While designed as a capital formation alternative to going public or conducting a private placement offering under Section 4(a)(2), use of the intrastate offering exemption has not been widely used since the SEC revised the regulation in 2016. Sometimes referred as “crowdfunding” due to the ability to raise smaller amounts from more investors, the intrastate offering exemption differs greatly from Regulation Crowdfunding, also known as Regulation CF.
North American Securities Administrators Association (NASAA), the group of state securities administrators tracks the state jurisdictions that have implemented an intrastate offering exemption. In total, 35 jurisdictions have adopted some form of an intrastate exemptions with the regulatory requirements differing from state-to-state. While not widely used by Issuers in the majority of jurisdictions, other states such as Texas, Michigan, and Georgia have seen numerous filers take advantage of the exemption.
The lack of widespread adoption is due to several factors including the availability of multiple capital formation options, lack of knowledge about the exemption, and the compliance burdens required by some states. Regulation D remains the most common method for Issuers to raise capital, and there has been an increased interest in Regulation A since it was overhauled into the current Regulation A+ framework. While the intrastate offering exemption limits the pool of potential investors to those in the same state where the Issuer is doing business, Regulation D and Regulation A+ have the potential to raise capital from investors in multiple jurisdictions.
The SEC’s exemption framework allows the states to create their own regulatory requirements as long as those requirements meet a minimum standard. As a result, the regulatory requirements can differ greatly from state-to-state with some obligations that are difficult, or expensive, for some Issuers. For example, some states require Issuers to provide audited financials that not all Issuers, especially small businesses or beginning stage companies, may not possess. Additionally, some states require all transactions to run through a state registered portal or exchange. If there are no registered portals, the intrastate offering exemption is essentially unavailable.
Alternatively, some states such as Georgia have used the intrastate exemption to encourage entrepreneurial activity and facilitate investment. Instead of a burdensome registration, the Invest Georgia Exemption only requires Issuers to file a simple application with the Commissioner of Securities. As long as Issuers comply with the conditions of either Rule 147A or the combination Section 3(a)(11)/Rule 147, Georgia does not impose additional restrictions or requirements. As a result, over 110 Issuers have utilized the Invest Georgia Exemption since its inception.
While not viable for all Issuers, the intrastate offering exemption remains a possible option for Issuers seeking a manageable capital raise solution. Additionally, Issuers can use the intrastate offering exemption as a stepping stone to a larger Regulation D or A+ offering in that Issuers can potentially use the intrastate offering as seed funding for the expenses of a larger offering.
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