Exemptions To Facilitate Intrastate and Regional Securities Offerings

Federal RegisterNov 10, 2015

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 230

[Release Nos. 33-9973; 34-76319; File No. S7-22-15]

RIN 3235-AL80

Exemptions To Facilitate Intrastate and Regional Securities Offerings

AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rules.

SUMMARY:

We are proposing amendments to Rule 147 under the Securities Act of 1933, which currently provides a safe harbor for compliance with the Section 3(a)(11) exemption from registration for intrastate securities offerings. Our proposal would modernize the rule and establish a new exemption to facilitate capital formation, including through offerings relying upon recently adopted intrastate crowdfunding provisions under state securities laws. The proposed amendments to the rule would eliminate the restriction on offers and ease the issuer eligibility requirements, while limiting the availability of the exemption at the federal level to issuers that comply with certain requirements of state securities laws.

We further propose rule amendments to Rule 504 of Regulation D under the Securities Act to facilitate issuers' capital raising efforts and provide additional investor protections. The proposed amendments to Rule 504 would increase the aggregate amount of securities that may be offered and sold in any twelve-month period from $1 million to $5 million and disqualify certain bad actors from participation in Rule 504 offerings.

DATES:

Comments should be received by January 11, 2016.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's Internet comment forms (

http://www.sec.gov/rules/proposed.shtml

);

• Send an email to

rule-comments@sec.gov

. Please include File Number S7-22-15 on the subject line; or

• Use the Federal Rulemaking Portal (

http://www.regulations.gov

). Follow the instructions for submitting comments.

Paper Comments

• Send paper comments to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-22-15. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Web site (

http://www.sec.gov/rules/proposed.shtml

). Comments also are available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly.

Studies, memoranda or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the SEC's Web site. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at

www.sec.gov

to receive notifications by email.

FOR FURTHER INFORMATION CONTACT:

Anthony G. Barone, Special Counsel, or Zachary O. Fallon, Special Counsel, Office of Small Business Policy, Division of Corporation Finance, at (202) 551-3460, U.S. Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-3628.

SUPPLEMENTARY INFORMATION:

We propose to amend Rule 147

and Rule 504

of Regulation D

under the Securities Act of 1933 (the “Securities Act”)

and to make technical amendments to Rules 504 and 505

of Regulation D.

17 CFR 230.147.

17 CFR 230.504.

17 CFR 230.500 through 230.508.

15 U.S.C. 77a

et seq.

17 CFR 230.505.

Table of Contents

I. Introduction And Background

II. Proposed Amendments To Rule 147

A. Rationale for Proposed Amendments to Rule 147

B. Explanation of Proposed Amendments to Rule 147

1. Elimination of Limitation on Manner of Offering

2. Elimination of Residence Requirement for Issuers

3. Requirements for Issuers “Doing Business” In State

4. Additional Amendments to Rule 147

a. Reasonable Belief as to Purchaser Residency Status

b. Residence of Entity Purchasers

c. Limitation on Resales

d. Integration

e. Other Considerations

f. State Law Requirements

C. Preservation of Section 3(a)(11) Statutory Intrastate Offering Exemption

III. Proposed Amendments To Rules 504 And 505 Of Regulation D

A. Overview of Rules 504 and 505

B. Proposed Amendments to Rules 504 and 505

C. Continued Utility of Rule 505 as an Exemption from Registration

IV. General Request For Comment

V. Economic Analysis

A. Baseline

1. Current Market Participants

a. Issuers

b. Investors

c. Intermediaries

2. Alternative Methods of Raising up to $5 Million of Capital

a. Exempt Offerings

b. Regulation Crowdfunding

c. Private Debt Financing

B. Analysis of Proposed Rules

1. Introduction

2. Analysis of Proposed Amendments to Rule 147

a. Elimination of Limitation on Manner of Offering

b. Ease of Eligibility Requirements for Issuers

c. Maximum Offering Amount and Investment Limitations for Offerings with Exemption from State Registration

3. Additional Amendments to Rule 147

4. Analysis of Proposed Amendments to Rule 504

C. Alternatives

1. Rescind Rule 505 Exemption

2. Lower Qualifying Thresholds under “Doing Business” In-State Tests

3. Eliminate “Doing Business” In-State Tests

4. Decreasing or Increasing Rule 504 Maximum Offering Limit

5. Additional Amendments to Rule 504

D. Request for Comment

VI. Paperwork Reduction Act

VII. Initial Regulatory Flexibility Act Analysis

VIII. Small Business Regulatory Enforcement Fairness Act

IX. Statutory Basis And Text Of Proposed Rules

I. Introduction and Background

Today's proposals are part of the Commission's efforts to assist smaller companies with capital formation consistent with other public policy goals, including investor protection. These proposals also complement recent efforts by the U.S. Congress,

state

legislatures,

and state securities regulators

to modernize existing federal and state securities laws and regulations to assist smaller companies with capital formation. We believe that the proposed amendments to Rule 147 and the amendment to increase the offering amount limitation in Rule 504 will help to facilitate capital formation by smaller companies by increasing the utility of these rules while maintaining appropriate protections for investors who purchase securities in these offerings. We believe that the proposed disqualification of certain bad actors from participation in Rule 504 offerings will provide for greater consistency across Regulation D and increase investor protection in such offerings.

Congress enacted the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), which was signed into law by President Obama on April 5, 2012. Pub. L. 112-106, 126 Stat. 306. Pursuant to Title II of the JOBS Act, the Commission adopted new paragraph (c) of Rule 506 of Regulation D, removing the prohibition on general solicitation or general advertising for securities offerings relying on Rule 506.

See

SEC Rel. No. 33-9415 (July 10,

2013). Pursuant to Title IV of the JOBS Act, the Commission amended Regulation A in order to permit issuers to raise up to $50 million annually. SEC Rel. No. 33-9741 (March 25, 2015) (“2015 Regulation A Release”). Pursuant to Title III of the JOBS Act, the Commission adopted rules permitting companies to use the Internet to offer and sell securities through crowdfunding (“Regulation Crowdfunding”).

See

SEC Rel. No. 33-9974 (Oct. 30, 2015) (“Regulation Crowdfunding Adopting Release”).

See, e.g.,

Ala. Code § 8-6-11 (2014); Ariz. Rev. Stat. Ann. § 44-1844 (2015); Colo. Rev. Stat. § 11-51-304(6) (2014); Fla. Stat. § 571.021, 517.061, 517.0611, 517.12, 517.121, 517.161, 626.9911; Ind. Code § 6-3.1-24-14 (2014); Ky. Rev. Stat. Ann. § 292.410-292.415 (2015); Me. Rev. Stat. Ann. tit. 32, § 16304, sub-§ 6-a (2014).

See, e.g.,

DC Mun. Regs. tit. 26-B, § 250 (2014); Ga. Comp. R. & Regs. 590-4-2-.08 (2011); Idaho Code Ann. § 30-14-203 (providing an exemption by order on a case-by-case basis); Kan. Admin. Regs. § 81-5-21 (2011).

We propose to modernize and expand Rule 147 under the Securities Act, a safe harbor for intrastate offerings exempt from registration pursuant to Securities Act Section 3(a)(11).

Consistent with the suggestions of market participants and state securities regulators,

the proposal would expand upon the statutory exemption in order to modify certain regulatory requirements of the rule that no longer comport with modern business practices or communications technology, thereby limiting the utility of the safe harbor for intrastate offerings, particularly in offerings by issuers seeking to raise capital pursuant to recently adopted crowdfunding provisions under state securities laws. The proposed amendments would eliminate the current restriction on offers, while continuing to require that sales be made only to residents of the issuer's state or territory. The proposed amendments also would redefine what it means to be an “intrastate offering” and ease some of the issuer eligibility requirements in the current rule, making the rule available to a greater number of businesses seeking intrastate financing. We also propose to limit the availability of the exemption to offerings that are either registered in the state in which all of the purchasers are resident or conducted pursuant to an exemption from state law registration in such state that limits the amount of securities an issuer may sell pursuant to such exemption to no more than $5 million in a twelve-month period and imposes an investment limitation on investors.

15 U.S.C. 77c(a)(11) (exempting “any security which is a part of an issue offered and sold only to persons resident within a single state or territory, where the issuer of such security is a person residing and doing business within, or, if a corporation, incorporated by and doing business within such state or territory.”).

See, e.g.,

Transcript of Record at 78, SEC Advisory Committee on Small and Emerging Companies (June 3, 2015),

available at http://www.sec.gov/info/smallbus/acsec/acsec-minutes-060315.pdf;

State Based Crowdfunding, presentation by Michael S. Pieciak, NASAA Corporate Finance Chair, SEC Advisory Committee on Small and Emerging Companies (June 3, 2015),

available at http://www.sec.gov/info/smallbus/acsec/state-based-crowdfunding.pdf;

Letter from Stanley Keller, Fed. Regulation of Sec. Comm. of the Bus. Law Section of the American Bar Assoc., to Linda C. Quinn and Mary E.T. Beach of the SEC Div. of Corp. Fin. (“ABA Letter”), submitted as appendix to letter from Stanley Keller to the SEC Advisory Committee on Small and Emerging Companies (June 1, 2015),

available at http://www.sec.gov/comments/265-27/26527-50.pdf.

We also propose to amend Rule 504 of Regulation D under the Securities Act to increase the aggregate amount of securities that may be offered and sold pursuant to Rule 504 in any twelve-month period from $1 million to $5 million and to disqualify certain bad actors from participation in Rule 504 offerings. The proposed increase would facilitate capital formation by increasing the flexibility that state securities regulators have to implement coordinated review programs to facilitate regional offerings.

The proposed bad actor disqualification provisions would provide for greater consistency across Regulation D. If adopted, the amendments to Rule 504 could result in the diminished utility of Rule 505, which historically has been little utilized in comparison to Rule 506

of Regulation D. We therefore seek comment on whether Rule 505 should be retained in its current or a modified form as an exemption from registration, or repealed.

The state registration of securities offerings under coordinated review programs are examples of efforts undertaken by states to streamline the state registration process for issuers seeking to undertake multi-state registrations. These programs establish uniform review standards and are designed to expedite the registration process, thereby potentially saving issuers time and money. Participation in such programs is voluntary and imposes no additional costs on issuers. The states have created coordinated review protocols for equity, small company and franchise offerings; direct participation program securities; and for certain offerings of securities pursuant to Regulation A. For more information on coordinated review programs,

see http://www.nasaa.org/industry-resources/corporation-finance/coordinated-review/.

For the period 2009 through 2014, 109,237 Forms D were filed, of which 1,409 reported an offering made in reliance upon Rule 505 of Regulation D, representing 1% of all offerings made in reliance upon Regulation D during this time period and 2% of all Regulation D offerings raising less than $5 million. During this same time period, 3,789 filings reported an offering made in reliance upon Rule 504, representing 3% of all offerings made in reliance upon Regulation D during this time period and 10% of all Regulation D offerings raising less than $1 million. The vast majority of Form D filings during this period reported an offering made in reliance on Rule 506.

II. Proposed Amendments To Rule 147

A. Rationale for Proposed Amendments to Rule 147

The proposed amendments to Rule 147 would establish a new Securities Act exemption for intrastate offerings of securities by companies doing business in-state, including offerings relying upon newly adopted and proposed crowdfunding provisions under state securities laws. The proposed amendments seek to modernize Rule 147, while retaining the underlying intrastate character of Rule 147 that permits companies to raise money from investors within their state pursuant to state securities laws without concurrently registering the offers and sales at the federal level.

Securities Act Section 3(a)(11) provides an exemption from registration under the Securities Act for, “[a]ny security which is part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within, or, if a corporation, incorporated by and doing business within, such State or Territory.”

In 1974, the Commission adopted Rule 147 under the Securities Act to provide objective standards for local businesses seeking to rely on Section 3(a)(11).

The Rule 147 safe harbor was intended to provide assurances that the intrastate offering exemption would be used for the purpose Congress intended in enacting Section 3(a)(11), namely the local financing of companies by investors within the company's state or territory.

Nothing in Rule 147 obviates

the need for compliance with any state law relating to the offer and sale of the securities

and nothing in our proposed amendments would affect continued compliance with such laws.

15 U.S.C. 77c(a)(11).

SEC Rel. No. 33-5450 (Jan. 7, 1974) [39 FR 2353 (Jan. 21, 1974)] (“Rule 147 Adopting Release”); SEC Rel. No. 33-5349 (Jan. 8, 1973) [38 FR 2468 (Jan. 26, 1973)] (“Rule 147 Proposing Release”).

See

Rule 147 Adopting Release.

See also

H.R. Rep. No. 73-85, at 6-7 (1933), H.R. Rep. No. 73-

1838, at 40-41 (1934) (Conf. Rep.) and SEC Rel. No. 33-4434, at 4 (Dec. 6, 1961) [26 FR 11896 (Dec. 13, 1961)] (“1961 Release”).

See

17 CFR 230.147 (Preliminary Note 2).

Section 3(a)(11) and the Commission's Rule 147 safe harbor limit both

offers

and

sales

to residents of the same state or territory in which the issuer is resident and doing business. Rule 147 also includes prescriptive threshold requirements that an issuer must satisfy in order to be considered “doing business” in-state. To satisfy these requirements, an issuer must, among other things:

• Derive at least 80% of its consolidated gross revenues in-state;

• have at least 80% of its consolidated assets in-state; and

• intend to use and use at least 80% of the net proceeds from an offering conducted pursuant to Rule 147 in connection with the operation on an in-state business or real property.

