiencies or weaknesses identified by OCIE staff in connection with the Compliance Rule:
“Inadequate Compliance Resources. OCIE staff observed advisers that did not devote adequate resources, such as information technology, staff and training, to their compliance programs…
Insufficient Authority of CCOs. OCIE staff observed CCOs who lacked sufficient authority within the adviser to develop and enforce appropriate policies and procedures for the adviser…
Annual Review Deficiencies. OCIE staff observed advisers that were unable to demonstrate that they performed an annual review or whose annual reviews failed to identify significant existing compliance or regulatory problems….
Implementing Actions Required by Written Policies and Procedures. OCIE staff observed advisers that did not implement or perform actions required by their written policies and procedures…..
Maintaining Accurate and Complete Information in Policies and Procedures. The staff observed advisers’ policies and procedures that contained outdated or inaccurate information about the adviser….
Maintaining or Establishing Reasonably Designed Written Policies and Procedures. OCIE staff observed advisers that did not maintain written policies and procedures or that failed to establish, implement, or appropriately tailor written policies and procedures that were reasonably designed to prevent violations of the Advisers Act. For example, staff observed advisers that claimed to rely on cursory or informal processes instead of maintaining written policies and procedures. In addition, staff observed advisers that utilized policies of an affiliated entity, such as a broker-dealer, that were not tailored to the business of the advisers….”
Review the Risk Alert here: https://www.sec.gov/files/Risk%20Alert%20IA%20Compliance%20Programs_0.pdf
Regulatory Update: SEC Amendments to Regulation CF, Reg D, Reg A and more are APPROVED!
Today the SEC voted to approve the long anticipated amendments to Regulation Crowdfunding (Reg CF)! The amendments will be effective 60 days after publication in the Federal Register.
SUMMARY
This effects Reg A, Reg D, Reg CF and other rules related to capital raises. For Regulation Crowdfunding (Reg CF), the amendments include:
raising the offering limit in Regulation Crowdfunding from $1.07 million to $5 million;
amend the investment limits for investors in Regulation Crowdfunding offerings by:
removing investment limits for accredited investors; and
using the greater of their annual income or net worth when calculating the investment limits for non-accredited investors; and
extending for 18 months the existing temporary relief providing an exemption from certain Regulation Crowdfunding financial statement review requirements for issuers offering $250,000 or less of securities in reliance on the exemption within a 12-month period.
The following link provides a summary of the forthcoming amendments: https://www.sec.gov/news/press-release/2020-273
The final rule linked here details the amendments specifically: https://www.sec.gov/rules/final/2020/33-10844.pdf
EFFECTIVE DATE PENDING
The amendments will be effective 60 days after publication in the Federal Register, except for the extension of the temporary Regulation Crowdfunding provisions, which will be effective upon publication in the Federal Register.
Regulatory Update: OFAC Risk Advisory – The Facilitation of Ransomware Payments Risk Violating OFAC Regulations
“Advisory on Potential Sanctions Risks for Facilitating Ransomware Payments
Date: October 1, 2020
The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) is issuing this
advisory to highlight the sanctions risks associated with ransomware payments related to
malicious cyber-enabled activities. Demand for ransomware payments has increased during the
COVID-19 pandemic as cyber actors target online systems that U.S. persons rely on to continue
conducting business. Companies that facilitate ransomware payments to cyber actors on behalf
of victims, including financial institutions, cyber insurance firms, and companies involved in
digital forensics and incident response, not only encourage future ransomware payment demands
but also may risk violating OFAC regulations. This advisory describes these sanctions risks and
provides information for contacting relevant U.S. government agencies, including OFAC, if
there is a reason to believe the cyber actor demanding ransomware payment may be sanctioned
or otherwise have a sanctions nexus.”
Read more here: https://home.treasury.gov/system/files/126/ofac_ransomware_advisory_10012020_1.pdf
Compliance News: SEC Issues Risk Alert – Cybersecurity and “Credential Stuffing”
September 15, 2020
SEC The Office of Compliance Inspections and Examinations (“OCIE”)
Cybersecurity: Safeguarding Client Accounts against Credential Compromise
“This Risk Alert highlights “credential stuffing” — a method of cyber-attack to client accounts that uses compromised client login credentials, resulting in the possible loss of customer assets and unauthorized disclosure of sensitive personal information.
