On October 26, 2016, the U.S. Securities and Exchange Commission (“SEC”) unanimously approved final rules enabling businesses to raise capital “intrastate” (within a state). The final rules, effective 150 days after publication in the Federal Register, amend Rule 147 of the Securities Act of 1933 (the “Act”) and add a new Rule 147A. Rule 147A, which is similar to amended Rule 147, will have no restriction on offers and will allow issuers to be incorporated or organized outside of the state in which the intrastate offering is conducted subject to certain conditions.
The final rules also adopt amendments to Rule 504 of Regulation D of the Act. The amendment increases the aggregate amount of securities that may be offered and sold in any twelve-month period from $1 million to $5 million and disqualifies certain “bad actors” from participating in Rule 504 offerings. Rule 505 is repealed.
According to commentary in the final rules:
“Securities Act Section 3(a)(11) provides an exemption from registration under the Securities Act for ‘[a]ny security which is part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within, or, if a corporation, incorporated by and doing business within, such State or Territory.’ In 1974, the Commission adopted Rule 147 under the Securities Act to provide objective standards for local businesses seeking to rely on Section 3(a)(11). The Rule 147 safe harbor was intended to provide assurances that the intrastate offering exemption would be used for the purpose Congress intended in enacting Section 3(a)(11), namely the local financing of companies by investors within the company’s state or territory. Rule 147 reflects this Congressional intent and generally relies upon state regulation to effectively protect investors.
Notwithstanding the importance of these limitations, due to developments in modern business practices and communications technology in the years since Rule 147 was adopted, [the SEC has] determined that it is necessary to update the requirements of Rule 147 to ensure its continued utility. [The SEC is] also establishing a new intrastate offering exemption under the Securities Act, designated Rule 147A, that will further accommodate modern business practices and communications technology and provide an alternative means for smaller companies to raise capital locally.
[The SEC is] adopting new Rule 147A pursuant to [its] general exemptive authority under Section 28 of the Securities Act, 19 and therefore, new Rule 147A will not be subject to the statutory limitations of Section 3(a)(11). Accordingly, Rule 147A will have no restriction on offers, but will require that all sales be made only to residents of the issuer’s state or territory to ensure the intrastate nature of the exemption. Rule 147A also will not require issuers to be incorporated or organized in the same state or territory where the offering occurs so long as issuers can demonstrate the in-state nature of their business, which [the SEC believes] will expand the number of businesses that will be able to seek intrastate financing under Rule 147A, as compared to amended Rule 147. Certain provisions of existing Rule 147 concerning legends and mandatory disclosures to purchasers and prospective purchasers will apply to offerings conducted pursuant to amended Rule 147 and Rule 147A.”
As is usually the case with securities laws, states will still have the ability to craft their own rules regarding crowdfunding including additional disclosure requirements, preventing “bad actors” from participating in the exemption, and the imposition of certain “anti-fraud” provisions.
The final rules include commentary on the proposed rules, which were largely unchanged except for the specifics outlined above, particularly the “break out” of the provisions of Rule 147A from Rule 147. They encompass some 212 double spaced pages.
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