17 CFR 230.147(c)(2)(i)-(iii).

Market participants and commenters have indicated that the combined effect of Section 3(a)(11)'s statutory limitation on offers and the prescriptive threshold requirements of Rule 147 unduly limit the availability of the exemption for local companies that would otherwise conduct intrastate offerings.

For example, market participants and commenters have noted that the use of the Internet for offerings makes it difficult for issuers to limit offers to in-state residents.

These concerns, in addition to developments in communication technologies and the increasing interstate nature of small business activities that have occurred since Section 3(a)(11) was enacted and Rule 147 was originally adopted, suggest that the current limitations are in need of modernization.

See

note 10 above.

See, e.g.,

Transcript of Record at 84, SEC Advisory Committee on Small and Emerging Companies (June 3, 2015).

Rule 147 has not been substantively changed since it was adopted in 1974.

A number of states have adopted and/or enacted crowdfunding

provisions in their rules or statutes, which may serve as another valuable tool small companies can use to raise capital.

Other states have similar forms of state-based crowdfunding bills pending.

State-based crowdfunding provisions generally require that an issuer, in addition to complying with various state-specific requirements to qualify for the exemption,

also comply with Section 3(a)(11) and Rule 147.

The Commission has received feedback from state securities regulators and market participants, however, who have indicated that the current statutory requirements in Section 3(a)(11) and regulatory requirements in Rule 147 make it difficult for issuers to take advantage of these new state crowdfunding provisions.

As the Commission noted in its proposing release for the rules implementing Title III of the JOBS Act, crowdfunding is a relatively new and evolving method to raise money using the Internet. Crowdfunding serves as an alternative source of capital to support a wide range of ideas and ventures. An entity or individual raising funds through crowdfunding typically seeks small individual contributions from a large number of people.

See

SEC Rel. No. 33-9470 (Oct. 23, 2013) [79 FR 66428 (Nov. 5, 2013)].

As of the date of this proposal, data from the North American Securities Administrators Association (“NASAA”) indicates that 29 states and the District of Columbia have enacted some form of a state-based crowdfunding exemption to state registration either through legislation, regulation or administrative orders.

See

notes 7-8 above;

see also

Intrastate Crowdfunding Directory, NASAA,

http://www.nasaa.org/industry-resources/corporation-finance/instrastate-crowdfunding-resource-center/intrastate-crowdfunding-directory/.

See, e.g.,

Intrastate Crowdfunding Legislation, prepared by NASAA,

available at

http://nasaa.cdn.s3.amazonaws.com/wp-content/uploads/2014/12/NASAA-Crowdfunding-Index_8-1-2015a1.pdf

(summarizing the latest developments in intrastate crowdfunding, including the status of proposed state intrastate crowdfunding legislation and regulations).

See, e.g.,

Ala. Code § 8-6-11 (2014) (aggregate offering limits); Ariz. Rev. Stat. Ann. § 44-1844 (2015) (investor limits); Fla. Stat. §§ 571.021, 517.061, 517.0611, 517.12, 517.121, 517.161, 626.9911 (2015) (audited financial statement requirements); Ind. Code § 6-3.1-24-14 (2014) (state filing requirements); Ky. Rev. Stat. Ann. §§ 292.410-292.415 (2015) (delivery of a disclosure document).

Of the 29 states and the District of Columbia that have adopted intrastate crowdfunding provisions, only Maine allows an issuer to rely upon a federal exemption other than a combination of Securities Act Section 3(a)(11) and Rule 147, namely the exemption provided by Rule 504 of Regulation D.

See

Me. Rev. Stat. tit. 32, § 16304(6-A)(D) (2013).

See

note 18 above.

See also

Recommendation to the Commission by the Advisory Committee on Small and Emerging Companies (Sept. 23, 2015),

available at http://www.sec.gov/info/smallbus/acsec/acsec-recommendation-modernize-rule-147.pdf.

The most common concerns expressed about Rule 147 are:

• The limitation of offers to in-state residents only, which raises questions about the proper use of the Internet for these offerings;

• The limitation of eligible issuers only to those that are incorporated or organized in-state, which excludes local issuers with local operations that incorporate or organize in a different state for business reasons; and

• The limitation of eligible issuers only to those that can satisfy each of the three 80% thresholds concerning their revenues, assets and use of net proceeds in order for the issuers to be deemed “doing business” within a state or territory, which unduly restricts the local businesses that may rely upon the exemption for local financings in their home state or territory.

Id.

The proposed amendments to Rule 147 would amend these requirements and revise the rule to allow an issuer to engage in any form of general solicitation or general advertising, including the use of publicly accessible Internet Web sites, to offer and sell its securities, so long as all sales occur within the same state or territory in which the issuer's principal place of business is located, and the offering is registered in the state in which all of the purchasers are resident or is conducted pursuant to an exemption from state law registration in such state that limits the amount of securities an issuer may sell pursuant to such exemption to no more than $5 million in a twelve-month period and imposes an investment limitation on investors. The proposed amendments would define an issuer's principal place of business as the location in which the officers, partners, or managers of the issuer primarily direct, control and coordinate the activities of the issuer and further require the issuer to satisfy at least one of four threshold requirements that would help ensure the in-state nature of the issuer's business.

As proposed, certain provisions of existing Rule 147 regarding legends and mandatory disclosures to purchasers and prospective purchasers would continue to apply to offerings conducted pursuant to the exemption.

In addition, any offer or sale under the proposed amendments to Rule 147 would need to comply with state securities laws.

See

proposed Rule 147(c).

See

proposed Rule 147(f).

B. Explanation of Proposed Amendments to Rule 147

As noted above, Rule 147 was adopted as a safe harbor for compliance with Section 3(a)(11). Our proposed amendments to the rule, however, would allow an issuer to make offers accessible to out-of-state residents and to be incorporated out-of-state, so long as sales are made only to in-state residents and the issuer's principal place of business is in-state and it satisfies at least one additional requirement that would further demonstrate the in-state nature of the issuer's business. As proposed, an issuer would only be able to avail itself of the

proposed exemption if the offering is registered in the state in which all of the purchasers are resident or is conducted pursuant to an exemption from state law registration in such state that limits the amount of securities an issuer may sell pursuant to such exemption to no more than $5 million in a twelve-month period and imposes an investment limitation on investors. Rule 147, as proposed to be amended, would no longer fall within the statutory parameters of Section 3(a)(11).

Accordingly, we propose to amend Rule 147 to create an exemption pursuant to our general exemptive authority under Section 28 of the Securities Act.

As amended, Rule 147 would function as a separate exemption from Securities Act registration rather than as a safe harbor under Section 3(a)(11).

Issuers that seek guidance on how to comply with Section 3(a)(11) after the adoption of any final rules amending Rule 147, as proposed, would continue to be able to rely on judicial and administrative interpretive positions on Rule 147 issued prior to the effectiveness of any such final rules.

15 U.S.C. 77z-3.

As noted above, our proposed amendments to Rule 147 are intended, in part, to facilitate the use of state-based crowdfunding statutes. Because many state statutes and rules require issuers to comply with the requirements of both Section 3(a)(11) and Rule 147, states should consider whether our proposed amendments to Rule 147 would require additional amendments to their respective statutes or rules to allow issuers to comply with requirements at both the state and federal level.

1. Elimination of Limitation on Manner of Offering

To satisfy Section 3(a)(11) and the current Rule 147 safe harbor, all of the securities in an offering must be both offered

and

sold exclusively to residents of the state or territory in which the issuer is resident and doing business. While the language limiting offers and sales to in-state residents in the statute and rule is clear, the legislative history of Section 3(a)(11), its subsequent amendments, and prior Commission guidance have created some uncertainty as to the scope of permissible offers that may be made pursuant to the exemption.

When Congress enacted Section 3(a)(11) in 1934, the legislative history stated, among other things, that “a person who comes within the purpose of the exemption, but happens to use a newspaper for the circulation of his advertising literature, which newspaper is transmitted in interstate commerce, does not thereby lose the benefits of the exemption.”

Consistent with this statement, the Commission in 1937 released staff guidance on the nature of the Section 3(a)(11) exemption in the form of a letter from the Commission's General Counsel.

In this letter, the General Counsel stated that, “the so-called `intrastate exemption' is not in any way dependent upon absence of use of the mails or instruments of transportation or communication in interstate commerce in the distribution.”

Rather, the letter explained that, so long as all the statutory requirements of the exemption are satisfied, such securities may be offered and sold through the mails and may even be delivered in interstate commerce to purchasers, if such purchasers, though resident, are temporarily out of the state. In this context, the letter further noted that securities exempt from registration pursuant to Section 3(a)(11) “may be made the subject of general newspaper advertisement (provided the advertisement is appropriately limited to indicate that offers to purchase are solicited only from, and sales will be made only to, residents of the particular state involved).”

See

H.R. Rep. No. 73-1838, at 40-41 (1934) (Conf. Rep.). Section 3(a)(11) initially was enacted as Securities Act Section 5(c). When Congress enacted the Securities Exchange Act of 1934, it also amended the Securities Act, including revising and re-designating Section 5(c) as Section 3(a)(11).

See

SEC Rel. No. 33-1459 (May 29, 1937) [11 FR 10958 (Sept. 27, 1946)] (“1937 Letter of General Counsel”).

Id.

The Commission released further guidance on Section 3(a)(11) in 1961 that restated the staff guidance in the 1937 Letter of General Counsel.

In its 1961 Release, the Commission explained that in order “[t]o give effect to the fundamental purpose of the exemption, it is necessary that the entire issue of securities shall be offered and sold to, and come to rest only in the hands of residents within the state. If any part of the issue is offered or sold to a non-resident, the exemption is unavailable not only for the securities so sold, but for all securities forming a part of the issue, including those sold to residents.”

See

1961 Release at 4.

Id.; see also

1937 Letter of General Counsel (stating that Section 3(a)(11) is “limited to case in which the entire issue of securities is offered and sold exclusively to residents of the state in question.”).

As noted above, however, market participants and commenters have indicated that Section 3(a)(11)'s statutory limitation on offers unduly limits the availability of the exemption, for example, by limiting the manner in which issuers may communicate with or locate potential in-state investors over the Internet.

Rule 147, as proposed to be amended, would require issuers to limit sales to in-state residents, but would no longer limit offers by the issuer to in-state residents.

Accordingly, amended Rule 147 would permit issuers to engage in general solicitation and general advertising that could reach out-of-state residents in order to locate potential in-state investors using any form of mass media, including unrestricted, publicly available Web sites, to advertise their offerings, so long as all sales of securities so offered are made to residents of the state or territory in which the issuer has its principal place of business.

See, e.g.,

notes 10 and 19 above.

See

proposed Rule 147(d).

Given that amended Rule 147 would allow offers to be accessible by out-of-state residents, the proposed amendments would require an issuer to include a prominent disclosure on all offering materials used in connection with a Rule 147 offering, stating that sales will be made only to residents of the same state or territory as the issuer.

This proposed disclosure requirement is intended to advise investors who are not residents of the state in which sales are being made that the intrastate offering would be unavailable to them.

See

proposed Rule 147(f)(3).

Request for Comment

1. Should we amend Rule 147 to eliminate the limitation on offers to in-state residents, as proposed? Why or why not? Please explain.

2. Should we retain the existing safe harbor and create a new rule pursuant to our authority under Section 28 to reflect our proposed revisions? Why or why not? How would our proposed revisions interact with other recent rules adopted pursuant to the JOBS Act, if at all?

3. Should we adopt the proposed disclosure requirement for all offering materials used in reliance on this rule? Why or why not? Should we require additional or different disclosure? If so, what language would be appropriate?

2. Elimination of Residence Requirement for Issuers

Rule 147 currently requires issuers to be incorporated or organized under the laws of the state or territory in which

the intrastate offering is conducted.

This requirement, while based on the language of Section 3(a)(11), is at odds with modern business practice in which issuers incorporate or organize in states other than the state or territory of their principal place of business, for example, to take advantage of well-established bodies of corporate or partnership law.

We do not believe that locus of entity formation should affect the ability of an issuer to be considered “resident” for purposes of an intrastate offering exemption at the federal level. Given modern business practices, the current requirement may be unnecessarily restrictive and may limit the usefulness of the exemption.

See

Rule 147(c)(1)(i) [17 CFR 230.147(c)(1)(i)]. For issuers such as general partnerships or other forms of business organizations that are not organized under any state or territorial law, Rule 147(c)(1)(ii) considers such issuers residents of the state or territory where the issuers' principal offices are located.

For example, data provided by issuers in Form D filings with the Commission indicates that approximately 30% of issuers conducting Rule 504 offerings and 62% of issuers conducting either Rule 505 or Rule 506 offerings have a principal place of business in a state other than the issuer's state of incorporation or organization.

See

discussion in Section V below.

Therefore, for corporations, limited partnerships, trusts, or other forms of business organizations, we propose to eliminate the current requirement of Rule 147 that limits the availability of the rule to issuers organized in the state in which an offering takes place.

Our proposed amendments would expand the universe of eligible issuers by eliminating the current “residence” requirement, while continuing to require that an issuer have a sufficient in-state presence determined by the location of the issuer's principal place of business.

In conjunction with the proposed requirement that all purchasers be in-state residents,

we believe that requiring an issuer to have an in-state principal place of business and to satisfy at least one additional requirement that demonstrates the in-state nature of the issuer's business should adequately ensure the intrastate nature of the offering, such that state authorities can effectively regulate an issuer's activities and enforce states' securities laws for the protection of resident investors.

Rule 147(c)(1)(i).

See

proposed Rule 147(c)(1).