The Office of Compliance Inspections and Examinations (“OCIE”) has observed in recent examinations an increase in the number of cyber-attacks against SEC-registered investment advisers (“advisers”) and brokers and dealers (“broker-dealers,” and together with advisers, “registrants” or “firms”) using credential stuffing. Credential stuffing is an automated attack on web-based user accounts as well as direct network login account credentials.1 Cyber attackers obtain lists of usernames, email addresses, and corresponding passwords from the dark web2 and then use automated scripts to try the compromised user names and passwords on other websites, such as a registrant’s website, in an attempt to log in and gain unauthorized access to customer accounts….”
Read more here:
https://www.sec.gov/ocie/announcement/risk-alert-credential-compromise
https://www.sec.gov/files/Risk%20Alert%20-%20Credential%20Compromise.pdf
Regulatory Update: SEC Modernizes the Accredited Investor Definition
The SEC issued a press release today announcing the modernization of the definition of “Accredited Investor”. You can find the Press Release as well as the Announcement below. The amendments and order become effective 60 days after publication in the Federal Register.
Press Release: https://www.sec.gov/news/press-release/2020-191
Final Rule: https://www.sec.gov/rules/final/2020/33-10824.pdf
“SEC Modernizes the Accredited Investor Definition
FOR IMMEDIATE RELEASE
2020-191
Washington D.C., Aug. 26, 2020 —
The Securities and Exchange Commission today adopted amendments to the “accredited investor” definition, one of the principal tests for determining who is eligible to participate in our private capital markets. Historically, individual investors who do not meet specific income or net worth tests, regardless of their financial sophistication, have been denied the opportunity to invest in our multifaceted and vast private markets. The amendments update and improve the definition to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in those markets. ” …
“Highlights
The amendments revise Rule 501(a), Rule 215, and Rule 144A of the Securities Act.
The amendments to the accredited investor definition in Rule 501(a):
add a new category to the definition that permits natural persons to qualify as accredited investors based on certain professional certifications, designations or credentials or other credentials issued by an accredited educational institution, which the Commission may designate from time to time by order. In conjunction with the adoption of the amendments, the Commission designated by order holders in good standing of the Series 7, Series 65, and Series 82 licenses as qualifying natural persons. This approach provides the Commission with flexibility to reevaluate or add certifications, designations, or credentials in the future. Members of the public may wish to propose for the Commission’s consideration additional certifications, designations or credentials that satisfy the attributes set out in the new rule;
include as accredited investors, with respect to investments in a private fund, natural persons who are “knowledgeable employees” of the fund;
clarify that limited liability companies with $5 million in assets may be accredited investors and add SEC- and state-registered investment advisers, exempt reporting advisers, and rural business investment companies (RBICs) to the list of entities that may qualify;
add a new category for any entity, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries, that own “investments,” as defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered;
add “family offices” with at least $5 million in assets under management and their “family clients,” as each term is defined under the Investment Advisers Act; and
add the term “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.
The amendment to Rule 215 replaces the existing definition with a cross reference to the definition in Rule 501(a).
The amendments expand the definition of “qualified institutional buyer” in Rule 144A to include limited liability companies and RBICs if they meet the $100 million in securities owned and invested threshold in the definition. The amendments also add to the list any institutional investors included in the accredited investor definition that are not otherwise enumerated in the definition of “qualified institutional buyer,” provided they satisfy the $100 million threshold.
The Commission also adopted conforming amendments to Rule 163B under the Securities Act and to Rule 15g-1 under the Exchange Act.
What’s Next?
The amendments and order become effective 60 days after publication in the Federal Register.
###”
Compliance News: Will SEC Regulation Crowdfunding be Amended Soon?
Some industry insiders speculate that the SEC will be voting on this proposal very soon!
See the Proposal and Press Release below and follow the SEC’s vote here: https://www.sec.gov/about/commission-votes/annual/commission-votes-ap-2020.xml
Press Release – https://www.sec.gov/news/press-release/2020-55
“SEC Proposes Rule Changes to Harmonize, Simplify and Improve the Exempt Offering Framework
Proposed amendments would provide a more rational framework, eliminate complexity and increase access to capital while preserving and enhancing important investor protections
FOR IMMEDIATE RELEASE
2020-55
Washington D.C., March 4, 2020 —
The Securities and Exchange Commission today announced that it has voted to propose a set of amendments that would harmonize, simplify, and improve the exempt offering framework to promote capital formation and expand investment opportunities while preserving and enhancing important investor protections. ….”
