Proposed Rule 147 Still in Limbo

In 1974 the  Securities and Exchange Commission (“SEC”)  adopted Rule 147 as a “safe-harbor”  for intrastate offerings under Section 3(a)(11) of the Securities Act of 1933 (the “Act.”)  On October 30, 2015, the SEC proposed sweeping changes to Rule 147. Notably, the proposed Rule 147 would be “decoupled” from Section 3(a)(11), instead being proposed under the SEC’s general exemptive authority in Section 28 of the Act.

Substantively, the proposal – while still limited to offerings entirely within one state – significantly liberalizes the restrictions on intrastate offerings contained in the current Rule 147 and Section 3(a)(11). First, it allows general solicitation across state lines (i.e., using the Internet), whereas such solicitation is now widely seen as problematic due to the current statutory and regulatory prohibition against offers outside the offering state.  The new rule does not prohibit interstate offers, but simply requires that all sales be made to residents of one state.

Also, the current Rule 147 provides that an issuer can make offers or sales only (i) in the state in which it is incorporated or organized; (ii) in the state where its principal office is located; (iii) in the state in which it earns 80% or its revenues and has 80% of its assets; and (iv) if 80% of the proceeds of the offering are used in the state.  The proposed Rule 147 basically requires only one of these standards to be met. The proposal also eliminates the requirement that the issuer be incorporated in the state.

The proposed Rule 147 is intended to coordinate with recently adopted rules and statutes in about 28 states that are designed to promote small intrastate offerings. By allowing general solicitation and simplifying residency requirements, the proposal carries great promise of providing small issuers the ability to more easily raise capital locally through exemptions synchronized under state and federal law.  However, by casting the proposal as an exemption under Section 28 of the 1933 Act, the SEC has created, probably unintentionally, complications in coordinating an offering under both the new state statutes and rules and the proposal.

The Commission received about 25 comment letters on the proposal by the January 11, 2016 deadline, most of which were generally supportive of the changes. A common thread through several comments, however, concerned whether the new rule would be usable, as intended, in tandem with the new state small offering provisions. Most of those state provisions were designed to coordinate with the then existing Rule 147 and  expressly require that an offering comply with Section 3(a)(11) to qualify for the state exemption. The SEC proposal, however, by divorcing itself from Section 3(a)(11) and providing for liberalizations not compliant with that section’s statutory requirements, is probably not immediately useful in most states. (See, e.g., Comment letter by Judith Shaw, NASAA President).

For example, Section 3(a)(11) expressly requires that “offers and sales” must be limited to state residents. By using Section 28 of the Act to adopt the proposal, the Commission was able to render that language moot at the federal level for offerings qualifying under the proposal. Nevertheless, out-of-state offerees in offerings contemplated by the proposal would still violate the many state law provisions requiring adherence to section 3(a)(11).

All except two of states that have adopted small offering provisions will have to modify their rules or statutes if the proposed Rule 147 is to have any application there. Some of those states fear that the burdensome legislative and rulemaking processes necessary to amend the newly-adopted state exemptions will serve to further delay or thwart entirely small businesses wanting to make full use of the expanded intrastate capital formation opportunities.

The Commission has not provided a timetable for when it might take action on the proposal.  Meanwhile, both states and potential users wait to assess whether the proposal’s promise can be achieved.

Parker MacIntyre provides legal and compliance services to investment advisers, broker dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please contact our firm for further guidance on Rule 147 or the Invest Georgia exemption.