The SEC has adopted final rules to modernize intrastate securities offerings under Rule 147, adopted new Rule 147A to broaden the availability of the existing safe harbor for intrastate securities offerings and amended Rule 504 of Regulation D to facilitate regional securities offerings by increasing the maximum amount of securities which may be sold under the exemption.
Intrastate Securities Offerings
SEC Rule 147 was originally adopted by the SEC to implement the intrastate exemption in Section 3(a)(11) of the Securities Act. Over time, it has become apparent the rule is too inflexible for wide spread use in modern times, given the prominence of incorporating outside of the state of the principal place of business, the development of the internet and the advent of crowdfunding.
Rule 147 as amended would remain a safe harbor under Section 3(a)(11) of the Securities Act, so that issuers may continue to use the rule for securities offerings relying on current state law exemptions. New Rule 147A would be substantially identical to Rule 147 except that it would allow offers to be accessible to out-of-state residents. The flexibility is important because out-of-state persons can read about internet based offerings even if they are not allowed to invest. New Rule 147A also permits companies to be incorporated or organized out-of-state.
Both new Rule 147A and amended Rule 147 would 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.
- Legend requirements to offerees and purchasers about the limits on resales.
Current Rule 504 of Regulation D provides an exemption from the registration requirements of the federal securities laws for some companies when they offer and sell up to $1,000,000 of their securities in any 12-month period.
A company can currently use this exemption so long as it is not a blank check company and does not have to file reports under the Securities Exchange Act of 1934. Also, the exemption generally does not allow companies to solicit or advertise their securities to the public, and purchasers receive “restricted” securities, meaning that they may not sell the securities without registration or an applicable exemption.
Rule 504 does allow companies to solicit or advertise their securities to the public and to sell securities that are not restricted, if one of the following circumstances is met:
- The company registers the offering exclusively in one or more states that require a publicly filed registration statement and delivery of a substantive disclosure document to investors;
- A company registers and sells the offering in a state that requires registration and disclosure delivery and also sells in a state without those requirements, so long as the company delivers the disclosure documents required by the state where the company registered the offering to all purchasers (including those in the state that has no such requirements); or
- The company sells exclusively according to state law exemptions that permit general solicitation and advertising, so long as the company sells only to “accredited investors.”
The amendments to Rule 504 would retain the existing framework, while increasing the aggregate amount of securities that may be offered and sold under Rule 504 in any 12-month period from $1 million to $5 million. The amendments also disqualify certain bad actors from participation in Rule 504 offerings.
The final rules also would repeal Rule 505, which permits offerings of up to $5 million annually that must be sold solely to accredited investors or no more than 35 non-accredited investors. The SEC believes Rule 505 is only rarely used today, and will be even less used now that Rule 504 has been amended.