See also

discussion on principal place of business in Section II.B.3. below, and the related discussion of the proposed requirement that an issuer satisfy at least one of four threshold requirements in order to help ensure the in-state nature of its business.

See

discussion in Section II.B.1.

The proposed amendments also would replace the current rule's “principal office” requirement for an issuer, such as a general partnership or other form of business organization that is not organized under any state or territorial law,

with the proposed “principal place of business” requirement.

Rule 147(c)(1)(ii).

See

proposed Rule 147(c)(1).

Request for Comment

4. Should we amend Rule 147 to eliminate the requirement that entities be incorporated or organized under the laws of the state in which the offering takes place, as proposed? Additionally, should we limit availability of the exemption to issuers organized or incorporated in the United States or one of its territories? Why or why not? Please explain.

5. Should we amend Rule 147, as proposed, to eliminate the current issuer residence requirement, while continuing to require an issuer to have a principal place of business in the state in which an intrastate offer and sale takes place? Would this requirement, in conjunction with the additional proposed requirements for an issuer to demonstrate the in-state nature of its business

and the requirement that all purchasers be in-state residents,

adequately ensure the intrastate nature of the offering such that a state can effectively regulate an issuer's activities?

See

discussion in Section II.B.3 (Requirements for Issuers “Doing Business” In-State) below.

See

note 46 above.

6. In addition to requiring that an issuer have its principal place of business in the state where the offer and sale occurs, should we also require that the issuer be registered in-state as an out-of-state entity and/or that the issuer have obtained all licenses and registrations necessary to lawfully conduct business in-state? Why or why not?

3. Requirements for Issuers “Doing Business” In-State

The Section 3(a)(11) intrastate offering exemption allows businesses to raise money within the state from investors who are more likely than those outside the state to be familiar with the issuer and its management. Accordingly, the doing business requirement of Section 3(a)(11) has traditionally been viewed strictly.

In adopting Rule 147, the Commission adhered to the concepts in existing court and Commission interpretations of Section 3(a)(11) that not only should the issuer's business be physically located within the state, but the principal or predominant business must be carried on there

and substantially all of the proceeds of the offering must be put to use within the state.

Rule 147 Adopting Release at 3.

Id.

at 3, n. 4,

citing,

Chapman v. Dunn, 414 F.2d 153 (6th Cir. 1969).

See also

1961 Release at 2 (“In view of the local character of the Section 3(a)(11) exemption, the requirement that the issuer be doing business in the state can only be satisfied by the performance of substantial operational activities in the state of incorporation. The doing business requirement is not met by functions in the particular state such as bookkeeping, stock record and similar activities or by offering securities in the state.”).

Id.

at 3, n.5,

citing,

SEC v. Truckee Showboat, Inc., 157 F.Supp. 824 (S.D. Cal. 1957). See also 1961 Release at 2 (“If the proceeds of the offering are to be used primarily for the purpose of a new business conducted outside of the state of incorporation and unrelated to some incidental business locally conducted, the exemption should not be relied upon.”).

Rule 147 followed these concepts by setting forth three 80% threshold tests for the issuer to be deemed “doing business” in-state. Specifically, Rule 147(c)(2) deems an issuer to be doing business in-state if its principal office is located within the state and at least:

• 80% of its consolidated gross revenues are derived from the operation of a business or of real property located in or from the rendering of services within such state or territory;

• 80% of its consolidated assets are located within such state or territory; and

• 80% of the net proceeds from the offering are intended to be used by the issuer, and are in fact used, 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 such state or territory.

17 CFR 230.147(c)(2).

We propose to simplify the doing business in-state determination by amending the current rule requirements so that an issuer's ability to rely on the rule would be based on the location of the issuer's principal place of business, as opposed to its “principal office.”

For purposes of the rule, we propose to define the term “principal place of business” to mean the location from which the officers, partners, or managers of the issuer primarily direct, control and coordinate the activities of the issuer.

As defined, an issuer

would only be able to have a “principal place of business” within a single state or territory and would therefore only be able to conduct an offering pursuant to amended Rule 147 within that state or territory. Issuers also would be required to register the offering in the state in which all of the purchasers are resident, or rely on an exemption from registration that limits the amount of securities an issuer may sell pursuant to such exemption to no more than $5 million in a twelve-month period and imposes an investment limitation on investors.

See

17 CFR 230.147(c)(2)(iv). We note that the issuer's “principal place of business” is conceptually consistent with the current rule's requirement that the “principal office” of the issuer be located within the state or territory of the offering.

See

proposed Rule 147(c)(1).

See also

related discussion on issuer residency requirements in Section II.B.2 and note 47 above.

Proposed Rule 147(c)(1). The proposed principal place of business definition is consistent with the use of that term in Exchange Act Rule 3a71-3, 17 CFR 240.3a71-3, for cross-border security based swap dealing activity and the use of

the term “principal office and place of business” in Investment Advisers Act Rule 203A-3(c), 17 CFR 275.203A-3(c).

See

discussion in Section II.B.f (State Law Requirements) below.

As discussed more fully in Section II.B.4.c below, we believe that our rules should continue to require that the securities sold in an intrastate offering in one state should have to come to rest within such state before sales are permitted to out-of-state residents.

Consistent with this view, we propose to limit the ability of an issuer that has changed its principal place of business to conduct an intrastate offering in a different state until such time as the securities sold in reliance on the proposed exemption in the prior state have come to rest in that state.

For these purposes, we propose that issuers that have changed their principal place of business after making sales in an intrastate offering pursuant to proposed Rule 147 would not be able to conduct an intrastate offering pursuant to proposed Rule 147 in another state for a period of nine months from the date of the last sale in the prior state, which is consistent with the duration of the resale limitation period specified in proposed Rule 147(e).

See

1961 Release at 4.

See

proposed Rule 147(e) (proposing to limit resales of a given security purchased in an offering pursuant to Rule 147 to out-of-state residents for a nine-month period from the date such security is sold by the issuer).

See

Note 1 to proposed Rule 147(c)(1), specifying that an issuer that has previously conducted an intrastate offering pursuant to proposed Rule 147 may not conduct another intrastate offering pursuant to the exemption, based upon satisfaction of the principal place of business definition in a different state or territory, until the expiration of the time period specified in proposed Rule 147(e), calculated on the basis of the date of the last sale in such offering.

Additionally, we propose to require issuers to satisfy an additional criterion that we believe would provide further assurance of the in-state nature of the issuer's business within the state in which the offering takes place. For these purposes, we propose to retain the 80% threshold tests of the current rule in modified form with the addition of an alternative test based on the location of a majority of the issuer's employees.

While the substance of the 80% threshold requirements of current Rule 147(c)(2) would be retained in the proposed rules, we propose to make compliance with any one of the 80% threshold requirements sufficient to demonstrate the in-state nature of the issuer's business. This would be a change to the current test, which requires issuers to meet all three conditions. We further propose to make certain technical revisions to the existing 80% thresholds that would simplify the structure, and clarify the application, of the rules.

In light of our proposal to require issuers to satisfy only one of the threshold tests, we propose to eliminate the current provision in Rule 147(c)(2)(i)(B), which does not apply the revenue test to issuers with less than $5,000 in revenue during the prior fiscal year.

While this accommodation may be reasonable in the context of the current conjunctive 80% threshold requirements of Rule 147(c)(2), we do not believe it would be necessary under the proposed rule. We further propose to add an alternative requirement to the three modified 80% threshold requirements that relates to the location of a majority of the issuer's employees. This proposed requirement would provide an additional method by which an issuer could demonstrate that it conducts in-state business sufficient to justify reliance on Rule 147, as proposed to be amended. For these purposes, we propose to permit an issuer to satisfy the requirement of proposed Rule 147(c)(2) by having a majority of its employees based in such state or territory.

We believe that these proposed requirements would not only provide important indicia of the in-state nature of the issuer's business, but also would provide issuers with additional flexibility to satisfy the proposed requirements, especially in light of the different roles employees play within smaller companies and the different locations at which such roles are carried out.

See

proposed Rule 147(c)(2).

For example, in order to streamline the presentation of proposed Rule 147(c)(2), we propose to redesignate current Rule 147(c)(2)(i)(A)-(B), 17 CFR 230.147(c)(2)(i)(A)-(B), which includes instructions on how to calculate revenue under Rule 147(c)(2)(i), as a note to the rule.

17 CFR 230.147(c)(2)(i)(B).

See

proposed Rule 147(c)(2)(iv).

As proposed, and in addition to the requirement that an issuer have its principal place of business in-state, an issuer would be required to meet at least one of the following requirements:

• The issuer derived at least 80% of its consolidated gross revenues from the operation of a business or of real property located in or from the rendering of services within such state or territory;

See

proposed Rule 147(c)(2)(i) and related notes to the rule indicating how and when an issuer would calculate its revenue for purposes of compliance with the proposed rule, based on when the first offer of securities is made pursuant to the exemption.

• The issuer had at the end of its most recent semi-annual fiscal period prior to the first offer of securities pursuant to the exemption, at least 80% of its consolidated assets located within such state or territory;

See

proposed Rule 147(c)(2)(ii).

• The issuer intends to use and uses at least 80% of the net proceeds to the issuer from sales made pursuant to the exemption 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 such state or territory;

See

proposed Rule 147(c)(2)(iii).

• A majority of the issuer's employees are based in such state or territory.

See

proposed Rule 147(c)(2)(iv).

We believe the proposed amendments would expand capital raising opportunities for companies while continuing to require them to have an in-state presence sufficient to justify reliance on the exemption. Given the increasing “interstate” nature of small business activities, it has become increasingly difficult for companies, even smaller companies that are physically located within a single state or territory, to satisfy all of the residence requirements of current Rule 147(c)(2).

The proposed modification of these requirements would facilitate the use of the exemption for capital raising by providing issuers with greater flexibility to comply with the requirements and would help to eliminate potential uncertainty about the availability of the exemption.

If we were to adopt a final rule, we expect the staff would undertake to study and submit a report to the Commission no later than three years following the effective date of the amendments on whether this framework appropriately provides assurances that an issuer is doing business in the state in which the offering takes place. The Commission

could also independently decide to engage in a retrospective review of the rule at any time.

See

discussion in Section V below.

See, e.g.,

Transcript of Record 82-91, SEC Advisory Committee on Small and Emerging Companies (June 3, 2015);

see also Exempted Transactions Under the Securities Act of 1933,

J. William Hicks, Thomas Reuters/West (2009), Ch. 4 (Intrastate Offerings Under Section 3(a)(11)) at § 4:66 (noting confusion and uncertainty in the application of Rule 147's objective standards to specific factual situations).

In addition, states could decide whether to adopt specific additional requirements not specifically contemplated in this proposal that are consistent with their respective interests in facilitating capital formation and protecting their resident investors in intrastate securities offerings within their jurisdiction.

If we were to adopt a rule in substantially the form proposed today, we believe that states that currently have statutes and/or rules that require compliance with Securities Act Section 3(a)(11) and Rule 147 would need to amend their provisions in order for issuers to fully avail themselves of the new rule.

We further believe that, in connection with any such amendment to their statutes and/or rules, states could consider whether any additional requirements should be adopted at the state level to regulate local offerings within their jurisdiction and provide additional investor protections.

States currently employ this approach to varying degrees in their respective state crowdfunding statutes.

See, e.g.,

DC Mun. Regs. tit. 26-B, § 250 (2014) (escrow required until minimum offering amount satisfied), Ind. Code § 6-3.1-24-14 (2014) (funding portal required).

See

discussion in Section II.B.f below for specific state law requirements for reliance on the proposed exemption.

See

note 25 and related discussions in Section II.A above and Section II.B.f below.

Request for Comment

7. Should we amend Rule 147 as proposed to require an issuer to have an in-state principal place of business and satisfy at least one of four alternative requirements that demonstrate the in-state nature of the issuer's business? Why or why not?

8. As proposed, should we limit the ability of issuers that have previously conducted an intrastate offering in reliance on proposed Rule 147, but that have since changed their principal place of business, to conduct an offering in reliance on the proposed rule in a different state until all of the securities sold in a prior intrastate offering have come to rest in the state in which the previous offering took place? Why or why not? Or, would the integration provisions of proposed Rule 147(g) sufficiently prevent an issuer from conducting two intrastate offerings pursuant to proposed Rule 147 within a short period of time, such that the proposed limitation would not be necessary? Should the proposed limitation be longer (

e.g.,

12 months)? Why or why not?

9. Should we modify, as proposed, the current 80% threshold requirements of Rule 147(c)(2)(i)-(iii) to no longer require an issuer to satisfy all of the thresholds and include an alternative requirement based on the location of a majority of the issuer's employees? Why or why not? If not, should we retain the current threshold requirements for an issuer to be deemed “doing business” within a state or territory, but at lower percentage thresholds? If so, please specify the appropriate percentage thresholds. Or should we use different alternative threshold tests than under the current or proposed rules? Please explain.

10. As proposed, if we retain the threshold requirements in modified form, should issuers only be required to meet one or more of the requirements? Should they be required to meet two or more of the requirements? Please explain.

11. Do the proposed 80% threshold requirements provide sufficient guidance to issuers as to how to comply with such requirements? If not, what additional guidance, rules or revisions to the proposed rules should the Commission provide to clarify compliance with the proposed requirements?

12. Is the proposed alternative requirement that an issuer have derived at least 80% of its consolidated gross revenues in-state an appropriate indicator of in-state business activities for purposes of an issuer's eligibility for the proposed exemption? Does this alternative requirement provide sufficient clarity for issuers that would seek to comply with it? As proposed, should this requirement continue to require an issuer to calculate gross revenue on a consolidated basis? Please explain.