*********
“FACT SHEET
Facilitating Capital Formation and Expanding Investment Opportunities by Streamlining Access to Capital for Entrepreneurs
March 4, 2020
The Securities and Exchange Commission today proposed a set of amendments to the exemptive framework under the Securities Act of 1933 that would simplify, harmonize, and improve certain aspects of the framework to promote capital formation while preserving or enhancing important investor protections.
The proposed amendments would:
address, in one broadly applicable rule, the ability of issuers to move from one exemption to another, and ultimately to a registered offering, providing more certainty to issuers raising capital;
increase the offering limits for Regulation A, Regulation Crowdfunding, and Rule 504 offerings, and revise certain individual investment limits based on the Commission’s experience with the rules, marketplace practices, capital raising trends, and comments received;
provide greater certainty to issuers and protection to investors by setting clear and consistent rules governing offering communications between investors and issuers, including permitting certain “demo day” activity without running afoul of the prohibition on general solicitation; and
harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions to reduce differences between exemptions, while preserving or enhancing investor protections.
Background
A majority of entrepreneurs and emerging businesses raise capital using the exempt offering framework under the Securities Act, from raising seed capital for new business to funding growth on the path to an initial public offering. The scope of exempt offerings has evolved over time through legislative changes and Commission rules, resulting in a current offering framework that is complex and made up of differing requirements and conditions for exemption, which may be confusing and difficult for issuers to navigate. In June 2019, the Commission issued a concept release that solicited public comment on possible ways to simplify, harmonize, and improve the exempt offering framework under the Securities Act. Informed by the comments received, as well as other feedback including recommendations of the Commission’s advisory committees, the SEC’s Government-Business Forum on Small Business Capital Formation, direct outreach to, and engagement with, investors and entrepreneurs, and Congressional feedback, the Commission’s proposed amendments are intended to reduce potential friction points to make the capital raising process more effective and efficient to meet evolving market needs.
Highlights
Offering and Investment Limits. The Commission proposed revisions to the current offering and investment limits for certain exemptions.
For Regulation A:
raise the maximum offering amount under Tier 2 of Regulation A from $50 million to $75 million; and
raise the maximum offering amount for secondary sales under Tier 2 of Regulation A from $15 million to $22.5 million.
For Regulation Crowdfunding:
raise the offering limit in Regulation Crowdfunding from $1.07 million to $5 million;
amend the investment limits for investors in Regulation Crowdfunding offerings by:
not applying any investment limits to accredited investors; and
revising the calculation method for investment limits for non-accredited investors to allow them to rely on the greater of their annual income or net worth when calculating the limit on how much they can invest.
For Rule 504 of Regulation D:
raise the maximum offering amount from $5 million to $10 million.
“Test-the-Waters” and “Demo Day” Communications. The Commission proposed several amendments relating to offering communications, including:
a proposed new rule that would permit an issuer to use generic solicitation of interest materials to “test-the-waters” for an exempt offer of securities prior to determining which exemption it will use for the sale of the securities;
a proposed rule amendment that would permit Regulation Crowdfunding issuers to “test-the-waters” prior to filing an offering document with the Commission in a manner similar to current Regulation A; and
a proposed new rule that would provide that certain “demo day” communications would not be deemed general solicitation or general advertising.
Regulation A and Regulation Crowdfunding Eligibility. The proposal includes amendments to the eligibility restrictions in Regulation Crowdfunding and Regulation A. These proposed rules would permit the use of certain special purpose vehicles to facilitate investing in Regulation Crowdfunding issuers, and would limit the types of securities that may be offered and sold in reliance on Regulation Crowdfunding.
Integration Framework. The current Securities Act integration framework for registered and exempt offerings consists of a mixture of rules and Commission guidance for determining whether multiple securities transactions should be considered part of the same offering.
The Commission proposed changes to the framework to better facilitate this determination by providing a general principle of integration that looks to the particular facts and circumstances of the offering, and focuses the analysis on whether the issuer can establish that each offering either complies with the registration requirements of the Securities Act, or that an exemption from registration is available for the particular offering.
The Commission also proposed four non-exclusive safe harbors from integration:
Safe Harbor 1 Any offering made more than 30 calendar days before the commencement of any other offering, or more than 30 calendar days after the termination or completion of any other offering, would not be integrated with another offering; provided that, for an exempt offering for which general solicitation is not permitted, the purchasers either were not solicited through the use of general solicitation, or established a substantive relationship with the issuer prior to the commencement of the offering for which general solicitation is not permitted.
