SEC Issues Rule 147 Intrastate Crowdfunding Guidance – Posted by Brenda Hamilton
In October of last year, the Securities and Exchange Commission (“SEC”), adopted final rules (1) amending Rule 147, also known as Intrastate Crowdfunding and Rule 504 under the Securities Act of 1933, as amended (the “Securities Act”), and (2) establishing a new Securities Act exemption designated Rule 147A. Amended Rule 147 and new Rule 147A took effect on April 20, 2017, and amended Rule 504 took effect on January 20, 2017. As amended, Rule 147 facilitates offerings relying on intrastate crowdfunding exemptions under state securities laws. Further, Rule 147A further accommodates offers accessible to out-of-state residents and companies that are incorporated out-of-state.
On April 19, 2017, the SEC issued a new compliance and disclosure interpretation addressing intrastate crowdfunded offerings under new Rule 147A under the Securities Act. The new Intrastate Crowdfunding compliance and disclosure interpretation provides that under Rule 147A(g)(1), offers and sales made in reliance on Rule 147A will not be integrated with prior offers and sales of securities. The issuer must still comply with all applicable state securities law requirements.
Rule 147A, which took effect this month, provides an exemption from registration for issuers conducting an intrastate crowdfunded offering that satisfy certain conditions.
Rule 147 of the Securities Act provides a safe harbor for intrastate offerings exempt from registration under Section 3(a)(11) of the Securities Act. The Rule 147 intrastate crowdfunding exemption has the following requirements:
- the issuer must be organized and have its “principal place of business” in the state where the securities are offered and sold,
- general advertising and general solicitation are allowed only in the state where the securities are offered and sold,
- there is no limit on the amount of securities that may be sold under the safe harbor,
- the issuer must satisfy at least one of four threshold requirements demonstrating the in-state nature of the issuer’s business,
- Issuers may rely on a “reasonable belief” standard with respect to the residence of the purchaser at the time of the sale of securities,
- Issuers must obtain a written representation from each investor as to the investor’s residency,
- resales to persons residing within the offering state are restricted for a period of six months,
- disclosures, including securities legends, must be provided to offerees and investors regarding the limits on resales among other things, and
- an integration safe harbor includes any prior offers or sales of securities by the issuer, as well as certain subsequent offers or sales occurring after the completion of the offering.
Principal Place of Business
Under the Rule 147 intrastate crowdfunding exemption, an issuer’s principal place of business is defined as the location where the officers, partners, or managers of the issuer primarily direct, control, and coordinate the issuer’s activities. An issuer may have a principal place of business only within a single state. Under Rule 147, if an Issuer changes its principal place of business after making sales in an intrastate offering, it will not be allowed to conduct an intrastate offering under Rule 147 in another state for a period of six months from the date of the last sale in the prior state.
Issuer Threshold Requirements
Under the Rule 147 intrastate crowdfunding exemption, an issuer must meet at least one of the following requirements to establish that its business is sufficiently intrastate:
- The issuer must derive 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 Rule 147, the issuer must have had at least 80% of its consolidated assets located within the state or territory,
- The issuer must intend to use and use at least 80% of the net proceeds from sales made under the Rule 147 for 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, or
- A majority of the issuer’s employees must be located in the state or territory.
Reasonable Belief as to Purchaser Residency Status
Under Rule 147, the issuer can satisfy the requirement that each investor in the Rule 147 offering be a resident of the same state or territory in which the issuer conducts the offering if:
- The investor is, in fact, a resident of the state or territory, and
- The issuer 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 investor was an in-state resident will be based on the facts and circumstances which could include:
- A pre-existing relationship between the issuer and the prospective investor that provides the issuer with sufficient insight and knowledge about the prospective investor’s primary residence, and
- Evidence of the prospective investor’s home address on a recent bill, pay stub, state or federal tax return, or on any state-issued driver’s license or identification card.
Residence of Purchasers
The Rule 147 intrastate crowdfunding exemption requires issuers to obtain a written representation from each purchaser as to the purchaser’s residency. Obtaining a written representation from purchasers of in-state residency status will not, without more, be sufficient to establish a reasonable belief that those purchasers are in-state residents.
The residency of an investor that is a legal entity, such as a corporation, partnership, trust, or other form of business entity, is the location where, at the time of sale, the entity has its principal place of business. A legal entity’s principal place of business is defined as the location in which the officers, partners, or managers of the entity primarily direct, control, and coordinate the activities of the entity.
Rule 147 Crowdfunding – Limitation on Resales
Rule 147(e) provides that resales of a security offered and sold in reliance on the Rule 147 intrastate crowdfunding exemption must be made only to residents of the state or territory in which the issuer was resident at the time of sale of the security by the issuer for a period of six months from the sale by the issuer to the original investor.
Rule 147 Crowdfunding – Disclosure Requirements
Rule 147(f) requires an issuer in a Rule 147 offering to include prominent disclosure in all offering materials stating that:
- All sales to investors will be made only to residents of the same state or territory as the issuer.
- Offers and sales of the securities are made pursuant to an exemption from the registration statement requirements of the Securities Act, and
- For a period of six months from the date of sale by the issuer, any resale must be made only to residents in the same state or territory in which the issuer resided at the time that the initial investment was made.
Rule 147 also requires issuers to include a prominent legend on all securities sold under the exemption advising of the resale restrictions under Rule 147(e).
Integration Safe Harbor in Rule 147 Crowdfunded Offerings
Rule 147(g) expands the scope of the existing integration safe harbor to make it consistent with Rule 251(c) of Regulation A+. Offers and sales made under Rule 147 will 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),
- 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 known as the crowdfunding exemption, or
- made more than six months after the offering is complete.
Rule 147(h) provides that, where an issuer decides to register an offering after making offers in reliance on Rule 147 limited only qualified institutional buyers (“QIB”) or institutional accredited investors (“IAI”), the offers will 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 will not be subject to integration if the issuer waits at least 30 calendar days between the last offer made in reliance on Rule 147 and the filing of a registration statement under the Securities Act.
Additionally, Rule 147 offerings are not be integrated with other exempt offerings made concurrently by the issuer as long as each offering complies with the requirements of the exemption that the issuer relies on for the specific offering. When the integration safe harbor is not available, whether subsequent offers and sales are integrated with any securities offered or sold under Rule 147 will depend on the particular facts and circumstances.
Rule 147A Crowdfunding Requirements
Rule 147A intrastate offering requirements are:
- Issuers may be incorporated or organized outside of the state in which they make the offering under Rule 147A, provided their principal place of business is in the state and the issuer complies with the requirements of Rule 147A, and
- Issuers relying on Rule 147A may make offers available to out-of-state residents using general solicitation or general advertising on the internet or other means, so long as sales are made only to in-state residents while Rule 147 requires that issuers make offers and sales only to in-state residents.
For further information about rule 147A and this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956 or by email at [email protected]. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
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Brenda Hamilton, Securities Attorney
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