The SEC just adopted a new rule called Rule 147A that allows companies to raise capital from investors within a single state (it is a new safe harbor under the intrastate exemption from the registration requirements of the 1933 Securities Act).
We already had a safe harbor for the federal intrastate exemption (Rule 147), but this one is new and improved!
Who can use it?
The company making the offering has to be “resident” and “doing business within” the state or territory in which all of the sales are made.
“Resident” means that the company has its principal place of business within that state (this is wherever the officers, partners, or managers of the business primarily direct, control and coordinate the activities of the issuer).
“Doing business within” means that one of the following is true:
- The company derived at least 80% of its gross revenues from business operations located within the state;
- The company has at least 80% of its assets located within that state;
- The company intends to use and uses at least 80% of the net proceeds from the offering 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 that state; or
- A majority of the company’s employees are based in that state.
Who can invest?
All of the purchasers of securities must be residents of that state. You need to do some due diligence to establish a “reasonable belief” that the purchasers are actually state residents.
Where can you advertise?
There are no restrictions on where the offer can be made, just the sales. This means that you can promote the offering online, using press releases, etc.
Can the securities be resold?
For a period of six months from the date of the sale of a security, any resale of such security shall be made only to persons resident within the same state. After that, resales are unrestricted under federal law.
The company is required to place a legend on the security stating that
“Offers and sales of these securities were made under an exemption from registration and have not been registered under the Securities Act of 1933. For a period of six months from the date of the sale by the issuer of these securities, any resale of these securities (or the underlying securities in the case of convertible securities) shall be made only to persons resident within the state or territory of .”
The company must also make a notation in its records of the transfer restriction and obtain a written representation from each purchaser as to his or her residence.
The issuer is required to prominently disclose to each potential investor the following:
“Sales will be made only to residents of the state or territory of . Offers and sales of these securities are made under an exemption from registration and have not been registered under the Securities Act of 1933. For a period of six months from the date of the sale by the issuer of the securities, any resale of the securities (or the underlying securities in the case of convertible securities) shall be made only to persons resident within the state or territory of .”
Timing with other offerings
Unlike before, you don’t have to have a six-month separation between another offering and your offering under this exemption. You can use this exemption anytime after another type of offering. So, for example, you could do a private offering and then immediately start an intrastate public offering.
State level compliance
You still have to make sure you comply with state level requirements for your offering. So, for example, if you want to do a public offering in California, you need to comply with the California registration requirements for public offerings.
If you’d like to learn more about using this new tool, contact us!
This can be established through a pre-existing relationship between the issuer and the prospective purchaser that provides the issuer with sufficient knowledge about the prospective purchaser’s principal residence; evidence of the home address of the prospective purchaser, as documented by a recently dated utility bill, pay-stub, information contained in state or federal tax returns, or other documentation.
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