On Oct. 26, 2016, the SEC adopted final rules intended to facilitate intrastate securities offerings, including amendments to existing Rule 147 under the Securities Act, and creation of a new Rule 147A. Rule 147, which was originally adopted in 1974, provides a safe harbor under the Securities Act for offers and sales of securities made only to residents of the state in which the issuing company is incorporated, has its principal office and is doing business. Given the limited scope of the exemption, it has historically been used infrequently.
New Rule 147A is substantially similar to Rule 147, but will allow offers (but not sales) to out-of-state residents, and will apply to companies that are incorporated in a different state. As a result, issuing companies may engage in general solicitations over the Internet or by other means that are accessible outside of the applicable state, so long as sales are limited to residents of the state. In addition, the company need not be incorporated in the state in which the offering occurs, as long as it has its principal place of business in the state (and otherwise meets the "doing business" test).
The amendments to Rule 147 adopted by the SEC do not change the fundamental requirements of the Rule, which will still be limited to offers and sales to residents within the company’s state of incorporation.
Both amended Rule 147 and new Rule 147A will include the following provisions:
- A requirement that the issuer has its "principal place of business" in-state and satisfies at least one "doing business" requirement that would demonstrate the in-state nature of the issuer’s business,
- A new "reasonable belief" standard for issuers to rely on in determining the residence of the purchaser at the time of the sale of securities,
- A requirement that issuers obtain a written representation from each purchaser as to residency,
- A limit on resales to persons residing within the state or territory of the offering for a period of six months from the date of the sale by the issuer to the purchaser,
- An integration safe harbor that would include any prior offers or sales of securities by the issuer made under another provision, as well as certain subsequent offers or sales of securities by the issuer occurring after the completion of the offering, and
- Legend requirements to offerees and purchasers about the limits on resales.
The SEC also amended Rule 504 under Regulation D to increase the amount of securities that can be offered and sold within a 12-month period from $1 million to $5 million, and to disqualify certain bad actors from participating in Rule 504 offerings (substantially similar as existing provisions in Rule 506 under Regulation D). As a result of these changes, the SEC repealed existing Rule 505, a separate exemption under Regulation D for private offerings of securities with an aggregate purchase price of $5 million within a 12-month period.
The amendments to Rule 147 and the adoption of new Rule 147A will become effective 150 days after publication in the Federal Register. The amendments to Rule 504 will become effective 60 days after publication in the Federal Register, and the repeal of Rule 505 will be effective 180 days after publication in the Federal Register.