Raising capital can be challenging for middle-market companies and private equity funds, due in large part to the various types of exempt offerings that exist. The current regulatory framework is such that determining whether an offering should be classified under Regulation A or under Rule 506(b) of Regulation D, for example, requires time, financial resources and outside expertise that middle-market organizations often do not have.
To determine whether to simplify the regulatory framework around capital raises, the Securities and Exchange Commission in June initiated a two-month period for the public to weigh in on proposed changes.
ACG’s public policy team collected feedback from its membership and submitted a comment letter in September recommending that the agency harmonize its offerings and offer additional clarity—with the goal of making it easier for middle-market companies and private equity funds to raise capital to support growth initiatives.
Middle Market Growth spoke with Scott Gluck, special counsel at Duane Morris LLP who works on regulatory issues on behalf of ACG Global, about the comments submitted by ACG to the SEC, and why this issue affects nearly all ACG members.
Q. What are “exempt” offerings and how do they impact ACG members and the middle market?
Federal securities law requires that every offering or sale of securities be registered with the Securities and Exchange Commission, unless an exemption from registration is available. Registering an offering with the SEC is a very time-consuming, costly and onerous process.
Exempt offerings serve as an alternative for capital formation and are a crucial source of funding for the middle-market businesses and private funds that form the core of ACG’s membership. Capital raised through exempt offerings is frequently referred to as “private capital,” and it serves as a critical tool for helping midsize companies to grow their operations and create jobs.
Q. Why is the SEC requesting feedback about harmonizing securities offering exemptions?
In recent years, Congress has expanded the number and types of exemptions available to issuers. These efforts have increased the options available to companies and private equity firms seeking to raise capital, but it has also resulted in a complex framework for exempt offerings.
Middle-market organizations in particular may find it difficult to navigate this regulatory web. They have fewer resources than their larger counterparts, yet they may be more likely to take advantage of exempt offerings. Through its request for comment period, the SEC sought public feedback on a broad range of issues to enable the agency to undertake a comprehensive review of the design and scope of the framework for these exempt offerings.
“IN ITS COMMENT LETTER, ACG DESCRIBED HOW HARMONIZING EXEMPT OFFERINGS IS LIKELY TO REDUCE COMPLEXITY AND COST, MAKING IT EASIER FOR MIDDLE-MARKET COMPANIES AND FUNDS TO RAISE CAPITAL THAT THEY CAN THEN USE TO CREATE JOBS.”
The ultimate goal of the request for comment is to harmonize the rules and regulations governing exempt offerings and to facilitate capital raising and capital formation.
Q. What feedback did ACG provide to the SEC as it relates to raising capital?
In its comment letter, ACG described how harmonizing exempt offerings is likely to reduce complexity and cost, making it easier for middle-market companies and funds to raise capital that they can then use to create jobs.
In its letter, ACG also addressed the definition of an “accredited investor.” Many exempt offerings restrict or prohibit individuals who do not meet the definition of an accredited investor from participating in the offering. The current definition is based solely on a person’s annual income or the amount of their assets. ACG recommended that the SEC expand its definition to include individuals who have passed FINRA examinations; have specific industry knowledge or expertise; have a level of sophistication outside of the financial sphere, regardless of income or net worth; or who pass an accredited investor examination.
A related issue involves “knowledgeable employees” of private funds. These individuals are considered “qualified purchasers” under the Investment Company Act, but they are not considered accredited investors under the securities laws— which is a much lower standard. These knowledgeable employees are generally not permitted to invest in the funds their firm sponsors, even though they are fully aware of the potential risks because they work there. ACG argued in the comment letter that this anomaly should be corrected.
Q. What other issues did ACG address in the letter?
Another issue ACG commented on relates to the definition of “general solicitation” or “general advertising.”
One of the key requirements for one of the most popular exemptions, the Rule 506(b) private placement, is that no general solicitation or general advertising can take place in connection with the offering. These terms are not defined, creating confusion for ACG members as to what does and does not constitute a general solicitation.
ACG’s comment letter also described why private fund advisers should be able to communicate with data aggregators, such as Pitchbook or Preqin, without their actions being considered a general solicitation. Currently, any communication with these market publications—even to correct erroneous information published on their platforms—could be considered a general solicitation. ACG’s Private Equity Regulatory Task Force has met with the SEC multiple times to discuss this issue, and the recent comment letter presented another opportunity to communicate to the SEC that this is an important issue for ACG and its private equity members.
Q. What happens next?
Comments in response to the SEC’s concept release were due Sept. 24. These will be published on the agency’s website and reviewed by SEC staff. After the review period, the SEC may begin proposing changes to the existing rules and regulations. ACG’s public policy staff will be tracking the issue closely and will update ACG members about new developments.
Kathryn Mulligan is the editor-in-chief of Middle Market Growth.