RACE Act Aims to Fast-Track Certain Securities Offerings Under $5M, Broadens 'Similar' Definition

The Regulation Advancement for Capital Enhancement Act of 2025, or RACE Act, looks to change how some companies can offer new types of stocks or bonds. It proposes a system where if a company has already gotten one class of securities approved by the Securities and Exchange Commission (SEC), they could get automatic approval for new, "substantially similar" classes of securities, provided each new offering is under $5 million. This bill amends Section 3(b) of the Securities Act of 1933, a part of the law that allows the SEC to exempt smaller offerings from full registration, to streamline the process for these specific types of capital-raising efforts.

Fast Lane for Funding: How It Works

The core idea of the RACE Act is to create an express lane for companies issuing certain types of securities. If a business has already gone through the process of having a class of securities "qualified" (which means the SEC has allowed it to be offered), this bill would let them file an offering statement for a new class of securities and have it automatically qualified upon filing. Think of it like a pre-approved status for raising additional, similar funds.

There are a few key conditions for this fast track, outlined in the proposed amendment to 15 U.S.C. 77c(b):

• The company must have already had a similar class of securities qualified by the SEC.
• The new securities must be "substantially similar" to the already approved ones, sharing predefined characteristics.
• The amount being raised for each new class must be less than $5,000,000.
• The total amount the company offers and sells using this fast-track exemption within any prior 12-month period can't exceed the overall limit for securities offered under the existing framework (paragraph (2) of Section 3(b)) during that same timeframe.

The Million-Dollar Question: What's "Substantially Similar"?

Here's where the details get particularly important. The RACE Act specifies that securities can be considered "substantially similar" even if they do not have the same nature or terms. This is a notably broad definition. Typically, you'd expect "similar" to mean, well, similar in key aspects like risk profile or investor rights. But this language opens the door for a company to offer, say, a new type of bond that has different repayment terms or seniority than a previously approved stock, and still potentially argue it's "substantially similar" enough for automatic qualification.

This flexibility could be a plus for companies wanting to quickly adapt their funding strategies. For example, a growing tech company that previously issued one type of stock to fund initial development might want to issue a new, slightly different series of stock to fund a specific new project. Under this bill, they might get that approved much faster. However, the looseness of the "substantially similar" definition, as stated in the bill, means that offerings with potentially quite different characteristics and risk levels might bypass a more thorough SEC review that would normally occur.

The Balancing Act: Speed vs. Scrutiny

So, what does this all mean for businesses and investors? On one hand, making it easier and cheaper for companies to raise capital, especially in chunks under $5 million, could spur innovation and growth. Businesses could get the funds they need more quickly, potentially leading to new products, services, or jobs. For investors, it might mean more diverse investment opportunities becoming available more rapidly.

On the other hand, the "automatic qualification" and the expansive definition of "substantially similar" raise questions about investor protection. The SEC's usual review process is designed to ensure that investors have adequate information and to identify potential issues with an offering. If certain offerings are automatically qualified with potentially less direct SEC oversight for that specific new class, there's a risk that less sound or more complex securities could reach the market without the customary level of scrutiny. This could place a greater burden on investors to perform their own due diligence, especially when the "similarity" between security classes isn't straightforward. The bill aims for efficiency in capital markets, but the potential trade-off is a shift in the SEC's gatekeeping role for these specific types of offerings.