13. Is the proposed alternative requirement that the issuer had, at the end of its most recent semi-annual fiscal period prior to an initial offer of securities in any offering or subsequent offering pursuant to the exemption, at least 80% of its consolidated assets located in-state an appropriate indicator of in-state business activities for purposes of an issuer's eligibility for the proposed exemption? Does this alternative requirement provide sufficient clarity for issuers that would seek to comply with it? As proposed, should this requirement continue to require an issuer to calculate assets by including the assets of its subsidiaries on a consolidated basis? Please explain.

14. Is the proposed alternative requirement that the issuer intend to use and use at least 80% of the net proceeds from sales made pursuant to the exemption 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 such state or territory an appropriate indicator of in-state business activities for purposes of an issuer's eligibility for the proposed exemption? Does this alternative requirement provide sufficient clarity for issuers that would seek to comply with it? Please explain.

15. As proposed, and in addition to the proposed alternative 80% threshold requirements, should we add an alternative threshold requirement based on the location of a majority of an issuer's employees? Why or why not?

16. In addition to the requirement in proposed Rule 147(c)(1) that an issuer have a principal place of business in-state, does the proposed requirement that an issuer be able to satisfy the requirements of proposed Rule 147(c)(2) by having a majority of its employees based in such state or territory provide a sufficient basis to determine the in-state nature of the issuer's business? Why or why not? If not, what additional or alternative criteria could we add to the proposed requirement to provide a sufficient basis?

17. As proposed, should we limit availability of the exemption to those issuers that can satisfy the proposed “principal place of business” definition and at least one of the additional requirements of proposed Rule 147(c)(2) that would demonstrate the in-state nature of the issuer's business? Why or why not? Please explain.

18. Is our proposed definition of “principal place of business” appropriate? Why or why not? Would the proposed definition of “principal place of business” alone adequately establish in-state status for purposes of determining eligibility to conduct an offering pursuant to the exemption at the federal level? Are there any additional or alternative requirements that should be included in the rule to establish in-state status?

4. Additional Amendments to Rule 147

a. Reasonable Belief as to Purchaser Residency Status

Current Rule 147(d) requires that offers and sales of securities pursuant to the rule be made only to persons resident within the state or territory of which the issuer is a resident.

Regardless of the efforts an issuer takes to determine that potential investors are residents of the state in which the issuer is a resident, the exemption would be

lost for the entire offering if securities are offered or sold to one investor that was not in fact a resident of the state. We believe that this requirement in the current rule is unnecessarily restrictive and gives rise to uncertainty for issuers. We therefore believe it should be changed in the amended rule.

17 CFR 230.147(d).

Consistent with the requirements in Regulation D,

we propose to add a reasonable belief standard to the issuer's determination as to the residence of the purchaser at the time of the sale of the securities.

As proposed, an issuer would satisfy the requirement that the purchaser in the offering be a resident of the same state or territory as the issuer's principal place of business by either the existence of the fact that the purchaser is a resident of the applicable state or territory, or by establishing that the issuer had a reasonable belief that the purchaser of the securities in the offering was a resident of such state or territory.

We believe that permitting issuers to sell on the basis of a reasonable belief of a purchaser's in-state residency status will increase the utility of the exemption by providing issuers with additional certainty about the availability of the exemption.

Rule 501(a) of Regulation D includes in the definition of “accredited investor,” persons who come within the enumerated categories of the rule, or who the issuer reasonably believes come within any of such categories, at the time of sale to such person. [17 CFR 230.501(a)].

See

proposed Rule 147(d).

Id.

Consistent with our proposal to permit issuers to satisfy the purchaser residency requirement by establishing a reasonable belief that such purchasers are in-state residents, we propose to eliminate the current requirement in Rule 147 that issuers obtain a written representation from each purchaser as to his or her residence.

We believe that this requirement is unnecessary in light of the proposed reasonable belief standard. In the context of the current intrastate exemption, the Commission has previously indicated that “[t]he mere obtaining of formal representations of residence . . . should not be relied upon without more as establishing the availability of the exemption.”

Whether an issuer has formed a reasonable belief that the prospective purchaser is an in-state resident would need to be determined on the basis of all facts and circumstances. Such facts and circumstances could include, but would not be limited to, for example, a pre-existing relationship between the issuer and the prospective purchaser that provides the issuer with sufficient insight and knowledge as to the prospective purchaser's primary residence so as to enable the issuer to establish a reasonable basis to believe that the prospective purchaser is an in-state resident. An issuer may also consider other facts and circumstances establishing the residency of a prospective purchaser, such as 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 any state-issued documentation, such as a driver's license or identification card.

17 CFR 230.147(f)(1)(iii).

See

1961 Release at 3.

Additionally, we are concerned that maintaining the current requirement for an issuer to obtain a written representation from purchasers of in-state residency status may cause confusion with the proposed reasonable belief standard. Issuers, particularly smaller issuers likely to conduct intrastate offerings, may mistakenly believe that obtaining a written representation from purchasers of in-state residency status would, without more, be sufficient to establish a reasonable belief that such purchasers are in-state residents, which, as noted above, would not be the case. For these reasons, we propose to eliminate the requirement that issuers obtain a written representation from purchasers as to their in-state residency. We are, however, seeking comment on whether this requirement should be retained.

Request for Comment

19. Should we add a reasonable belief standard to the issuer's determination as to the residence of the purchaser at the time of the sale of the securities, as proposed? Why or why not?

20. Should we eliminate the requirement to obtain a written representation from the purchaser, as proposed? Why or why not? Alternatively, should we retain the requirement to obtain a written representation but supplement it with a reasonable belief standard? Why or why not? What additional benefit, if any, would be provided by supplementing the current written representation requirement with a reasonable belief standard?

21. Should the rules provide a safe harbor for determining an individual purchaser's residence, based upon certain objective criteria, such as: (1) The jurisdiction in which a person owns or leases its primary home, (2) the jurisdiction in which a person maintains certain other indicia of residence (such as a driver's license, voting registration, tax situs), or (3) the jurisdiction in which a person's principal occupation is based? Why or why not? Are there other criteria that should be used to establish such a safe harbor?

b. Residence of Entity Purchasers

The proposed amendments also would define the residence of a purchaser that is a legal entity, such as a corporation, partnership, trust or other form of business organization, as the location where, at the time of the sale, the entity has its principal place of business.

The proposed amendments define a purchaser's “principal place of business,” consistent with the proposed definition for issuer eligibility purposes, as the location in which the officers, partners, or managers of the entity primarily direct, control and coordinate the activities of the issuer.

See

proposed Rule 147(d). Under the current rule, an entity is a resident of the state or territory where the entity has its “principal office.” We have not defined “principal office.” Rule 147(c)(2)(iv) [17 CFR 230.147(c)(2)(iv)].

See

proposed Rule 147(c)(1).

Request for Comment

22. Should we define the residence of a purchaser that is a legal entity, such as a corporation, partnership, trust or other form of business organization, as the location where, at the time of the sale, the entity has its principal place of business? Why or why not? Should we define principal place of business differently for this purpose? If so, how should we define it?

23. Current Rule 147(d)(3) provides that an entity organized for the specific purpose of acquiring the securities offered pursuant to the rule is not treated as a resident of the state or territory unless all of the beneficial owners of such organization are also residents of such state or territory.

Should we revise the rule to base the test upon the location of the principal place of business of the specific purpose entity, as opposed to the residency of all of its beneficial owners? Why or why not?

17 CFR 230.147(d)(3).

c. Limitation on Resales

Under current Rule 147(e), “during the period in which securities that are part of an issue are being offered and sold by the issuer, and for a period of nine months from the date of the last sale by the issuer of such securities, all resales of any part of the issue, by any person, shall be made only to persons resident within such state or territory.”

The limitation on resales in Rule 147(e), which is also a condition that must be satisfied in order for the

issuer to be able to rely on the safe harbor,

is designed to help ensure that the securities issued in an intrastate offering have come to rest in the state of the offering before any potential redistribution out-of-state.

While this requirement may be appropriate for purposes of compliance with a safe harbor under Section 3(a)(11), we believe it is unduly restrictive

and that its application in Rule 147 can give rise to uncertainty for issuers in the offering process by conditioning the availability of the safe harbor on circumstances beyond the issuer's control. We therefore propose to amend both the substance and application of Rule 147(e).

17 CFR 230.147(e).

See

Rule 147(a), 17 CFR 230.147(a).

See

1961 Release at 3.

For example, in an offering of securities that takes an issuer one year to complete, a purchaser of securities on day one of the offering must wait twenty-one months before it is able to resell to an investor out-of-state, while the last purchaser in such offering would only be required to wait for a period of nine months before similarly being able to sell to out-of-state purchasers.

As the Commission previously noted when discussing resales pursuant to Section 3(a)(11), the requirement that the entire distribution of securities pursuant to the intrastate exemption be offered and sold to in-state residents should not be read to suggest “that securities which have actually come to rest in the hands of resident investors, such as persons purchasing without a view to further distribution or resale to non-residents, may not in due course be resold by such persons, whether directly or through dealers or brokers, to non-residents without in any way affecting the exemption.”

1961 Release, at 4.

The Commission's approach in the 1961 Release reflects the view that the determination as to when a given purchase of securities in an intrastate offering has come to rest in-state depends less on a defined period of time after the final sale by the issuer in such offering than it does on whether a resident purchaser—that seeks to resell any securities purchased in such an offering—has taken the securities “without a view to further distribution or resale to non-residents.”

In this regard, we believe that a time-based limitation on potential resales to non-residents of securities purchased in an intrastate offering that relates back to the date of the initial purchase by a resident investor from the issuer would more precisely address the concern regarding out-of-state resales.

Id.

(“[i]f the securities are resold but a short time after their acquisition to a non-resident this fact, although not conclusive, might support an inference that the original offering had not come to rest in the state . . .”). The Commission previously has taken a time-based holding period approach, for example, in Securities Act Rule 144, regarding resales of restricted securities issued in private offerings in order to help ensure that resellers of the securities are not engaged in a distribution of securities and, therefore, not considered underwriters of the securities issued under the definition of such term in Securities Act Section 2(a)(11).

For these reasons, we propose to amend the limitation on resales in Rule 147(e) to provide that “for a period of nine months from the date of the sale by the issuer of a security sold pursuant to this rule, any resale of such security by a purchaser shall be made only to persons resident within such state or territory, as determined pursuant to paragraph (d) of this rule.”

We believe that a nine-month limitation on resales by resident purchasers to non-residents would adequately ensure that the securities purchased by such residents were purchased without a view to further distribution to non-residents.

Proposed Rule 147(e).

In such circumstances, resales of securities that were initially purchased in an intrastate offering must themselves be registered or exempt from registration in any state in which such resale takes place.

Additionally, as mentioned above, the application of Rule 147(e) in the context of the Section 3(a)(11) safe harbor may give rise to uncertainty in the offering process that we propose to address in the amended rules. Currently, Rule 147(a) requires issuers to comply with all of the terms and conditions of the rule in order for an offering to come within the safe harbor.

This provision makes the safe harbor unavailable to an issuer for the entire offering if, regardless of the efforts the issuer takes to ensure that secondary sales comply with the resale limitations,

securities are sold in the secondary market before the expiration of the resale period to a person that is not in fact an in-state resident. The application of Rule 147(e) in the overall scheme of the safe harbor can therefore cause uncertainty for issuers during, and for a period of nine months after the completion of, the offering about whether the safe harbor is or continues to be available based on circumstances outside of the issuer's control.

Rule 147(a), 17 CFR 230.147(a).

See, e.g.,

Rule 147(f) (requiring legends and stop transfer instructions to the issuer's transfer agent).

See, e.g., Exempted Transactions Under the Securities Act of 1933,

at § 4:52.

See also

Section II.B.3 above, discussing related concerns regarding the uncertainty interjected into the offering process by the current 80% requirement as to the issuer's in-state use of proceeds in Rule 147(c)(2)(iii).

While we propose to maintain the resale limitations in Rule 147(e), in the modified form discussed above, we also propose to amend Rule 147(b) so that an issuer's ability to rely on Rule 147 would no longer be conditioned on a purchaser's compliance with Rule 147(e).

We believe that this proposed amendment to the application of Rule 147(e), as it relates to Rule 147(b), would increase the utility of the exemption by eliminating the uncertainty created in the offering process for issuers under the current rules. Additionally, we do not believe that eliminating this uncertainty would result in an increased risk of issuer non-compliance with the rules because, as proposed, issuers would remain subject to requirements relating to, for example, in-state sales limitations, and legend, stop transfer instructions for transfer agents, and offeree and purchaser disclosures, in order to satisfy the exemption at the federal level. In addition, issuers would continue to be subject to the antifraud and civil liability provisions of the federal securities laws, as well as state securities law requirements.

See

proposed Rule 147(b). As proposed, current Rule 147(a) would be re-designated as Rule 147(b).

Request for Comment

24. Should we amend the rule, as proposed, to impose a limitation on resales by resident purchasers to non-residents based on the date of sale by the issuer to the relevant purchaser rather than based on the date when the offering terminates? Why or why not?

25. Is the proposed nine-month period appropriate? Should it be longer or shorter? If so, what would be the appropriate amount of time (

e.g.,

six months, one year, etc.)?

26. Instead of adopting the limitation on resales proposed in Rule 147(e), should securities issued under amended Rule 147 be considered “restricted securities” under Rule 144(a)(3)?

