Organizations seeking to raise capital have multiple options at their disposal – each with their own benefits, limitations, and regulatory obligations. As part of the JOBS Act, the SEC was tasked with reviewing an almost century old regulatory structure with the goal of easing and modernizing aspects of the federal securities regulations concerning capital formation. One of these such areas that the SEC reviewed and modernized was the traditional intrastate offering exemption.
The intrastate offering exemption, codified as Section 3(a)(11) of the Securities Act of 1933, customarily has been used in conjunction with the safe harbor contained in Rule 147. Under this framework, offerings conducted by an Issuer, that are only offered or sold within the same state jurisdiction as the Issuer, solely to residents within the same state jurisdiction as the Issuer, are exempt from registration with the SEC, and instead only have to comply with the respective state’s securities laws.
The SEC realized that the restrictions of Rule 147, namely the prohibition of offerings being accessible to out-of-state residents, greatly restricted the ability of small businesses and start-ups to utilize the internet to conduct the offerings. As a result of the modernization efforts, the SEC created a new exemption, Rule 147A, that loosened the requirements regarding where the Issuer is organized and offers to in-state residents. Under Rule 147A, Issuers must still satisfy a “Doing Business” in-state test and offers that a viewed by out-of-state residents does not void the exemption.
The ”Doing Business” test requires an Issuer to satisfy at least one requirement to be deemed as doing business in that jurisdiction. The test is in addition to the Issuer maintaining a “principal place of business” within the same jurisdiction.
- The Issuer derived at least 80% of its consolidated gross revenues from the operation of a business or of real property located in-state or from rendering of services in-state;
- The Issuer had at least 80% of its consolidated assets located in-state;
- The issuer intends to use and uses at least 80% of the net proceeds from the offering towards the operation of a business or of real property in-state, the purchase of real property located in-state, or the rendering of services in-state; or
- A majority of the Issuer’s employees are based in-state.
While the revision of the intrastate offering exemption greatly increased the usability of the exemption for small and emerging companies, the exemption has remained relatively obscure compared to the more well known Regulation D and Regulation A+ offerings.
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