Navigating the transition from a Regulation Crowdfunding (Reg CF) offering to a larger Regulation A (Reg A) offering requires careful adherence to SEC rules, especially Rule 152, to avoid a costly problem called integration. If the SEC determines that your two separate offerings are “integrated,” they will treat them as a single offering. This can lead to a retroactive violation of the registration requirements of the Securities Act of 1933.
Understanding the Integration Problem
Integration is the legal doctrine the SEC uses to prevent companies from structuring what should be a single, large public offering into a series of smaller, unregistered or exempt offerings. If the SEC determines that the two offerings are integrated, the company must assess whether the combined total is still eligible for the exemption used.
For example, if you complete a Reg CF raise (a crowdfunding raise limited to $5 million) and immediately start a Reg A raise (up to $75 million), the SEC could view the combined $80 million as a single offering. Since $80 million exceeds the Reg CF limit, the company would retroactively violate Reg CF, leading to significant legal penalties and rescission risk.
Navigating the “Safe Harbor” Rules
The SEC provides “safe harbors” that, if met, guarantee two offerings will not be integrated. The key safe harbor for moving from a Reg CF to a Reg A offering is found in Rule 152. But a safe harbor is like a magic spell, and if you cast a spell incorrectly, you have no magic to protect you.
The General Rule 152 Safe Harbor
Rule 152 generally states that a private offering (like those conducted under Reg D Rule 506(b) or certain other exemptions) will not be integrated with a subsequent registered public offering.
However, the SEC’s framework for moving from one exemption to another is primarily governed by Rule 255(c) and Rule 360 (the general integration rules), which offer a specific exception for the Reg CF to Reg A transition.
The Non-Integration Safe Harbor (Rule 255(c) & Rule 360)
The specific rule that prevents integration when switching from a Reg CF offering to a Reg A offering is typically found within the general integration framework. To ensure non-integration, you must generally meet two key conditions related to the public solicitation of the first offering:
- Reg CF Offering is Complete: The company must ensure that the Reg CF offering is formally terminated or completed before the Reg A offering begins. This is paramount. You can’t have an ongoing crowdfunding while you start your Reg A offering.
- Timing: The SEC provides a specific safe harbor period. Generally, if the two offerings are separated by 30 calendar days, they will not be integrated.
- Confidential Filing: If the Reg CF offering is still ongoing, you can submit a confidential Reg A filing to the SEC so that you can keep the ball rolling for your Reg A offering, but won’t run the risk of integration because the new offering won’t be public, so the 30 calendar days won’t apply since no member of the public was solicited or even aware of the Reg A filing.
Key Action: To be absolutely safe when moving from Reg CF to Reg A, ensure that there is a 30-day “cooling-off” period between the official termination of your Reg CF offering and the commencement of the public solicitation or “Testing the Waters” phase of your Reg A offering.
Practical Steps to Avoid Integration Risk
To ensure your transition is compliant and avoids integration penalties, take these steps:
- Formally Terminate Reg CF: File the required termination notice or final forms (Form C-U) to formally close the Reg CF offering with the SEC.
- The 30-Day Gap: Do not begin any public marketing, advertising, or “Testing the Waters” (TTC) activities for the Reg A offering until 30 calendar days have passed after the completion or termination of the Reg CF offering.
- Maintain Separate Records: Ensure all marketing materials, investor lists, and accounting records for the two offerings are clearly delineated and kept separate. This demonstrates intent to treat them as distinct transactions.
- Change in Circumstances: While not a safe harbor, a strong argument against integration can be made if there is a material change in the business plan, capitalization, or use of proceeds between the two offerings.
By strictly adhering to the 30-day safe harbor separation and formalizing the termination of the first offering, companies can confidently move from the smaller Reg CF exemption to the larger Reg A framework without triggering integration risks.