Or is the purpose underlying the limitation on resales in Rule 147 (

i.e.,

that the securities must come to rest in-state before sales to out-of-state residents are permitted) sufficiently distinct from the purpose underlying the limitation on resales of restricted securities such that securities issued in a Rule 147 transaction should not be considered restricted securities? Why or why not?

17 CFR 230.144(a)(3).

27. As proposed, should we no longer condition an issuer's ability to satisfy Rule 147 on investor compliance with Rule 147(e)? Why or why not? Are there any risks to investors posed by the proposed revisions to Rule 147(b) that would no longer condition the

availability of the rule on an issuer's compliance with Rule 147(e)?

d. Integration

The integration safe harbor of current Rule 147(b)(2) provides that offers or sales of securities that take place either prior to the six-month period immediately preceding, or after the six-month period immediately following, any Rule 147 offering will not be integrated with any offers or sales of securities by the issuer made in reliance on the safe harbor.

For offers or sales of securities occurring within the six-month period immediately before or after any offers or sales pursuant to a Rule 147 offering, Preliminary Note 3 to the rule states that the determination of whether offers and sales of securities are deemed part of the same issue, or should be deemed “integrated,” is a question of fact that will depend on the particular circumstances.

17 CFR 230.147(b)(2);

see also

Rule 147 Adopting Release at 3.

See

17 CFR 230.147 (Preliminary Note 3). Preliminary Note 3 cites to the guidance provided in Release. No. 33-4552, at 3 (Nov. 6, 1962) [27 FR 11316 (Nov. 16, 1962)], in which the Commission describes the traditional five-factor test for integration, and explains that “any one or more of the following factors may be determinative of the question of integration:

1. are the offerings part of a single plan of financing;

2. do the offerings involve issuance of the same class of security;

3. are the offerings made at or about the same time;

4. is the same type of consideration to be received; and

5. are the offerings made for the same general purpose.”

Integration safe harbors provide issuers, particularly smaller issuers whose capital needs often change, with valuable certainty about their eligibility to comply with an exemption from Securities Act registration.

We believe that, while the existing Rule 147 safe harbor provides issuers with some certainty with respect to the integration of offers or sales of securities within the six-month period immediately preceding and following a Rule 147 offering, amended Rule 147 should reflect the Commission's most recent statements on the subject.

See

2015 Regulation A Release at Section II.B.5. (Integration).

Id.

The concept of integration has evolved since the adoption of Rule 147 in 1974,

100

particularly as it relates to the integration of potential offers and sales that occur concurrently with, or close in time with the particular exempt offering being considered.

101

We therefore propose to update the rule's integration provisions by expanding the scope of the current provision in a manner that is consistent with the Commission's most recently adopted integration safe harbor, Rule 251(c) of Regulation A.

102

We believe that this approach to integration would not only benefit issuers, particularly smaller issuers, by providing valuable certainty as to the availability of an exemption for a given offering, but that such issuers would also benefit from increased consistency in the application of the integration doctrine among the exemptive rules available to smaller issuers.

103

100

At the time the Commission adopted Rule 147, the Commission generally deemed intrastate offerings to be “integrated” with those registered or private offerings of the same class of securities made by the issuer at or about the same time. Paragraph (b) of Rule 147 was intended to create greater certainty and to eliminate in certain situations the need for a case-by-case determination of when certain intrastate offerings should be integrated with other offerings, such as those registered under the Act or made pursuant to the exemption provided by Section 3 or 4(a)(2) of the Act.

See

Rule 147 Adopting Release at 3.

101

See e.g.,

Rule 251(c) of Regulation A [17 CFR 230.251(c)]; 2015 Regulation A Release, at Section II.B.5.; SEC Rel. No. 33-8828, Section II.C.1 (Aug. 3, 2007) [72 FR 45116 (Aug. 10, 2007)]; Rule 701 [17 CFR 230.701].

102

See

17 CFR 230.251(c). Rule 251(c) was originally adopted as an integration safe harbor in 1992.

See

SEC Rel. No. 33-6949 (July 30, 1992) [57 FR 36442 (Aug. 13, 1992)]. The 2015 Regulation A Release did not substantively change Rule 251(c), except for the addition to the safe harbor list of subsequent offers or sales of securities issued pursuant to Securities Act Section 4(a)(6).

See

Rule 251(c)(2)(vi).

103

See

Rule 251(c) of Regulation A [17 CFR 230.251(c)]; Rule 701 [17 CFR 230.701].

The proposed Rule 147 safe harbor would include any prior offers or sales of securities by the issuer, as well as certain subsequent offers or sales of securities by the issuer occurring within six months after the completion of an offering exempted by Rule 147. As proposed, offers and sales made pursuant to Rule 147 would not be integrated with:

• Prior offers or sales of securities; or

• Subsequent offers or sales of securities that are:

• Registered under the Act, except as provided in Rule 147(h);

• Exempt from registration under Regulation A (17 CFR 230.251

et seq.

);

• Exempt from registration under Rule 701 (17 CFR 230.701);

• Made pursuant to an employee benefit plan;

• Exempt from registration under Regulation S (17 CFR 230.901 through 230.905);

• Exempt from registration under section 4(a)(6) of the Act (15 U.S.C. 77d(a)(6)); or

• Made more than six months after the completion of an offering conducted pursuant to this rule.

104

See

proposed Rule 147(g).

As with Rule 251(c) of Regulation A, the proposed safe harbor from integration provided by proposed Rule 147(g) would expressly provide that any offer or sale made in reliance on the rule would not be integrated with any other offer or sale made either before the commencement of, or more than six months after, the completion of the Rule 147 offering. In other words, for transactions that fall within the scope of the safe harbor, issuers would not have to conduct an independent integration analysis of the terms of any offering being conducted under the provisions of another rule-based exemption in order to determine whether the two offerings would be treated as one for purposes of qualifying for either exemption. This bright-line rule would assist issuers, particularly smaller issuers, in analyzing certain transactions, but would not address the issue of potential offers or sales that occur concurrently with, or close in time after, a Rule 147 offering.

Consistent with the current integration guidance in Preliminary Note 3 to Rule 147, our proposed amendments would clarify that, if the safe harbor does not apply, whether subsequent offers and sales of securities would be integrated with any securities offered or sold pursuant to this rule would depend on the particular facts and circumstances. There would be no presumption that offerings outside the integration safe harbors should be integrated.

An offering made in reliance on Rule 147 would not be integrated with another exempt offering made concurrently by the issuer, provided that each offering complies with the requirements of the exemption that is being relied upon for the particular offering.

105

For example, an issuer conducting a concurrent exempt offering for which general solicitation is not permitted would need to be satisfied that purchasers in that offering were not solicited by means of the offering made in reliance on amended Rule 147.

106

Alternatively, an issuer conducting a concurrent exempt offering for which general solicitation is permitted would need to comply with the legend and disclosure requirements of proposed Rule 147(f).

107

If the concurrent exempt offering for which general solicitation is permitted imposes additional restrictions on the general solicitation, such as, for example, the limitations imposed on advertising pursuant to Rule 204 of Regulation Crowdfunding, the issuer's general solicitation would not be able to go beyond the more restrictive requirements. Also, an issuer conducting a concurrent Rule 506(c) offering could not include in its Rule 506(c) general solicitation materials an advertisement of a concurrent Rule 147 offering, unless that advertisement also included the necessary disclosure for, and otherwise complied with, Rule 147(f).

108

105

We adopted a similar approach to integration in the context of offerings under Regulation A.

See

2015 Regulation A Release at Section II.B.5.

106

For a concurrent offering under Rule 506(b), an issuer would need to conclude that purchasers in the Rule 506(b) offering were not solicited by means of a general solicitation under amended Rule 147. For example, the issuer may have had a preexisting substantive relationship with such purchasers. Otherwise, the solicitation conducted in connection with the Rule 147 offering may preclude reliance on Rule 506(b).

See also

SEC Rel.

No. 33-8828 (Aug. 3, 2007) [72 FR 45116 (Aug. 10, 2007)].

107

See

proposed Rule 147(f).

108

See id.; see also

discussion in Section II.B.1 above.

Consistent with our approach to integration in Rule 251(c), we are proposing that offers or sales made in reliance on Rule 147 should not be integrated with subsequent offers or sales that are registered under the Securities Act, except as provided under our proposed paragraph (h) to Rule 147, or qualified by the Commission pursuant to Regulation A. While prior offers or sales of securities made in reliance on Rule 147 are currently not integrated with subsequent Regulation A offerings,

109

we believe that expressly adding subsequent offers or sales of securities made in reliance on Regulation A to the Rule 147 integration safe harbor would provide issuers with clarity and additional certainty about their eligibility to conduct a Rule 147 offering before commencing an offering pursuant to Regulation A. Additionally, we believe that issuers that seek to register offerings under the Securities Act should be encouraged to do so without the risk that prior offers or sales pursuant to Rule 147 could be integrated with such offerings. We are mindful, however, of the risk that offers made pursuant to Rule 147 shortly before a registration statement is filed could be viewed as conditioning the market for that registered offering. Accordingly, proposed Rule 147 would address this risk by excluding from the safe harbor any such offer made to persons other than qualified institutional buyers and institutional accredited investors within the 30-day period before a registration statement is filed with the Commission.

110

109

See

Rule 251(c)(1) of Regulation A, 17 CFR 230.251(c)(1).

110

In such circumstances, whether an offer made within the thirty-day period before the filing of a registration statement would constitute an impermissible offer for purpose of Securities Act Section 5(c) would be based on the facts and circumstances of such offer.

Additionally, subsequent offers or sales pursuant to Securities Act Rule 701 or an employee benefit plan would be included in the proposed Rule 147(g) integration safe harbor. While these types of offerings to employees and to persons that provide similar functions for the issuer may provide the issuer with capital, they are primarily compensatory in nature and benefit the issuer and its employees in a manner that is distinct from other types of securities offerings, such as by aligning employee and company interests. For these reasons, we believe that these types of compensatory employee benefit offerings should be included in the safe harbor, if they occur subsequent to a Rule 147 offering.

We also propose to include subsequent offers or sales made pursuant to Regulation S

111

in proposed Rule 147(g), as this exemption is only available for offers and sales of securities that are made outside the United States.

112

Given their offshore character, we do not believe that offerings conducted pursuant to Regulation S should be integrated with previous Rule 147 intrastate offerings.

111

17 CFR 230.900 through 905.

112

See

Preliminary Note 6 of Regulation S.

Additionally, we propose to include in the list of transactions covered by the Rule 147 safe harbor subsequent offers or sales of securities made pursuant to rules we are concurrently adopting today in a companion release for securities-based crowdfunding transactions under Title III of the JOBS Act.

113

Given the unique capital formation method available to issuers and investors in the crowdfunding rules we are adopting and the small dollar amounts involved, we do not propose to integrate offers or sales of such securities issued in federal crowdfunding transactions that occur subsequent to the completion of any offering conducted pursuant to Rule 147.

114

113

See

Regulation Crowdfunding Adopting Release.

114

See id.

An issuer contemplating a securities-based crowdfunding transaction pursuant to Section 4(a)(6) subsequent to any offers or sales conducted in reliance on Rule 147, as proposed to be amended, should look to the rules for securities-based crowdfunding transactions to ensure compliance with the advertising provisions of the exemption.

Request for Comment

28. As proposed, should we include any prior offers or sales of securities made by the issuer before the start of a Rule 147 offering in the Rule 147(g) integration safe harbor? Why or why not?

29. Should the Rule 147(g) integration safe harbor include, as proposed, the list of subsequent offers or sales of securities by the issuer that may be made within six months after the termination of the Rule 147 offering without being subject to integration? Why or why not?

30. Should we expand the list of subsequent offers or sales of securities by the issuer that may be made within six months after the termination of the Rule 147 offering without being subject to integration to include other types of offers and sales of securities by the issuer? Alternatively, should we narrow the list of subsequent offers or sales of securities included in the integration safe harbor? Why or why not? Please explain.

31. Should we include language in the rule text expressly stating that an offering made in reliance on Rule 147 would not be integrated with another exempt offering made concurrently by the issuer, provided that each offering complies with the requirements of the exemption that is being relied upon for the particular offering? Why or why not?

32. Should we include a new paragraph (h) to Rule 147, as proposed, concerning offers to investors other than qualified institutional investors and institutional accredited investors within 30 calendar days prior to a registered offering? Why or why not?

e. Other Considerations

Currently, Rule 147(f)(3) requires issuers, in connection with any offers or sales pursuant to the rule, to disclose, in writing, the limitations on resale contained in Rule 147(e)

115

and the requirements for stop transfer instructions for the issuer's transfer agent set forth in Rule 147(f)(1)(i)-(ii).

116

The same requirements apply in connection with the issuance of new certificates for any of the securities that are part of the same issue that are presented for transfer during the period specified in Rule 147(e). We believe that these disclosure requirements provide important protections to investors and issuers alike by helping to ensure that investors understand the limitations and restrictions associated with a purchase of securities pursuant to the rule.

Currently, however, the rule does not specifically identify to whom or when such disclosure should be provided.

117

We propose to retain the substance of these requirements, in modified form, in the amended rules, while clarifying the application of the disclosure requirements.

118

115

17 CFR 230.147(e).

See also

discussion in Section II.B.4.c above.

116

17 CFR 230.147(f)(1)(i)-(ii).

117

See

17 CFR 230.147(f)(3).

118

Proposed Rule 147(f)(1)(i) would retain the existing legend requirement for stock certificates but specify the exact language to be provided.

