2007 Proposed Revisions to Regulation D

By Catherine C. Cownie and Joseph F. Leo | March 17, 2008
Recently, the United States Securities and Exchange Commission proposed to make certain revisions to Regulation D of the Securities Act of 1933. Regulation D provides for various securities registration exemptions that were intended to assist smaller companies in raising capital. The purpose of these exemptions was to allow companies to raise significant capital, whether to capitalize a new company or raise additional capital for an existing company, without requiring a full registration of the offering. Registration can be costly, and may not be feasible for smaller companies to undertake.

According to the SEC, the proposed revisions are intended to clarify certain SEC staff interpretations of Regulation D and to modernize the regulations to reflect current market conditions. The SEC tries to strike a balance between the needs of small businesses to raise capital in a cost-effective manner and the need to protect investors. Please note that the revisions the SEC is proposing are not final and may not be implemented as they are currently proposed.

One of the most significant proposed changes to Regulation D includes the creation of a new exemption under Rule 507. The proposed Rule 507 would allow for certain limited advertising in offerings that are made only to "large accredited investors." General advertising is prohibited in other commonly used Regulation D exemptions. The term large accredited investor is defined in the proposed Rule 507 as entities with assets in excess of $10 million, individuals who own investments in excess of $2.5 million or have annual income in excess of $400,000, among other requirements. The limited advertising may allow companies to attract investments by certain large investors that the company would not otherwise have access to.

Certain Regulation D exemptions treat high net worth investors differently, under the assumption that they do not need as much protection from the SEC as other investors. These high net worth investors are called accredited investors in Regulation D and are subject to certain financial suitability thresholds. Another of the SEC's significant proposed revisions to Regulation D is to adjust these financial suitability thresholds for inflation. The SEC is concerned that not linking these thresholds to inflation actually reduces the protection of these thresholds over time. The SEC is considering this step despite the fact that it is concerned this may lead to companies avoiding the use of the Regulation D exemptions.

Increasing these investor suitability thresholds could, in the future, shrink the pool of potential investors for companies seeking to raise capital through Regulation D exemptions.
The SEC has also proposed to reduce the amount of time that companies must wait between exempt offerings in order to consider the two offerings to be separate. Should the SEC consider the two offerings to be part of the same offering, it may make certain Regulation D exemptions unavailable. The SEC has proposed to reduce these waiting periods, allowing companies more flexibility in relying on several different exemptions under Regulation D within a reasonably short period of time, even if these different exemptions have inconsistent requirements. Currently, companies must wait six months between exempt offerings in order for the SEC to consider them separate offerings. The proposed revisions to Regulation D would shrink this six-month waiting period to 90 days. This is a significant reduction that would give companies flexibility in designing their capitalization plans.

While the SEC has not yet adopted these revisions to Regulation D, they do signal sensitivity by the SEC to the difficulty smaller companies face in raising the capital they require.

While the SEC seeks to strike a balance between the needs of smaller businesses and protection of investors, these proposed revisions, should they be adopted, would allow companies to raise capital in an efficient manner without having to resort to costly registration of these offerings.

Catherine C. Cownie represents a number of renewable fuels clients in the federal and state registration process and Joseph F. Leo practices mainly in the area of securities law and corporate transactions. Both practice at BrownWinick, a Des Moines, Iowa-based law firm serving the renewable fuels industry. Reach Cownie at cownie@brownwinick.com or (515) 242-2490 and Leo at leo@brownwinick.com or (515) 242-2462.

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