SEC Proposes Rule Amendments to Facilitate Intrastate and Regional Securities Offerings | Practical Law

SEC Proposes Rule Amendments to Facilitate Intrastate and Regional Securities Offerings | Practical Law

The SEC announced proposed amendments to Rule 147, the intrastate offering exemption, and Rule 504 of Regulation D, each under the Securities Act.

SEC Proposes Rule Amendments to Facilitate Intrastate and Regional Securities Offerings

by Practical Law Corporate & Securities
Published on 04 Nov 2015 • USA (National/Federal)
The SEC announced proposed amendments to Rule 147, the intrastate offering exemption, and Rule 504 of Regulation D, each under the Securities Act.
On October 30, 2015, the SEC announced proposed rule amendments to Rule 147 under the Securities Act and Rule 504 of Regulation D. The proposal would, among other things:
  • Modernize and expand Rule 147 by establishing a new exemption from SEC registration for certain intrastate offerings, including those conducted pursuant to crowdfunding provisions under state securities laws.
  • Increase the amount of securities that may be offered and sold under Rule 504 in any 12-month period from $1 million to $5 million.
The SEC is accepting comments on the proposal until January 11, 2016.

Proposed Amendments to Rule 147

Currently, Rule 147 provides a safe harbor for intrastate offerings exempt from registration under Section 3(a)(11) of the Securities Act. Rule 147 grants an exemption from registration to issuers conducting an intrastate offering that satisfy the following conditions:
  • The issuer must be organized and doing business in the state where the securities are offered and sold.
  • General advertising and general solicitation to market the securities are allowed only within the state and there is no limit on the amount of securities that may be sold pursuant to the exemption.
  • Resales are permitted to in-state residents. Resales by non-affiliates to out-of-state residents are only permitted beginning nine months after the last sale of securities by the issuer.
  • The exemption is destroyed if the issuer offers or sells its securities to out-of-state residents.
The proposal would amend Rule 147 to allow an issuer to engage in any form of general solicitation or general advertising, including through publicly accessible websites, to offer and sell its securities, as long as:
  • All sales are made to residents of the same state or territory in which the issuer's principal place of business is located (see Principal Place of Business, Reasonable Belief as to Purchaser Residency Status and Residence of Entity Purchasers).
  • The issuer satisfies at least one of four threshold requirements that would help ensure the in-state nature of the issuer's business (see Threshold Requirements for Issuers).
  • The offering is either:
    • registered in the state in which all of the purchasers are resident; or
    • conducted under an exemption from state law registration in a state that limits the amount of securities an issuer may sell under the exemption to no more than $5 million in a 12-month period and imposes an investment limitation on investors.
The proposal would require an issuer in a Rule 147 offering to include a prominent disclosure on all offering materials used in connection with the offering, stating that all sales will be made only to residents of the same state or territory as the issuer.
Under the proposal, amended Rule 147 would function as a separate exemption from registration rather than as a safe harbor under the Section 3(a)(11) exemption. The Section 3(a)(11) exemption would continue to be a capital raising alternative for issuers with local operations seeking local financing.

Principal Place of Business

Currently, Rule 147 requires that an issuer be organized in the state where the securities are offered and sold. Under the proposal, an issuer organized in a different state could still take advantage of the Rule 147 exemption so long as its principal place of business is located in the state where the securities are sold.
An issuer's principal place of business would be defined as the location in which the officers, partners or managers of the issuer primarily direct, control and coordinate the activities of the issuer. An issuer would be able to have a principal place of business only within a single state or territory. Issuers that change their principal place of business after making sales in an intrastate offering under Rule 147 would not be allowed to conduct an intrastate offering under Rule 147 in another state for a period of nine months from the date of the last sale in the prior state.

Threshold Requirements for Issuers

In addition to the requirement that an issuer have its principal place of business in the state where it sells securities pursuant to Rule 147, under the proposal, an issuer would also be required to meet at least one of the following requirements to demonstrate that the issuer's business is sufficiently intrastate:
  • The issuer derived at least 80% of its consolidated gross revenues from the operation of a business or of real property located in or from the rendering of services within the state or territory.
  • At the end of its most recent semi-annual fiscal period prior to the first offer of securities under the exemption, the issuer had at least 80% of its consolidated assets located within the state or territory.
  • The issuer intends to use and uses at least 80% of the net proceeds to the issuer from sales made under the exemption in connection with the operation of a business or of real property, the purchase of real property located in, or the rendering of services within the state or territory.
  • A majority of the issuer's employees are based in the state or territory.
Existing Rule 147(c)(2) contains more restrictive requirements to demonstrate that an issuer is doing business predominantly in-state.

