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Understanding the SEC’s Updated Offering Exemption Rules

10.09.17

Companies are generally required to register securities offerings with the SEC. But under Rule 147, certain offerings by certain smaller companies may be exempt from registration with the SEC, saving significant time and money. The SEC recently updated Rule 147 and added a new Rule 147A to make it easier for companies to raise capital from investors through intrastate offerings.

Why the change?

Rule 147 is a safe harbor under the Securities Act of 1933 that exempts companies from registering offerings with the SEC as long as they’re intrastate transactions.

The SEC’s update was designed to address several shortcomings in the previous rules, including the following:

  • A single offer to a nonresident would defeat the exemption, making online crowdfunding virtually impossible.
  • A company incorporated in another state couldn’t take advantage of the exemption, even if its principal place of business was in the state where the offer was made.
  • The test for whether a company was doing business within a state was unduly restrictive.

The SEC amended Rule 147 to relax the “doing business” requirements. But its ability to resolve the first two issues was limited by the Securities Act, so the SEC added Rule 147A. This new rule is intended to facilitate crowdfunding.

Which offerings are now exempt?

To conduct an exempt offering under the newly revised Rule 147, a company must:

  1. Be incorporated and have its principal place of business in state,
  2. Satisfy at least one of the doing business requirements (below),
  3. Limit offers and sales to in-state residents or persons the issuer reasonably believes are in-state residents,
  4. Obtain a written representation of residency from each purchaser, and
  5. Include appropriate legends on stock certificates or similar documents indicating that securities can only be resold to in-state residents during the six-month period following the sale.

A company does business in state if 1) it derives at least 80% of its gross revenues from an in-state business or real property, 2) at least 80% of its consolidated assets are located in state, 3) at least 80% of the offering’s net proceeds will be used for an in-state business or real property, or 4) the majority of its employees are based in state.

Rule 147A offerings are subject to the same requirements, except that the issuer doesn’t need to be incorporated in state and offers aren’t limited to in-state residents.

Don’t overlook state law

Remember, even if an offering is exempt from SEC registration, it still must comply with applicable state securities laws. Fortunately, many states have passed or are considering their own crowdfunding laws.