Yesterday the SEC adopted rules intended to facilitate intrastate and regional securities offerings. The SEC made general updates and modernized old Rule 147, the safe harbor exemption for intrastate securities offerings under Section 3(a)(11) of the Securities Act. The SEC also adopted a new exemption in Rule 147A, which differs from Rule 147 primarily in that it expressly permits general solicitation and does not require the issuer to be formed in the same state as its principal place of business and investors. This should allow Rule 147A to work more effectively with state-level crowdfunding exemptions. (We have previously blogged about the challenges of crowdfunding under Rule 147.)
The SEC also revised Rule 504 to increase the aggregate offering amount limitation from $1m to $5m and to add “bad actor” disqualifications (aligning it with recent updates to Rule 506). In addition, the SEC repealed the little used and now largely redundant to Rule 505.
These rules have various effective dates tied to publication of the rules in the Federal Register, which will likely occur next week:
- Revised Rule 147 – 150 days after publication in the Federal Register
- New Rule 147A – 150 days after publication in the Federal Register
- Revised Rule 504 – 60 days after publication in the Federal Register
- Repeal of Rule 505 – 180 days after publication in the Federal Register
Here are a few notable highlights from the adopting release:
Rule 147
- Retains in-state formation requirement (e.g., an entity formed in WA that has a WA principal place of business may sell securities to WA investors)
- Updates to entity residency language to speak of “principal place of business”
Rule 147A
- No in-state formation requirement (e.g., entity formed in DE that has a WA principal place of business may sell to WA investors)
- Permits offers to out-of-state residents, so long as sales are limited to in-state residents
- Permits general solicitation and general advertising (including use of unrestricted websites)
- Requires prominent disclosure in all offering materials that sales will be made only to residents of the same state or territory as the issuer
- In space-constrained social media (e.g., Twitter), the issuer may use an active hyperlink to the disclosure
Common Elements of Rule 147 and Rule 147A
- Issuer must satisfy at least one “doing business” requirement that demonstrates the in-state nature of the issuer’s business
- “Reasonable belief” standard for issuers to rely upon in determining the residence of the purchaser at the time of the sale of securities
- Must obtain a written representation from each purchaser as to his or her residency
- Residence of a purchaser that is a non-natural person is the location where, at the time of the sale, the entity has its “principal place of business”
- 6-month resale limitations
- Integration safe harbor (similar to Reg D)
- Specified disclosure requirements, including legend requirements, to offerees and purchasers about the limits on resales
- No federal notice filing (although states likely require one)
- No ongoing reporting requirements (Regulation Crowdfunding does)
- But no Section 12(g) exclusions, so be cautious of growing shareholder bases
Rule 504
- Maximum aggregate offering amount increased from $1m to $5m
- Bad actor disqualifications added
Rule 505
- Repealed
Intrastate Broker-Dealers
- Intrastate broker-dealer may have a website viewable by out-of-state persons, so long as it takes measures reasonably designed to ensure that its business remains exclusively intrastate (prominent disclaimers suffice, but are not the exclusive measures)
Check out the Nifty Exemption Tables in the Adopting Release
- Main Characteristics of Existing Rules 147, 504 and 505 (page 88) — compares these exemptions prior to the new rules
- Other Provisions Currently Available for Capital Raising (page 104) — summarizes the key elements of the exemptions under Section 3(a)(11), Section 4(a)(2), Regulation A, Regulation Crowdfunding, Rule 506(b) and Rule 506(c)
- Intrastate Crowdfunding and Regulation Crowdfunding Provisions (page 109) — compares the key elements of Rule 147 and state-level crowdfunding exemptions to those of Regulation Crowdfunding