On October 26, 2016, the Securities and Exchange Commission (SEC) adopted final rules that modernize how companies can raise money to fund their businesses through intrastate and regional securities offerings.
First, the final rules amend Securities Act Rule 147 to modernize the safe harbor under Section 3(a)(11) of the Securities Act, so that issuers may continue to use state law exemptions that are conditioned upon compliance with both Section 3(a)(11) and Rule 147. Secondly, the final rules establish a new intrastate offering exemption, Securities Act Rule 147A, that further accommodates offers accessible to out-of-state residents and companies that are incorporated or organized out-of-state. The new 147A exemption may be attractive to crowdfunding businesses operating in states that have more permissive exemptions than the federal crowdfunding rules.
Both the 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
In addition, the final rules amend Rule 504 of Regulation D under the Securities Act to increase the aggregate amount of securities that may be offered and sold from $1 million to $5 million. The rules also apply bad actor disqualifications to Rule 504 offerings. Because of these changes to Rule 504, the final rules repeal Rule 505 of Regulation D, which permitted offerings of up to $5 million annually that were sold only to accredited investors or to no more than 35 non-accredited investors.
Amended Rule 147 and new Rule 147A will be effective 150 days after publication in the Federal Register. Amended Rule 504 will be effective 60 days after publication in the Federal Register. The repeal of Rule 505 will be effective 180 days after publication in the Federal Register.
The SEC's explanation of the rule changes can be found at https://www.sec.gov/rules/final/2016/33-10238.pdf.
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