Specifically, we propose to clarify in the text of the amended rule the specific language of the required disclosure and that such disclosure should be prominently provided to each offeree and purchaser at the time any offer or sale is made by the issuer to such person pursuant to the exemption.

119

The rule, however, would no longer require that such disclosure be made in writing in all instances. We propose to amend the current requirement to provide issuers with flexibility by permitting them to provide the required disclosure to offerees in the same manner in which an offer is communicated,

120

while continuing to require written disclosure to all purchasers. We believe that this approach would reduce the compliance obligations of issuers, particularly smaller companies likely to conduct offerings pursuant to the exemption, by no longer requiring disclosure to offerees in writing when offers are communicated orally. As the proposed requirement would apply to every offer of securities by the issuer pursuant to the exemption, including subsequent offers to the same offeree, and in light of the continuing requirement to provide written disclosure to all purchasers of the securities, we do not believe that the easing of the current requirement as it relates to oral offers would result in an increase in risks to investors.

119

Currently, Rule 147(f)(3) requires issuers to disclose the required information “in connection with” any offers or sales of securities but does not specify the time at which such disclosure must be provided to offerees or purchasers. Proposed Rule 147(f)(3) would require issuers to provide the required disclosure to offerees and purchasers at the time of any offers or sales of securities, thereby eliminating the risk that an issuer could, for example, make an offer of securities at one point in time and provide the required disclosures at a later date.

See

proposed Rule 147(f)(3).

120

This proposed approach would be consistent with the treatment of the “testing the waters” legend requirements in Rule 255(b) of Regulation A.

See

17 CFR 230.255(b).

As noted above, we propose to retain the substance of the disclosure requirements of current Rule 147(f)(3), in modified form, in the amended rules. As proposed, Rule 147(f)(3) would require issuers to make specified disclosures to offerees and purchasers about the limitations on resale contained in proposed Rule 147(e) and the legend requirement of proposed Rule 147(f)(1)(i), but would no longer require issuers to disclose to offerees and purchasers the stop transfer instructions provided by an issuer to its transfer agent

121

and the provisions of Rule 147(f)(2) regarding the issuance of new certificates during the Rule 147(e) resale period.

122

Although issuers would have to continue to comply with these requirements,

123

we believe that requiring issuers to disclose that information to offerees and purchasers does not add anything to the existing disclosures under Rules 147(e) and (f)(1), and we therefore propose to eliminate this disclosure requirement from the rule.

124

121

Rule 147(f)(1)(ii), 17 CFR 230.147(f)(1)(ii).

122

Rule 147(f)(2), 17 CFR 230.147(f)(2). Additionally, as discussed in Section II.B.1 above, we propose to require issuers in offerings conducted pursuant to Rule 147 to disclose to each offeree in the manner in which any offer is communicated and to each purchaser of a security in writing that sales will be made only to residents of the same state or territory as the issuer.

See

proposed Rule 147(f)(3).

123

See

proposed Rule 147(f)(1)(ii) and proposed Rule 147(f)(2).

124

See

proposed Rule 147(f)(3).

Request for Comment

33. As proposed, should we modify the requirements of current Rule 147(f)(3) to require issuers to disclose to offerees and purchasers the resale limitations of Rule 147(e) and the legend requirement of Rule 147(f)(1)(i) at the time any such offer or sale is made, but no longer require an issuer to disclose to such persons the stop transfer instructions to its transfer agent, if any, and the provisions of Rule 147(f)(2) regarding the issuance of new certificates during the Rule 147(e) resale period?

125

Or should we preserve the existing rule requirements? Why or why not?

125

See also

Request for Comment 3 above regarding proposed Rule 147(f)(3) and the requirement that issuers disclose to offerees and purchasers that sales will be made only to residents of the same state or territory as the issuer.

34. As proposed, should we permit the disclosures required by Rule 147(f)(3) to be provided orally? Should we instead require these disclosures to be made in writing, as under the current rule? Alternatively, should we no longer require these disclosures to be provided to offerees, while continuing to require that they be provided to purchasers? Or, prior to making any sales, should we require issuers that only make oral offers to provide, in addition to the required oral disclosure, written disclosure to offerees a reasonable time before any sales are made to such persons? Why or why not?

35. Should the amendments to Rule 147 include a substantial compliance provision, similar to the provision in Rule 508 of Regulation D,

126

or otherwise account for insignificant deviations in a manner that is similar to Rule 260 of Regulation A?

127

In light of the proposal to permit issuers to sell securities pursuant to Rule 147 on the basis of a reasonable belief as to a purchaser's residency status, what additional situations, if any, could a substantial compliance or insignificant deviation rule address? Please explain.

126

17 CFR 230.508.

127

17 CFR 230.260.

36. Should we amend Rule 147 to make the exemption available for secondary distributions? Why or why not?

f. State Law Requirements

We believe the proposed amendments to Rule 147 would facilitate capital formation by smaller companies seeking to raise capital in-state by increasing the utility of the rule while maintaining appropriate protections for resident investors. Consistent with the policy underlying the adoption of objective standards for determining compliance with Section 3(a)(11) in current Rule 147, we believe that the protections afforded to resident investors in an intrastate offering primarily flow from the requirements of state securities law.

128

For example, as with the federal securities laws, states generally require an issuer to register an offering with appropriate state authorities when offers or sales of securities are made to their residents, unless the state has adopted, by rule or statute, an exemption from registration.

128

See

note 14 above.

As discussed above,

129

in recent years a number of states have adopted and/or enacted provisions in their rules or statutes that generally require an issuer, in addition to complying with various state-specific requirements to qualify for an exemption from registration,

130

to comply with Section 3(a)(11) and Rule 147.

131

Of the states that have adopted and/or enacted provisions that require an issuer to comply with Rule 147, either alone or in conjunction with Section 3(a)(11), no state has adopted and/or enacted a provision with an aggregate offering amount that exceeds $4 million.

132

Additionally, almost all

of these states have adopted provisions that impose investment limitations on investors.

129

See

Section II.A above.

130

See

note 24 above.

131

See

note 25 above.

132

See

http://www.nasaa.org/industry-resources/corporation-finance/instrastate-crowdfunding-

resource-center/intrastate-crowdfunding-directory/

. Illinois is the only state with a crowdfunding provision allowing for a maximum aggregate offering amount up to $4 million in a twelve-month period. All other states that have adopted some form of a state-based crowdfunding provision limit the aggregate offering amount to between $1 million and $2.5 million.

See

Illinois House Bill 3429, § 4.T. (2015),

available at: https://legiscan.com/IL/text/HB3429/id/1257029

Rule 147 does not currently have an offering amount limitation and does not currently limit the amount of securities an investor can purchase in an offering pursuant to the rule. Preliminarily, however, we believe that, in light of the proposed changes to Rule 147, which, as noted above, would no longer be a safe harbor for compliance with Section 3(a)(11), a maximum offering amount limitation and investor investment limitations in the rule would provide investors with additional protection and would be consistent with existing state law crowdfunding provisions.

133

As such, we are proposing to limit the availability of Rule 147, as proposed to be amended,

134

to issuers that have registered an offering in the state in which all of the purchasers are resident or that conduct the offering pursuant to an exemption from state law registration in such state that limits the amount of securities an issuer may sell pursuant to such exemption to no more than $5 million in a twelve-month period and that limits the amount of securities an investor can purchase in any such offering.

135

We are particularly interested in getting feedback from the states and market participants, however, and are seeking comment on this issue, including whether additional or alternative requirements should be imposed on offerings conducted pursuant to the proposed rule at the federal level.

133

States may have non-crowdfunding exemptions for larger offerings and issuers seeking to rely on any such state exemption could continue to conduct the offering pursuant to Section 3(a)(11) or find an alternate federal exemption.

See, e.g.,

Section 202(14) of the Uniform Securities Act of 2002 (exempting transactions to not more than 25 purchasers, other than institutional investors and federal covered investment advisers, that do not utilize a general solicitation or general advertising).

134

See

discussions in Section II.B.1 through II.B.2.e above for additional limitations and requirements that would apply to offerings conducted pursuant to proposed Rule 147.

135

See

proposed Rule 147(a).

State crowdfunding laws allow, and in some states mandate, the use of an intermediary. The intermediary may be a federally registered broker-dealer, or an intrastate broker-dealer that is exempt from federal registration requirements. Section 15(a)(1) of the Exchange Act provides an exemption for a broker-dealer whose business is “exclusively intrastate and who does not make use of any facility of a national securities exchange.” In the state crowdfunding context, some intermediaries may be small broker-dealers seeking to only operate intrastate. To the extent that information posted on the Internet in connection with a state crowdfunding offering by an intermediary would be considered an interstate offer of securities, such business would be ineligible for the intrastate broker-dealer exemption. We are seeking comment on these issues, including whether the proposed rule should require issuers to use the services of any such intermediary at the federal level.

Request for Comment

37. Should we limit the availability of Rule 147, as proposed to be amended, to issuers that have registered an offering in the state in which all of the purchasers are resident or that conduct the offering pursuant to an exemption from state law registration in such state that limits the amount of securities an issuer may sell pursuant to such exemption to no more than $5 million in a twelve-month period and the amount of securities an investor can purchase in any such offering? Why or why not?

38. Would the proposed requirements that an issuer conduct the offering pursuant to an exemption from state law registration in such state that limits the amount of securities an issuer may sell pursuant to such exemption to no more than $5 million in a twelvemonth period and that limits the amount of securities an investor can purchase in any such offering provide adequate investor protections at the federal level? Why or why not? Or, are the proposed maximum offering amount and/or investor investment limitations unnecessary at the federal level, in light of the local character of the intrastate offerings that would be conducted pursuant to the proposed rule and the presence of state oversight in such offerings? Please explain.

39. Should Rule 147, as proposed to be amended, specify the maximum offering amount limitation that must be included in a state exemption from registration? Why or why not? Should the proposed $5 million maximum offering amount limitation be adopted at a lower or higher dollar amount? If so, what amount and why? If not, why not?

40. Should Rule 147, as proposed to be amended, itself specify a maximum offering amount limitation for purposes of compliance with the proposed rule at the federal level and, in a change from the proposed rule, no longer require that a maximum offering amount limitation be included in any exemptive provision adopted at the state level? What benefit, if any, is derived from the proposed inclusion of a specified maximum offering amount limitation of not more than $5 million of securities in a twelve-month period at both the state and federal level? Please explain.

41. Should the proposed requirement that a state law exemption from registration impose investment limitations on investors, when the offering is conducted pursuant to proposed Rule 147 at the federal level, include specific maximum dollar amounts that an investor must be subject to or other specific criteria, such as criteria based on an investor's net worth and/or annual income? Why or why not? Please explain.

42. Should Rule 147, as proposed to be amended, include the proposed requirement that a state law exemption include investment limitations in order for the issuer to be able to conduct an intrastate offering pursuant to Rule 147, as proposed to be amended? Why or why not? Please explain.

43. Should we limit the application of the proposed requirement that a state law exemption include investment limitations, in order for the issuer to be able to conduct an intrastate offering pursuant to Rule 147, as proposed to be amended, to non-accredited investors only, while not requiring an accredited investor, as that term is defined in Rule 501(a) of Regulation D,

136

to be subject to an investment limitation? Why or why not?

136

See

17 CFR 230.501(a).

44. Should the provisions at the federal level allow states to have greater flexibility in drafting exemptive provisions that in their judgment provide sufficient investor protections at the state level, whether or not such state law provisions include a maximum offering amount limitation or investor investment limitations? Why or why not?

45. As an additional or alternative requirement to the current requirements in proposed Rule 147, should we limit the availability of the exemption to issuers that have registered an offering in the state in which all of the purchasers are resident or that conduct the offering pursuant to an exemption from state law registration in such state that requires the use of an intermediary? Why or why not?

46. Should we provide guidance about the operation of the intrastate broker-dealer exemption under the

Exchange Act, including with respect to the use of the Internet in connection with offers and sales of securities? Why or why not? Should we permit intrastate broker-dealers to use the Internet to make interstate offers so long as all sales are limited to intrastate purchasers? Why or why not?

47. Should we adopt any minimum disclosure or delivery requirements for offerings that are conducted pursuant to the proposed rule that are offered pursuant to an exemption from state registration, such as narrative and/or financial statement disclosure and delivery requirements similar to the requirements of Rule 502(b) of Regulation D?

137

Should any potential disclosure or delivery requirements be limited to sales only to non-accredited investors? Why or why not?

137

17 CFR 230.502(b).

48. Whether we adopt the proposed revisions to Rule 147 as amended Rule 147 or as a new rule, should we require a notice filing with the exemption? For example, if we repeal Rule 505 and adopt the exemption as new Rule 505, should we require issuers that conduct offerings pursuant to the new exemption to file offering related information with the Commission on a Form D? Why or why not? Should we instead adopt a new form to file offering related information that is similar to the information disclosed on Form D? If so, what information should that new form elicit?

C. Preservation of Section 3(a)(11) Statutory Intrastate Offering Exemption

The proposed amendments, if adopted, would not alter the fact that the Section 3(a)(11) statutory exemption continues to be a capital raising alternative for issuers with local operations seeking local financing. We believe, however, that it is possible that issuers will find it easier to satisfy the requirements of proposed Rule 147 than Section 3(a)(11).

The proposed amendments to Rule 147 would operate prospectively only. If adopted as proposed, Rule 147 would no longer be a safe harbor for conducting a valid intrastate exempt offering under Section 3(a)(11). An issuer that attempts to comply with amended Rule 147, but fails to do so, may claim any other exemption that is available. Failure to satisfy the requirements of amended Rule 147, however, would also likely result in a failure to satisfy the statutory requirements for the intrastate offering exemption under Section 3(a)(11) since the requirements of Section 3(a)(11) are more restrictive.

