Revised Rule 147 and Regulation D

FINRA Rules

 

What’s Permitted?

  • Current Rule 147 permits the sale of securities without SEC registration to residents of a single state (intrastate exemption) if the corporation is organized in that same state and:
  • At least 80% of the assets are located, revenues are generated, and proceeds are used in that same state, and
  • 100% of the purchasers are residents of that state (there is a nine-month resale restriction for sales that are made to out-of-state residents)
  • Revised Rule 147 permits the sale of securities without SEC registration to residents of a single state if the corporation is organized and has its principal place of business in that state and meets any one of the following four requirements:

What are the Requirements?

  1. At least 80% of its consolidated gross revenues are derived from the operation of a business or of real property that is located in the state or territory or from the rendering of services within the state or territory;
  2. At least 80% of its consolidated assets are located within the state or territory at the end of its most recent semi-annual fiscal period prior to the first offer of securities under the exemption;
  3. At least 80% of the net proceeds from the offering are intended to be used by the issuer, and are in fact used, in connection with 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
  4.  A majority of the issuer’s employees are based in the state or territory (this fourth requirement was not included in the original Rule 147)

How is Rule 147A Changing the Game?

  • Rule 147A has the same requirements as those listed above; however, it does permit an issuer that is incorporated in State A, but has its principal place of business in State B, to use the intrastate exemption and raise capital in State B.
  • For example, ABC Company is incorporated in Delaware, but its principal business is conducted in New Jersey. Under Rule 147A, ABC will be allowed to offer securities to residents of New Jersey.
  • Rule 147A will permit an issuer to use general solicitation and publicly available websites. For this reason, offers are able to be made outside of the state, but all sales must still be limited to in-state residents. For both Rule 147 and Rule 147A, the restriction on resales to out-of-state residents is six-months (for Rule 147, this is a reduction from nine months)

Main Difference Between Rule 147 and Rule 147A

  • Rule 147 is the safe harbor for issuers that have their principal place of business in a state, are doing business in that state, and want to offer securities to residents of that state.
  • Rule 147A is the new safe harbor for issuers that are organized in a state, but have their principal office in another state and want to offer securities to residents of that state.
  • For example, ABC is incorporated in Delaware, but its principal business is conducted in New Jersey. Under Rule 147A, ABC will be allowed to offer securities to residents of New Jersey.

Regulation D Updates

  • Issuers will now be permitted to offer $5,000,000 (increased from $1,000,000) of securities over any 12-month period
  • Offerings will be disqualified if any “bad actors” participate in the offerings
  • The definition of “bad actor” is identical to what is found in Rule 506
  • Since 504 offerings have been increased to $5,000,000, Rule 505 has been repealed
  • Rule 504 changes are effective January 20, 2017, while the repeal of Rule 505 is effective May 20, 2017

Testimonials