Reasonable Belief as to Purchaser Residency Status

Under the proposal, an issuer could satisfy the requirement that each purchaser in the offering be a resident of the same state or territory in which the issuer has its principal place of business if:
  • The purchaser is, in fact, a resident of the state or territory.
  • The issuer can establish that it had a reasonable belief that the purchaser was a resident of the state or territory.
Whether an issuer formed a reasonable belief that the prospective purchaser was an in-state resident would be determined based on the facts and circumstances. These facts and circumstances could include:
  • A pre-existing relationship between the issuer and the prospective purchaser that provides the issuer with sufficient insight and knowledge about the prospective purchaser's primary residence.
  • Evidence of the prospective purchaser's home address on a recent utility bill, pay stub, state or federal tax return, or on any state-issued document, such as a driver's license or identification card.
The proposal would eliminate the current requirement in Rule 147 that issuers obtain a written representation from each purchaser as to his or her residence.

Residence of Entity Purchasers

Under the proposal, the residence of a purchaser that is a legal entity, such as a corporation, partnership, trust or other form of business organization, would be the location where, at the time of sale, the entity has its principal place of business. Such a purchaser's principal place of business would be defined as the location in which the officers, partners, or managers of the entity primarily direct, control and coordinate the activities of the entity.

Limitation on Resales

The proposal would amend the limitation on resales in Rule 147(e) to provide that resales of a security by a purchaser must be made only to residents of the state or territory for a period of nine months from the sale by the issuer to the purchaser.
The proposal would also amend Rule 147(b) so that an issuer's ability to rely on Rule 147 would no longer be conditioned on a purchaser's compliance with the limitation on resales in Rule 147(e) (as is currently the case).

Integration Safe Harbor

The proposal would expand the scope of Rule 147's current integration safe harbor to make it consistent with Rule 251(c) of Regulation A, the SEC's most recently adopted integration safe harbor. As proposed, offers and sales made under Rule 147 would not be integrated with:
  • Prior offers or sales of securities.
  • Subsequent offers or sales of securities that are:
    • registered under the Securities Act, except as provided in Rule 147(h) (as discussed in the following paragraph);
    • exempt from registration under Regulation A;
    • exempt from registration under Rule 701;
    • made under an employee benefit plan;
    • exempt from registration under Regulation S;
    • exempt from registration under Section 4(a)(6) of the Securities Act, the JOBS Act crowdfunding provision (see Legal Update, SEC Adopts Final Crowdfunding Rules); or
    • made more than six months after the completion of the offering.
Under the proposal, Rule 147(h) would provide that, where an issuer decides to register an offering after making offers in reliance on Rule 147 limited only to qualified institutional buyers (QIBs) and institutional accredited investors (IAIs), the offers would not be subject to integration with any subsequent registered offering. If the issuer makes offers in reliance on Rule 147 to persons other than QIBs or IAIs, the offers would not be subject to integration if the issuer (and any underwriter, broker, dealer, or agent used by the issuer in connection with the offering) waits at least 30 calendar days between the last offer made in reliance on Rule 147 and the filing of the registration statement.
A Rule 147 offering would not be integrated with another exempt offering made concurrently by the issuer as long as each offering complies with the requirements of the exemption that the issuer relies on for the particular offering.
If the integration safe harbor does not apply, whether subsequent offers and sales would be integrated with any securities offered or sold under Rule 147 would depend on the particular facts and circumstances.

Proposed Amendments to Rule 504

Rule 504 of Regulation D currently provides certain issuers with an exemption from registration for offers and sales of up to $1 million of securities in a 12-month period. The proposal would increase the amount of securities that may be offered and sold in any 12-month period from $1 million to $5 million.
In addition, the proposal would disqualify certain "bad actors" from participation in Rule 504 offerings. The proposed disqualification provisions would be implemented by reference to the disqualification provisions set forth in Rule 506(d) of Regulation D (see Practice Note, Section 4(a)(2) and Regulation D Private Placements: Bad Actors Disqualified from Relying on Safe Harbor).
In light of the proposed changes to Rule 504, the proposal also seeks comment on the continued utility of Rule 505 as an exemption from registration.
For more information on exempt offerings under Rule 147 or Rule 504, see Practice Note, Road Map for Undertaking a Private Offering.