The U.S. Securities and Exchange Commission (the “SEC”) recently adopted final rules that are intended to modernize how companies can raise money to fund their businesses through intrastate (Rules 147 and 147A) and small offerings (Rule 504) while maintaining investor protections.
Amendments to Rule 147 and a new Rule 147A
The new rules update the existing intrastate offering framework that permits companies to raise money from investors within their state without concurrently registering the offers and sales at the federal level. An amended Rule 147 would remain a safe harbor under Section 3(a)(11) of the Securities Act of 1933 (the “Securities Act”), so that issuers may continue to use the rule for securities offerings relying on current state law exemptions. A new Rule 147A would be substantially identical to Rule 147 except that it would allow offers to be accessible to out‑of‑state residents and for companies to be incorporated or organized out‑of‑state.
Both new Rule 147A and amended Rule 147 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 harbour 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; and
- Legend requirements to offerees and purchasers about the limits on resales.
Amendments to Rule 504 and Repeal of Rule 505
Rule 504 of Regulation D is an exemption from registration under the Securities Act for offers and sales of up to $1 million of securities in a 12‑month period, provided that the issuer is not an Exchange Act reporting company, investment company or blank cheque company. The rule also imposes certain conditions on the offers and sales, with limited exceptions made for offers and sales made in accordance with specified types of state registration provisions and exemptions. 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 and disqualifying certain bad actors from participation in Rule 504 offerings. The final rules would also 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 foregoing is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, please contact the author who would be pleased to discuss the issues above with you, in the context of your particular circumstances.