New and Amended Rules for “Intrastate” Offerings

On November 28, 2016, we published a Client Alert regarding the SEC’s modernization of Rule 147 under the Securities Act of 1933 to reflect developments in current business practices and communication technologies, particularly the internet, to ensure the “continued utility” of Rule 147 as a “safe harbor” for “intrastate offerings relying on Section 3(a)(11) of the Securities Act. We also reported that the SEC adopted a new Rule 147A that is similar to Rule 147 but adds flexibility for issuers. For our analysis, please see our previous Client Alert on intrastate offerings here.

The amended Rule 147 and the new Rule 147A will become effective on April 20, 2017.

Changes to Rule 504 and Repeal of Rule 505

On December 1, 2016, we published a Client Alert regarding the amendment to Rule 504 of Regulation D that is intended to facilitate smaller companies’ “capital raising efforts and provide additional investor protections.” As a result of the changes to Rule 504, the SEC will repeal seldom-used Rule 505 of Regulation D. For our analysis, please see our previous Client Alert on amended Rule 504 and the repeal of Rule 505 here.

The amended Rule 504 became effective on January 20, 2017 and the repeal of Rule 505 will become effective on May 22, 2017.

The SEC’s adopting release covering these changes to the intrastate offering rules and to Regulation D can be found here.

OUR VIEWS ON THE USEFULNESS OF THE NEW RULES

Intrastate Offerings

We believe that the modernization of the rules for intrastate offerings may make intrastate offerings more popular for private company capital raises, especially if states revise their state crowdfunding laws or regulations to refer to Regulation 147A. Intrastate offerings may incur lower offering costs than (a) federal Regulation Crowdfunding offerings, which have considerable drawbacks, or (b) Rule 504 offerings that must be registered in the state where the offering is made in the absence of other state exemption(s). Issuers may also use Rule 147A for offerings that are larger than $5 million and that are registered with the applicable state. As helpful as the amendments to Rule 147 and the adoption of new Rule 147A may otherwise be, however, the unwillingness of the SEC to provide a permanent exemption from Section 12(g) registration under the Exchange Act for securities sold in an offering under amended Rule 147 or Rule 147A may limit the usefulness of these rules as a practical matter.

Amended Rule 504: If the states revise their existing regional coordinated review programs as the SEC hopes, and if those revisions produce a registration process that is cost-effective in light of the size of the offering, we believe that these changes will result in an increased number of Rule 504 offerings that are registered with one or more states. Further, we foresee a broader use of Rule 504 for offerings that are designed to raise more than $1 million while relying on state blue sky exemptions for offerings made to a small number of persons (such as 10, 15, or 25 persons, depending on the state). This strategy could be useful for issuers that desire to raise more than $1 million from one or a few accredited investors but that also want to offer the securities to friends, family members, and employees who are not accredited investors.