On October 26 the Securities and Exchange Commission (SEC) unanimously adopted new and amended rules aimed at making it easier for companies to raise money from investors through intrastate and small offerings.
The SEC adopted new Rule 147A and amended Rule 147 of the Securities Act that ease restrictions on solicitation of investor capital in intrastate offerings. The SEC also amended Rule 504 of Regulation D to increase the aggregate limit on equities sold or debt raised in a 12-month period without having to register with the SEC. These changes continue the SEC's movement toward rules that facilitate capital raising by smaller issuers, including new provisions for federal crowdfunding and enhanced Regulation A offerings.
Rules 147 and 147A
The adoption of Rule 147A and amendments to Rule 147 modernize the existing intrastate offering framework that permits companies to raise money from investors within their state without registering with the SEC. Avoiding registration dramatically simplifies the offering process and allows issuers to avoid substantial compliance costs.
Until now, issuers relying on this 1970s-era exemption could not advertise their offerings outside their state, a restriction that SEC Chairwoman Mary Jo White described as "outmoded by tremendous expansion of Internet communications." In particular, because online communications cannot practically be limited to a single state, issuers of intrastate securities were effectively barred from advertising their offerings on social media or on crowdfunding platforms.
Under the new rules, intrastate offerings can be made accessible to out-of-state residents so long as actual sales are made only to residents of the state where the issuer does business. Intrastate issuers must have their "principal place of business" in the state where sales are made and demonstrate they are "doing business" there by meeting one of several requirements. They also must have a reasonable belief that purchasers reside in their state at the time of sale. A written representation from each purchaser is required, but that alone is not sufficient to establish such a belief. Restrictive legend requirements and limitations on resale also apply.
New Rule 147A is substantially identical to amended Rule 147 except that it will allow offers to be accessible to out-of-state residents and for companies relying on Rule 147A to be incorporated or organized out-of-state. Both will take effect 150 days after publication in the Federal Register.
Rules 504 and 505
Amendments to Rule 504 increase the aggregate offering amount to $5 million in a 12-month period, up from only $1 million, a limit that had been in place since the 1980s. In light of the increased threshold, the SEC also repealed Rule 505, a little-used exemption for small offerings. Rule 504 offerings will also be subject to the same bad actor disqualifications as are found in Rule 506 under Regulation D, the most commonly used safe harbor from federal registration requirements and the exemption used by most interstate crowdfunding issuers.
Amended Rule 504 will take effect 60 days after publication in the Federal Register.
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While the SEC was unanimous in adopting these changes, it was not without reservation. Commissioner Kara M. Stein said she anticipates the new rules will "enhance the fundraising options available to small and local businesses." But, she added, "[o]nly time will tell whether we can relax capital-raising regulations, while also maintaining appropriate investor protections."
It is important to remember that Rules 147 and 147A and Rule 504 merely establish parameters for exemption from registration with the SEC under Section 3(a)(11) of the Securities Act. They do not preempt state securities laws. Many states have enacted their own crowdfunding regulations that must also be observed. Issuers must be mindful as well of filing requirements to notify the SEC of the use of Rule 504.
SEC Final Rule: Exemptions to Facilitate Intrastate and Regional Securities Offerings (Securities Act Release No. 33-10238): https://www.sec.gov/rules/final/2016/33-10238.pdf.