We recognize that none of the existing state crowdfunding provisions contemplate reliance upon the proposed amendments to Rule 147 and that states that have crowdfunding provisions based on compliance with Section 3(a)(11), or compliance with both Section 3(a)(11) and Rule 147, would need to amend these provisions in order for issuers to take full advantage of these amendments.

138

States that have adopted crowdfunding provisions based on current Rule 147 may need to consider the import of any final rule amendments at the federal level. We are seeking comment on how the amendments to Rule 147 would impact these provisions and whether it would be better if the proposed amendments to Rule 147 were adopted as a new exemption from registration, rather than as amendments to current Rule 147.

138

See

note 25 and related discussion in Section II.A above.

Request for Comment

49. Should we leave existing Rule 147 in place and unchanged as a safe harbor for compliance with Section 3(a)(11) while adopting the proposed revisions to Rule 147 as a new rule instead? For example, if we were to repeal Rule 505 of Regulation D,

139

should the Commission adopt the proposed revisions to Rule 147 as new Rule 505 of Regulation D? If so, are there any additional changes to the proposed rule that should be made if it were to be adopted instead as a new rule? If so, please explain what changes are needed and why.

139

17 CFR 230.505.

See

discussion in Section III.C below.

50. States that have adopted crowdfunding provisions based on current Rule 147 may need to consider the import of any final rule amendments at the federal level. How would the proposed amendments to Rule 147 impact these provisions? Would the Commission's rulemaking process, which in this case provides for a 60-day comment period, and the additional time before any final rules potentially would be adopted and thereafter become effective, provide sufficient time for states to consider and address the impact of the proposed amendments on their state law provisions? Why or why not? Please explain.

III. Proposed Amendments to Rules 504 and 505 of Regulation D

A. Overview of Rules 504 and 505

Rule 504

140

of Regulation D provides issuers with an exemption from registration for offers and sales of up to $1 million of securities in a twelve-month period, provided that the issuer is not:

140

17 CFR 230.504.

• Subject to reporting pursuant to Section 13 or 15(d) of the Exchange Act;

141

17 CFR 230.504(a)(1).

• an investment company;

142

17 CFR 230.504(a)(2). Investment companies are companies that are registered or required to be registered under the Investment Company Act of 1940. 15 U.S.C. 80a-1

et seq.

• a development stage company that either has no specific business plan or purpose or that has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies (“blank check company”).

143

17 CFR 230.504(a)(3).

Additionally, Rule 504 imposes certain conditions, including limitations on the use of general solicitation or general advertising in the offering and the restricted status of securities issued pursuant to the exemption, with limited exceptions in this regard for offers and sales made:

• Exclusively in one or more states that provide for the registration of the securities, and require the public filing and delivery to investors of a substantive disclosure document before sale that are made in accordance with state law requirements;

• in one or more states that have no provision for the registration of the securities or the public filing or delivery of a disclosure document before sale, if the securities have been registered in at least one state that provides for such registration, public filing and delivery before sale, offers and sales are made in that state in accordance with such provisions, and the disclosure document is delivered before sale to all purchasers (including those in the states that have no such procedure); or

• exclusively according to state law exemptions from registration that permit general solicitation and general advertising so long as sales are made only to “accredited investors” as defined in Rule 501(a) of Regulation D.

144

17 CFR 230.504(b)(1).

Rule 504, together with Rules 505 and 506, comprise the Securities Act exemptions of Regulation D.

145

Adopted

by the Commission in 1982,

146

Regulation D replaced three previously existing exemptions with a cohesive set of rules designed to:

145

17 CFR 230.500 through 508. Rules 501 through 503 contain definitions, conditions, and other provisions that apply generally throughout Regulation D. Rules 504, 505 and 506(c) are exemptions from registration under the Securities Act, while Rule 506(b) is a “safe harbor” for compliance for the non-public offering exemption in Section 4(a)(2) of the Securities Act. Rule 507 disqualifies issuers from relying on Regulation D, under certain circumstances, for failure to file a

Form D notice. Rule 508 provides a safe harbor for certain insignificant deviations from a term, condition, or requirement of Regulation D.

146

See

SEC Rel. No. 33-6389 (Mar. 8, 1982) [47 FR 11251 (Mar. 16, 1982)].

• Simplify existing rules and regulations;

• eliminate any unnecessary restrictions that those rules and regulations placed on issuers, particularly small businesses; and

• achieve uniformity between state and federal exemptions in order to facilitate capital formation consistent with the protection of investors.

147

Id.

at 2.

Regulation D offerings are exempt from the registration requirements of the Securities Act. Offerings conducted pursuant to Rule 504 or Rule 505, however, must be registered in each state in which they are offered or sold unless an exemption to state registration is available under state securities laws.

148

The vast majority of states require registration of Rule 504 offerings.

149

One state, however, recently adopted a form of state-based crowdfunding that permits the use of general solicitation, but still exempts the issuances of securities from state registration where, in addition to following various state-specific requirements to qualify for the exemption, an issuer also complies with Rule 504 of Regulation D.

150

Additionally, offerings conducted pursuant to Rules 505 and 506 are subject to bad actor disqualification provisions, while offerings conducted pursuant to Rule 504 are not subject to such provisions.

151

148

Section 18(b)(4)(D) of the Securities Act provides “covered security” status to all securities sold in transactions exempt under Commission rules promulgated under Section 4(a)(2), which includes Rule 506 of Regulation D. Covered security status under Section 18 provides for the preemption of state securities laws registration and qualification requirements for offerings of such securities. In comparison, securities issued pursuant to either Rules 504 or 505 are not covered securities as these two exemptions are adopted pursuant to the Commission's authority under Section 3(b)(1) of the Securities Act.

149

New York and the District of Columbia do not require registration of Rule 504 offerings.

See

SEC Rel. No. 33-7644, 2 n.12 (Feb. 25, 1999) [64 FR 11090 (Mar. 8, 1999)] (“Seed Capital Release”).

150

Of the 29 states and the District of Columbia that have adopted intrastate crowdfunding provisions, only Maine allows an issuer to rely upon Rule 504 of Regulation D.

See

Me. Rev. Stat. tit. 32, § 16304(6-A)(D) (2013).

151

See

Rule 505(b)(2)(iii), 17 CFR 230.505(b)(2)(iii), and Rule 506(d), 17 CFR 230.506(d), of Regulation D.

B. Proposed Amendments to Rules 504 and 505

We propose to increase the aggregate amount of securities that may be offered and sold in any twelve-month period pursuant to Rule 504 from $1 million to $5 million and to disqualify certain bad actors from participation in Rule 504 offerings. We believe these amendments to Rule 504 will facilitate capital formation, result in increased efficiencies (and potentially lower costs) to issuers and increase investor protection. We also understand that state securities regulators have sought to expedite the state securities law registration process by developing coordinated review programs.

152

We believe these amendments could give state securities regulators greater flexibility to develop regional coordinated review programs that would rely on Rule 504 at the federal level by increasing the maximum amount of capital that can be raised by issuers under such programs and by providing states with assurance that certain bad actors would be excluded from the exemptive regime at the federal level. We further propose a technical amendment to Rules 504 and 505 to account for the re-designation of Securities Act Section 3(b) as Section 3(b)(1) that occurred as a result of the enactment of the JOBS Act in 2012.

153

Additionally, in order to account for the proposed increase in the Rule 504 aggregate offering amount limitation, we propose technical amendments to the notes to Rule 504(b)(2) that would update the current illustrations in the rule regarding how the aggregate offering limitation is calculated in the event that an issuer sells securities pursuant to Rule 504 and Rule 505 within the same twelve-month period.

154

We also are seeking comment on whether any additional changes to Rule 504 should be made at this time that would further increase issuer capital formation options without any increase in risks to investors.

152

For example, in order to address the potential inefficiencies associated with state law review and qualification of Regulation A offering statements, as highlighted by the GAO Report to Congress required under Title IV of the JOBS Act, state securities regulators and NASAA implemented a streamlined coordinated review program for Regulation A offerings that was designed to address many of the perceived concerns of market participants.

See

Factors that May Affect Trends in Regulation A Offerings, GAO-12-839 (July 2012)

available at:

http://www.gao.gov/assets/600/592113.pdf

(“GAO Report”).

See also

note 11 above for a brief description of state coordinated review programs.

153

Pub. L. 112-106, 126 Stat. 306.

154

See

Notes 1 and 2 to Rule 504(b)(2). [17 CFR 230.504(b)(2)].

In light of the proposed changes to Rule 504, we also seek comment on the continued utility of Rule 505 as an exemption from registration. Rule 505 is used far less frequently than Rule 506, and an increase in the Rule 504 offering ceiling from $1 million to $5 million could diminish its utility.

The proposed amendments to Rule 504 would raise the aggregate amount of securities an issuer may offer and sell in any twelve-month period from $1 million to $5 million, which is the maximum statutorily allowed under Section 3(b)(1).

155

The Commission has not raised the 12-month aggregate offering limit in Rule 504 since 1988, when the Commission increased the original Rule 504 offering limit of $500,000 to $1 million.

156

We believe that raising the aggregate offering limitation to the maximum statutorily allowed under Section 3(b)(1) would facilitate issuers' ability to raise capital. The proposed offering limitation would increase the flexibility of state securities regulators to set their own state offering limitations and to consider whether any additional requirements should be implemented at the state level. In addition, it would facilitate state efforts to increase the efficiencies associated with the registration of securities offerings in multiple jurisdictions through regional coordinated review programs.

155

Rules 504 and 505 were adopted pursuant to the Commission's small issues exemptive authority under Section 3(b)(1) of the Securities Act, which gives the Commission authority to adopt an exemption for offerings not exceeding $5 million where the Commission believes registration under the Securities Act is not necessary by reason of the small amount involved or the limited character of the public offering.

156

See

SEC Rel. No. 33-6758 (Mar. 3, 1988) [53 FR 7870 (Mar. 10, 1988)].

See also

discussion in Section V below.

Much like the deference that Congress provided to the states in the intrastate offering exemption under Section 3(a)(11), in adopting Rule 504, the Commission placed substantial reliance upon state securities laws and regulations.

157

As the Commission has stated previously, we believe that the size and local nature of the smaller offerings that are typically conducted by smaller issuers pursuant to Rule 504 does not warrant imposing extensive regulation at the federal level.

158

157

Seed Capital Release at 1;

see also

SEC Rel. No. 33-6389 (Mar. 8, 1982) [47 FR 11251 (Mar. 16, 1982)].

158

Seed Capital Release, at 2.

The purpose of Rule 504 is to aid small businesses raising “seed capital.”

159

Rule 504 permits eligible

issuers

160

to offer and sell securities to an unlimited number of persons without regard to their sophistication, wealth or experience and, in certain circumstances, without delivery of any specified information.

161

These offerings are, however, subject to federal antifraud provisions and civil liability provisions.

162

Securities issued under the exemption are restricted,

163

and the offering is subject to the prohibition against general solicitation and general advertising,

164

unless the rule's specified conditions permitting the issuance of freely tradable securities and a public offering are met.

165

159

Id.

“Seed capital” refers to the initial investments that are typically made in newly formed startup companies in order to assist such

companies with the beginning of their operations. These investments are usually relatively small in total dollar amounts.

160

See

note 143 and related text in the discussion above.

161

Rule 504 permits sales to an unlimited number of accredited and non-accredited investors.

See

note 105 and related text in the discussion above.

162

Seed Capital Release, at 2. 15 U.S.C. 77

(a)(2).

163

See

Rule 504(b)(1) [17 CFR 230.504(b)(1)]; Rule 144(a)(3)(ii) [17 CFR 230.144(a)(3)(ii)].

164

See

Rule 504(b)(1) [17 CFR 230.504(b)(1)]; Rule 502(c) [17 CFR 230.502(c)].

165

See

note 144 and related text in the discussion above.

Similar to the rationale underlying our proposal to ease the eligibility requirements for issuers under Rule 147, increasing the Rule 504 offering limit to $5 million would create a larger federal exemptive framework for state regulators to tailor and coordinate among themselves state specific requirements for smaller offerings by smaller issuers that are consistent with their respective sovereign interests in facilitating capital formation and the protection of investors in intrastate and regional interstate securities offerings. Increasing the offering limit from $1 million to $5 million may also make the Rule 504 exemption more attractive to start-up companies seeking capital financing, as compared to alternative financing methods, as the legal and accounting expenses of the offering may be offset by the larger gross proceeds of the offering to the issuer.

In conjunction with our proposed increase to the Rule 504 aggregate offering amount limitation, we are proposing to adopt provisions that would disqualify certain bad actors from participation in offerings conducted pursuant to the exemption.

166

We believe that the proposed disqualification provisions, which are substantially similar to related provisions in Rule 506 of Regulation D,

167

would create a more consistent regulatory regime across Regulation D that would benefit investors in Rule 504 offerings with increased protections. We also believe that our proposed rule amendments may bolster efforts among the states to enter into, or revise existing, regional coordinated review programs that are designed to increase efficiencies associated with the registration of securities offerings in multiple jurisdictions without increasing risks to investors.

166

See

proposed Rule 504(b)(3).

167

See

17 CFR 230.506(d).

See also

Rule 262 of Regulation A, 17 CFR 230.262, and Rule 505(b)(2)(iii) of Regulation D, 17 CFR 230,505(b)(2)(iii).