Safe Harbor 2 Offers and sales made in compliance with Rule 701, pursuant to an employee benefit plan, or in compliance with Regulation S would not be integrated with other offerings.
Safe Harbor 3 An offering for which a Securities Act registration statement has been filed would not be integrated with another offering if made subsequent to: (i) a terminated or completed offering for which general solicitation is not permitted; (ii) a terminated or completed offering for which general solicitation is permitted and made only to qualified institutional buyers and institutional accredited investors; or (iii) an offering that terminated or completed more than 30 calendar days prior to the commencement of the registered offering.
Safe Harbor 4 Offers and sales made in reliance on an exemption for which general solicitation is permitted would not be integrated with another offering if made subsequent to any prior terminated or completed offering.
Other Improvements to Specific Exemptions. The amendments also would:
change the financial information that must be provided to non-accredited investors in Rule 506(b) private placements to align with the financial information that issuers must provide to investors in Regulation A offerings;
add a new item to the non-exclusive list of verification methods in Rule 506(c);
simplify certain requirements for Regulation A offerings and establish greater consistency between Regulation A and registered offerings; and
harmonize the bad actor disqualification provisions in Regulation D, Regulation A, and Regulation Crowdfunding.
What’s Next?
The comment period for the proposal will remain open for 60 days following publication in the Federal Register.
“
Source: https://www.sec.gov/news/press-release/2020-55
Regulatory Update: SEC Issues Select COVID-19 Compliance Risks for Broker-Dealers and Investment Advisers
Select COVID-19 Compliance Risks and Considerations for Broker-Dealers and Investment Advisers (August 12, 2020)
The Risk Alert is intended to share some of these observations with Firms, investors, and the public generally. OCIE’s observations and recommendations fall broadly into the following
six categories: (1) protection of investors’ assets; (2) supervision of personnel; (3) practices relating to fees, expenses, and financial transactions; (4) investment fraud; (5) business continuity; and (6) the protection of investor and other sensitive information.
Visit the SEC’s Release Here: https://www.sec.gov/files/Risk%20Alert%20-%20COVID-19%20Compliance.pdf
Regulatory Update: FINRA NTM 20-21 Private Placement Communications
FINRA Issued Notice to Members (NTM) 20-21 to remind member firms of the requirements to compliance with FINRA communication rules when marketing private placements. The following are some select excerpts from the NTM. The NTM addresses communications, fair and balance considerations, internal rates of return, forecasts, distribution rates, third-party materials and more. Please see the full NTM for complete details. https://www.finra.org/sites/default/files/2020-06/Regulatory-Notice-20-21.pdf
“Private placements are unregistered, non-public securities offerings that rely on an available exemption from registration with the Securities and Exchange Commission (SEC) under either Sections 3 or 4 of the Securities Act of 1933 (Securities Act).1 Most private offerings, however, are sold pursuant to one of three “safe harbors” under Rules 504, 506(b), and 506(c) of Securities Act Regulation D (Reg D).”
“FINRA Rule 2210(d)(1) requires that all member firm communications be fair, balanced and not misleading. Communications that promote the potential rewards of an investment also must disclose the associated risks in a balanced manner.”
“FINRA disciplinary actions demonstrate that member firms can be liable for violations of Rule 2210 when distributing or using noncompliant retail communications prepared by a third party.”
“Rule 2210 requires communications that discuss the benefits of an investment also to include a discussion of its risks.”
“Rule 2210(d)(1)(F) generally prohibits the use of any prediction or projection of performance, as well as any exaggerated or unwarranted claim, opinion or forecast.13 Accordingly, retail communications concerning private placements may not project or predict returns to investors such as yields, income, dividends, capital appreciation percentages or any other future investment performance.”
Regulatory Update: Municipal Advisors – Temporary Conditional Exemption from the Broker Registration Requirements
The Temporary Conditional Exemptive Order [Release No. 34-89074] is intended to address disruption in the municipal securities markets as a result of COVID-19 and permits registered municipal advisors to solicit banks, their wholly-owned subsidiaries that are engaged in commercial lending and financing activities, and credit unions (“Qualified Providers”) in connection with direct placements of securities issued by their municipal issuer clients, subject to the requirements of the Order. Note that the” direct placement of securities” is an activity that triggers broker-dealer registration requirements.
