More on the Rules for an Offering in a Single State
Rule 147 Intrastate Exemption: Proposed Amendments.
The proposed amendments would: (1) eliminate the current restriction on offers, while continuing to require that sales be made only to residents of the issuer’s state; and (2) redefine what it means to be an “intrastate offering” and ease some of the issuer eligibility requirements, among other things. The SEC noted that the use of the Internet for offerings makes it difficult for issuers to limit offers to in-state residents, especially in the context of intrastate crowdfunding. The SEC also noted that the current issuer eligibility requirements exclude local issuers with local operations that incorporate or organize in a different state for business reasons. (For detailed discussions on this topic, see our previous blog series “Comparison of LLC Statutes.”)
The proposed amendments to Rule 147 would allow an issuer to engage in any form of general solicitation, including the use of publicly accessible Internet sites, that could reach out-of-state residents in order to locate potential in-state investors, so long as sales are made only to in-state residents and the issuer’s principal place of business is in-state. The proposed amendments would define an issuer’s principal place of business as the location in which the officers, partners, or managers of the issuer primarily direct, control, and coordinate the activities of the issuer, and further require that the issuer satisfy at least one of four threshold requirements (as opposed to all of the requirements as currently written) to help ensure the in-state nature of the issuer’s business: the three 80% requirements in the current rule, plus a new proposed requirement that the issuer have a majority of the issuer’s employees in the state. The SEC says these proposed requirements would not only provide important indicia of the in-state nature of the issuer’s business, but also would provide issuers with additional flexibility to satisfy the proposed requirements, especially in light of the different roles employees play within smaller companies and the different locations at which such roles are carried out.
The SEC also found it too restrictive that under the current rule, the exemption would be lost for the entire offering if securities are offered or sold to one out-of-state investor, regardless of the efforts an issuer takes to determine that potential investors are in-state residents. Accordingly, the proposed amendments seek to add a reasonable belief standard to the issuer’s determination as to the residence of the purchaser at the time of the sale of the securities (i.e., an issuer would satisfy the requirement that the purchaser be an in-state resident by establishing that the issuer had a reasonable belief that the purchaser was an in-state resident) and to eliminate the current requirement that an issuer obtain a written representation from each purchaser as to his or her residence. An issuer would form a reasonable belief regarding residence on the basis of all facts and circumstances, e.g., a pre-existing relationship, evidence of the home address, or any state-issued documentation such as a driver’s license.
The offering must be registered in the state in which all of the purchasers are residents or be conducted pursuant to an exemption from state law registration in such state that limits the amount of securities an issuer may sell pursuant to such exemption to no more than $5 million in a 12-month period and imposes an investment limitation on investors. The issuer must also take precautions against interstate sales by placing a prominent legend that offers and sales of the securities are limited to in-state residents and that the securities have not been registered, among other things.
This post was part of a multi-part series on the SEC proposed rules on Rule 147 and Rule 504 of Regulation D. You can find the other posts by searching our blogs at www.mcbrideattorneys.com. In our next post, we will discuss the proposed amendments to Rule 504.
This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.
Steps have been taken to verify the contents of this article prior to publication. However, readers should not, and may not, rely on this article. Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.
About the Author
Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Firm, PLLC, which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: 407-517-0064;[email protected], or www.mcbrideattorneys.com.