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.

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On the same day that it released rule amendments allowing some Rule 506 offerings to be sold through public solicitation, the SEC proposed an additional set of rule amendments for those offerings. While the newly adopted rule primarily concerns verification of accredited investor status, the additional proposals relate more to the materials used by issuers to solicit those investors.

Currently, offerings under Regulation D require a Form D to be filed 15 days after the first sale; no prefiling is required. The proposal, however, would require that any offering to be sold using general solicitation would require that Form D be filed with the SEC 15 days prior to any solicitation. The SEC has also proposed a temporary rule, Rule 510T, which would go further and require all solicitation material to be filed with the SEC prior to its first use. Under the proposal, this temporary rule would expire in two years.

In addition, the proposed rule changes would require solicitation materials to include legends informing recipients of certain facts relating to the securities offered, such as the requirement that all investors must be accredited, that regulators have not approved the offering and that the securities have transfer restrictions. The proposal also extends to private funds the Rule 156 requirements currently relating to investment company advertising materials.
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The Securities and Exchange Commission (“SEC”) recently adopted long-awaited rule changes required by the 2012 Dodd-Frank Act that will allow some offerings under Rule 506 to be offered using general solicitation. At the same time, the SEC proposed a set of additional changes that would further regulate this new type of offering.

Offerings under Rule 506, which provides one of the three operative safe harbor offering alternatives under Regulation D, have been prohibited from using any form of public solicitation since the rule’s inception in 1982. However, Congress responded to calls from industry seeking easier and less expensive ways to raise investment capital by creating the “crowdfunding” exemption and by loosening the public solicitation prohibition for Rule 506 offerings.

The rule amendment creates a new subsection 506(c), which provides that public solicitation is allowed if the offering is limited to accredited investors and the issuer takes reasonable steps to verify each investor’s accredited status. Although the rule does not enumerate specific verification procedures or even create a defined safe harbor, the issuing release describes a “principles-based” approach to verification and discusses a number of verification alternatives that may be considered adequate.
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