SEC Adopts New Rule 147A To Facilitate Interstate Securities Offerings
The Securities and Exchange Commission (SEC) recently adopted new rules aimed at modernizing how companies can raise money to fund their business through intrastate and smaller private offerings of securities. The rules, adopted Oct. 26, 2016, create a new Rule 147A and amended Rule 147 of the Securities Act. The SEC also amended Rule 504 of Regulation D, which was discussed here.
Under the Securities Act, an offer to sell securities must generally be registered with the SEC. Rule 147 is a safe harbor that exists under Section 3(a)(11) of the Securities Act of 1933, and can be used by companies to raise funds without federal registration. More specifically, it provides an exemption for a securities offering that takes place entirely within one state.
The problem with Rule 147 is that it didn't keep up with changes in technology and business practices, not having been substantively updated since it was adopted in the 1970’s. For example, issuers who relied on the exemption couldn’t advertise their offerings outside their state, which effectively barred them from advertising on social media or similar platforms.
New Rule 147A and Amended Rule 147
Under the new Rule 147A, issuers can make offers accessible to out-of-state residents, as long as the actual sales are limited to in-state residents. At the same time, the SEC retained the Rule 147 safe harbor under Section 3(a)(11) so that issuers can continue to use state law exemptions that are conditioned upon compliance with both Section 3(a)(11) and Rule 147.
Various amendments were made to Rule 147, including replacing the “principal office” requirement with a “principal place of business” requirement. This means intrastate issuers must have their "principal place of business" in the state where sales are made and demonstrate they are "doing business" there.
Rule 147, as amended, also includes the following provisions:
- A requirement that issuers obtain a written representation from each purchaser as to his or her residency;
- An integration safe harbor that will include any prior offers or sales of securities by the issuer, as well as certain subsequent offers or sales of securities by the issuer occurring after the completion of the offering; and
- Disclosure requirements, including legend requirements, to offerees and purchasers about the limits on resales.
The provisions of amended Rule 147 and new Rule 147A are almost identical, except that Rule 147A allows an issuer to make offers accessible to out-of-state residents and to be incorporated or organized out-of-state.
The new rules, which will be effective on April 20, 2017, continue the SEC’s movement toward rules that update and expand the capital raising avenues for smaller companies. Importantly, both Rule 147 and Rule 147A offerings must comply with state substantive securities laws (aka "blue sky laws").