SEC Adopts Changes to Rules 147 and 505
Changes Reflect Adoption of Intrastate Crowdfunding and Increased Usage of Private Offerings Under Regulation D
The Securities and Exchange Commission (SEC) on October 26, 2016 voted to update Rules 147 and 504.
These changes reflect the increased use of Rule 147 in connection with intrastate securities offerings, often in combination with state intrastate crowdfunding rules. The revision to Rule 504 reflects the increased usage of Regulation D in connection with private offerings and the liberalization of private offerings under the 2012 JOBS Act and the SEC’s Regulation CF. Because the SEC took more than three years to implement the crowdfunding provisions in Title III of the JOBS Act, many state regulators and legislators took steps to implement intrastate crowdfunding rules as contemplated by Rule 147. Those state rules, in many respects, were more permissive than what the SEC had previously allowed. As a result, the North American Securities Administrators Association joined with a bipartisan group from Congress to support these changes.
New Rule 147A and Amendments to Rule 147
The SEC adopted new Rule 147A and amended Securities Act Rule 147 to modernize 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.
Amended Rule 147 continues to serve as a safe harbor under Section 3(a)(11) of the Securities Act so that issuers engage in securities offerings in reliance on state law exemptions. New Rule 147A will be nearly identical to Rule 147 except that it will 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 contain the following provisions:
- The issuer must have its “principal place of business” in-state and satisfy at least one “doing business” requirement that would demonstrate the in-state nature of its business;
- A new “reasonable belief” standard for issuers to rely on when determining the residence of a securities purchaser at the time of sale;
- A requirement that issuers obtain a written representation from each purchaser regarding 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 includes 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 check company. The rule also imposes conditions on offers and sales, with limited exceptions for offers and sales made in accordance with specified types of state registration provisions and exemptions. The amendment to Rule 504 will 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. The amendment will also disqualify certain bad actors from participating in Rule 504 offerings.
At the same time, the final rule also repeals Rule 505, which permits offerings of up to $5 million annually that must be sold solely to accredited investors of no more than 35 non-accredited investors. With the increase in the maximum offering amount under Rule 504 from $1 million to $5 million, Rule 505 becomes unnecessary.
Amended Rule 147 and new Rule 147A will become effective 150 days after publication in the Federal Register and Amended Rule 504 will become effective 60 days after publication in the Federal Register. The repeal of Rule 505 will become effective 180 days after publication in the Federal Register.