The Order permits a Registered Municipal Advisor to 1) engage in “Permitted Activities”—i.e., solicitation—of one or more Qualified Providers in connection with a potential Direct Placement of municipal securities by its Municipal Issuer client, and 2) receive transaction-based compensation for services provided in connection with that Direct Placement, without being required to register as a broker under Section 15(a) of the Exchange Act, so long as all of the conditions in this Order are met.
Read the full Order Granting a Temporary Conditional Exemption from the Broker Registration Requirements of Section 15(a) of the Securities Exchange Act of 1934 for Certain Activities of Registered Municipal Advisors: https://www.sec.gov/rules/exorders/2020/34-89074.pdf
Crowdfunding News: SEC Provides Temporary, Conditional Relief to Allow Small Businesses to Pursue Expedited Crowdfunding Offerings
SEC Provides Temporary, Conditional Relief to Allow Small Businesses to Pursue Expedited Crowdfunding Offerings
FOR IMMEDIATE RELEASE
2020-101
Washington D.C., May 4, 2020 —
The Securities and Exchange Commission today announced that it is providing temporary, conditional relief for established smaller companies affected by COVID-19 that may look to meet their urgent funding needs through a Regulation Crowdfunding offering. Today’s actions, which follow suggestions made by members of the SEC’s Small Business Capital Formation Advisory Committee, will expedite the offering process for eligible companies by providing relief from certain rules with respect to the timing of a company’s offering and the financial statements required. To take advantage of the temporary rules, a company must meet enhanced eligibility requirements and provide clear, prominent disclosure to investors about its reliance on the relief. The relief will apply to offerings launched between the effective date of the temporary rules and Aug. 31, 2020.
https://www.sec.gov/news/press-release/2020-101
The following table summarizes the current rules and today’s temporary amendments:
Requirement Existing Regulation Crowdfunding Temporary Amendment Eligibility The exemption is not available to:
Non-U.S. issuers;
Issuers that are required to file reports under Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
Investment companies;
Blank check companies;
Issuers that are disqualified under Regulation Crowdfunding’s disqualification rules; and
Issuers that have failed to file the annual reports required under Regulation Crowdfunding during the two years immediately preceding the filing of the offering statement.
To rely on the temporary rules, issuers must meet the existingeligibility criteria PLUS:
The issuer cannot have been organized and cannot have been operating less than six months prior to the commencement of the offering; and
An issuer that has sold securities in a Regulation Crowdfunding offering in the past, must have complied with the requirements in section 4A(b) of the Securities Act and the related rules.
Offers permitted After filing of offering statement (including financial statements) After filing of offering statement, but financial statements may be initially omitted (if not otherwise available) Investment commitments accepted After filing of offering statement (including financial statements) After filing of offering statement that includes financial statements or amended offering statement that includes financial statements Financial statements required when issuer is offering more than $107,000 and not more than $250,000 in a 12-month period Financial statements of the issuer reviewed by a public accountant that is independent of the issuer Financial statements of the issuer and certain information from the issuer’s Federal income tax returns, both certified by the principal executive officer Sales permitted After the information in an offering statement is publicly available for at least 21 days As soon as an issuer has received binding investment commitments covering the target offering amount (note: commitments are not binding until 48 hours after they are given) Early closing permitted Once target amount is reached if:
The offering remains open for a minimum of 21 days;
The intermediary provides notice about the new offering deadline at least five business days prior to the new offering deadline;
Investors are given the opportunity to reconsider their investment decision and to cancel their investment commitment until 48 hours prior to the new offering deadline; and
At the time of the new offering deadline, the issuer continues to meet or exceed the target offering amount.
As soon as binding commitments are received reaching target amount if:
The issuer has complied with the disclosure requirements in temporary Rule 201(z);
The intermediary provides notice that the target offering amount has been met; and
At the time of the closing of the offering, the issuer continues to meet or exceed the target offering amount.
Cancellations of investment commitments permitted For any reason until 48 hours prior to the deadline identified in the issuer’s offering materials. Thereafter, an investor is not able to cancel any investment commitments made within the final 48 hours of the offering (except in the event of a material change to the offering). For any reason for 48 hours from the time of the investor’s investment commitment (or such later period as the issuer may designate). After such 48 hour period, an investment commitment may not be cancelled unless there is a material change to the offering.
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