The proposed Rule 504 disqualification provisions would be implemented by reference to the disqualification provisions of Rule 506 of Regulation D.

168

We believe that creating a uniform set of bad actor triggering events across the various exemptions from Securities Act registration should simplify due diligence, particularly for issuers that may engage in different types of exempt offerings. As proposed, the bad actor triggering events for Rule 504 would be substantially similar to existing provisions in Regulation D,

169

Regulation A,

170

and those adopted today in Regulation Crowdfunding

171

and would apply to the issuer and other covered persons (such as underwriters, placement agents, and the directors, officers and significant shareholders of the issuer). Consistent with the Commission's treatment of disqualification in Rule 506(e), we propose that disqualification would only occur for triggering events that occur after effectiveness of any rule amendments,

172

but disclosure would be required for triggering events that pre-date effectiveness of any rule amendments.

173

168

See

proposed Rule 504(b)(3), referencing the disqualification provisions of Rule 506(d), 17 CFR 230.506(d), and note to proposed Rule 504(b)(3), referencing the disclosure provisions of Rule 506(e), 17 CFR 230.506(e).

169

See

Rules 505(b)(2)(iii) and 506(d) of Regulation D, 17 CFR 230,505(b)(2)(iii), 230.506(d).

170

See

Rule 262 of Regulation A, 17 CFR 230.262.

171

See

Rule 503 of Regulation Crowdfunding.

172

See

proposed Rule 504(b)(3).

173

See id.

Issuers have overwhelmingly relied upon Rule 506 instead of Rule 504 for offerings of $1 million or less.

174

As discussed more fully in Section V below, data suggests that this may be due to the preemption of state registration requirements, which is available to Rule 506 offerings, but not Rule 504 or 505 offerings.

175

State regulators seeking to modernize and coordinate their regulatory regimes to facilitate early-stage capital financings may benefit from the proposed changes to Rule 504.

174

For the period 2009 through 2014, 34,705 Form D filings were made for offerings of less than $1 million, of which 3,719 reported an offering made in reliance upon Rule 504. This represented 11% of all Regulation D offerings raising less than $1 million. During this time period, 30,461 Form D filings reported an offering made in reliance upon Rule 506, representing 88% of all Regulation D offerings raising less than $1 million. Only 525 Form D filings reported reliance upon Rule 505, representing only 2% of all Regulation D offerings during this time period raising less than $1 million.

See

Scott Bauguess, Rachita Gullapalli and Vladimir Ivanov, “Capital Raising in the U.S.: An Analysis of the Market for Unregistered Securities Offerings, 2009-2014” (October 2015) (“Unregistered Offerings White Paper”),

available at

http://www.sec.gov/dera/staff-papers/white-papers/unregistered-offering10-2015.pdf

175

Id.

The data on Regulation D offerings for the period from 2009 through 2014, suggests that the preemption of state securities laws registration and qualification requirements, which is unique to Rule 506 offerings in Regulation D, may be of greater value to issuers than the unique features of either Rules 504 or 505. Data suggests that Rule 506 is the dominant offering method even among those offerings eligible for Rules 504 or 505. Almost 50% of all Rule 506 offerings by non‐funds issuers since 2009 were for $1 million or less and therefore may have qualified for the Rule 504 exemption based on offering size. An additional 20% of offerings were for between $1 million and $5 million and therefore could have claimed a Rule 505 exemption based on offering size.

We also are seeking public comment on whether additional changes to Rule 504 should be adopted in the final amended rules. In particular, in conjunction with the proposed increase in the Rule 504 offering amount limitation, we are contemplating amending the calculation of the aggregate offering limitation in Rule 504(b)(2).

176

Currently, this rule requires issuers to aggregate all securities sold within the preceding 12 months in any transaction that is exempt under Section 3(b) or in violation of Section 5(a) of the Securities Act for purposes of computing the aggregate offering price under Rule 504.

177

This rule also includes illustrations of how the aggregate offering limitation is calculated in the event that an issuer sells securities pursuant to Rule 504 and Rule 505 within the same twelve-month period.

178

176

We seek comment below on whether, if Rule 505 is retained in the final rules, a corresponding change should be made to Rule 505(b)(2), 17 CFR 230.505(b)(2).

See

Request for Comment 63 below.

177

17 CFR 230.504(b)(2);

see also

17 CFR 230.505(b)(2).

178

See

Notes 1 and 2 to Rule 504(b)(2). [17 CFR 230.504(b)(2)].

When the current aggregation provisions in Rules 504 and 505 were originally adopted in Rule 505's predecessor Rule 242, the Commission noted that aggregating offering amounts across offerings conducted pursuant to Section 3(b) was intended to “limit[] the potential for the issuer to raise large sums by circumventing the registration provisions of the Securities Act through

multiple offerings pursuant to Section 3(b).”

179

In the intervening years, however, in implementing Congressional mandates,

180

the Commission has increased the potential for issuers, particularly smaller issuers, to raise large sums of capital in offerings that are exempt from registration in a more cost-effective manner, while continuing to provide appropriate safeguards for investors.

181

Therefore, we are seeking comment on whether the current requirements for Rule 504(b)(2), as they relate to the aggregation of offering proceeds across all offerings that are conducted pursuant to Securities Act Section 3(b), should be retained in the amended rules.

179

SEC Rel. No. 33-6180 (Jan. 17, 1980). This provision was subsequently carried over into Rule 505 and adopted into Rule 504 when Regulation D was adopted by the Commission in 1982.

See

SEC Rel. No. 33-6389 (March 8, 1982); SEC Rel. No. 33-6339 (Aug. 7, 1981).

180

See

JOBS Act, Pub. L. 112-106, 126 Stat. 306.

181

See, e.g.,

Regulation A, 17 CFR 230.251

et seq.,

providing non-Exchange Act reporting companies with the option to raise up to $20 million annually pursuant to the requirements of Tier 1 and up to $50 million annually pursuant to the requirements of Tier 2.

The Commission has brought a number of enforcement actions in recent years against persons that have sought to use the provision in Rule 504(b)(1)(iii) permitting conditional use of general solicitation and general advertising to engage in fraudulent offerings.

182

In light of the foregoing, we also are seeking comment on whether we should adopt additional changes to Rule 504 that could potentially increase investor protections in such offerings. In particular, we are considering, and seeking comment on, whether limitations on resale should be imposed on securities sold in reliance on Rule 504(b)(1)(iii) or whether Rule 504(b)(1)(iii) should be repealed.

183

182

See, e.g.,

SEC v. Stephen Czarnik, Case No. 10-cv-745 (S.D.N.Y.), Litigation Release No. 21401 (Feb. 2, 2010); SEC v. Yossef Kahlon, a/k/a Jossef Kahlon and TJ Management Group, LLC, Case No. 4:12-cv-517 (E. D. Tex.) (Aug. 14, 2012).

183

Any such amendment would not affect the resale status of securities sold under the exemptions in Rules 504(b)(1)(i) and 504(b)(1)(ii), which exempt certain offerings of securities that are registered under a state securities law that requires the public filing and delivery of a disclosure document to investors before sale. As such, the resale limitations of Rule 502(d) would continue not to apply to securities sold in transactions that are exempted by those rules and those securities would not be “restricted securities” for purposes of Rule 144.

Lastly, we propose certain technical amendments to Rules 504 and 505. We propose a technical amendment to Rule 504(b)(2), and its related provision in Rule 505(b)(2), that would update the reference to Securities Act Section 3(b) to Section 3(b)(1). This technical revision is necessary in light of the re-designation of Section 3(b) as Section 3(b)(1) that occurred as a result of the Securities Act amendments in Title IV of the JOBS Act.

184

Additionally, we propose technical amendments to the notes to Rule 504(b)(2) that would update the current illustrations of how the aggregate offering amount limitation is calculated in the event that an issuer sells securities pursuant to Rule 504 and Rule 505 within the same twelve-month period.

185

This technical revision is necessary in order to account for the proposed increase to the Rule 504 aggregate offering amount limitation.

184

Pub. L. 112-106, 126 Stat. 306, at Sec. 401.

185

See

Notes 1 and 2 to proposed Rule 504(b)(2).

Request for Comment

As proposed, should we increase the Rule 504 offering limit from a maximum of $1 million of securities in a twelve-month period to a maximum of $5 million of securities in a twelve-month period? Why or why not? Should we adopt a higher or lower aggregate offering limit? If so, what should the aggregate offering limit be and why? For example, should we use our general exemptive authority to adopt a $20 million annual offering limit in Rule 504 that aligns with the maximum offering limit permitted under Tier 1 of Regulation A? 52.

52. Would the proposed increase in the Rule 504 aggregate offering amount limitation give state securities regulators greater flexibility to develop regional coordinated review programs that would rely on Rule 504 at the federal level? Why or why not? What additional changes, if any, could we make to Rule 504 in order to facilitate efforts by state securities regulators to develop robust coordinated review programs that include appropriate investor protections and encourage capital formation?

53. Should we amend Rule 504, as proposed, to include bad actor disqualification provisions that align with those included in Rule 506(d) of Regulation D? Why or why not?

54. As proposed, should issuers only be disqualified from reliance on Rule 504 for bad actor disqualifying events that occur after the effectiveness of any final rule amendments? Why or why not?

55. If we adopt bad actor disqualification provisions for Rule 504 offerings, should we require issuers to provide disclosure to purchasers of any bad actor disqualifying events that occur before effectiveness of any final rule amendments as proposed? Why or why not?

56. Should we amend the method by which an issuer calculates compliance with the Rule 504 aggregate offering amount limitation to remove the reference to other offerings conducted pursuant to Section 3(b)(1)? Or should we instead continue to require issuers to aggregate Rule 504 offerings with all offerings conducted within the prior twelve-month period pursuant to Section 3(b)(1) and/or in violation of Section 5(a) when calculating the offering amount limitation? Why or why not? Should offerings made in violation of Section 5(a) be aggregated in all instances?

57. Are there additional changes to Rule 504 that would increase the general utility of the exemption or provide additional investor protections? If so, please explain.

58. Should Rule 504 be available to Exchange Act reporting companies? Why or why not?

59. Should securities sold in reliance on Rule 504(b)(1)(iii) pursuant to a state law exemption that permits general solicitation and general advertising so long as sales are made only to accredited investors be subject to the limitations on resale in Rule 502(d) and, as such, be deemed “restricted securities” for purposes of Rule 144? Alternatively, should we adopt a requirement, similar to proposed Rule 147(e),

186

that would require the securities to come to rest within such state by only prohibiting resales to out of state residents for a period of nine months after such securities are purchased by an investor? Why or why not?

186

See

proposed Rule 147(e) and related discussion in Section II.B.4.c above.

60. Are there other amendments we should make to Rule 504(b)(1)(iii) to address concerns about potential abuse of this provision? Please explain.

61. Should we repeal Rule 504(b)(1)(iii), in light of our proposed revisions to Rule 147? With the exception of the unrestricted status of securities sold pursuant to Rule 504(b)(1)(iii), what value would this rule continue to provide to issuers and investors?

C. Continued Utility of Rule 505 as an Exemption From Registration

As noted above, in light of the proposed changes to Rule 504, we also are seeking comment on the continued utility of Rule 505 as an exemption from registration. Rule 505 is used far less frequently than Rule 506, and an increase in the Rule 504 offering ceiling from $1 million to $5 million could diminish its utility. Rule 505 is available to both non-reporting and

reporting issuers,

187

so long as the aggregate offering amount does not exceed $5 million in any twelve-month period.

188

An issuer relying upon Rule 505 may not engage in general solicitation or general advertising and securities issued under the exemption are restricted securities.

189

187

Rule 505 is available to any issuer that is not an investment company.

188

As with Rule 504, the aggregate offering price includes proceeds from offers and sales under Section 3(b) or in violation of Section 5(a) of the Securities Act.

See

note 176 above.

189

See

Rule 505(b), 17 CFR 230.505(b).

Issuers relying upon Rule 505 are subject to additional conditions not required under Rule 504, such as the following:

• Sales to no more than 35 non-accredited investors and an unlimited number of accredited investors;

190

Rule 505(b)(2)(ii), 17 CFR 230.505(b)(2)(ii).

• Delivery of a disclosure document to non-accredited investors

191

that generally contains the same information as included in a Securities Act registration statement.

192

191

Rule 505(b)(1), 17 CFR 230.505(b)(1). An issuer may decide what information to give to accredited investors, subject to the antifraud provisions of the federal securities laws. If the issuer provides information to accredited investors, it must make this information available to the non-accredited investors as well. As noted in Section III.B above, however, certain offerings conducted pursuant to Rule 504 also require the delivery of a disclosure document to investors, as required under state law.

192

Financial statements required to be provided to non-accredited investors under Rule 502(b) must be audited by a certified public accountant. As indicated in the note to Rule 502(b)(1), “issuers providing required information to non-accredited investors should also consider providing such information to accredited investors as well, in view of the antifraud provisions of the federal securities laws.”

• Disqualification of felons and other “bad actor” from participating in the offering.

193

Rule 505(b)(2)(iii) refers to the disqualification provisions of Rule 262 of Regulation A. Issuers relying upon Rule 506 of Regulation D are also subject to similar disqualification provisions under Rule 506(d) of Regulation D. While not currently applicable to Rule 504 offerings, we propose to adopt bad actor disqualification provisions for Rule 504 that would be substantially similar to those applicable to Rule 506 offerings.

See

discussion Section III.B above.

With the exception of the offering limitation contained in Rule 505, the Rule 505 requirements are substantially similar to the requirements of Rule 506.

194

Nevertheless, issuers have overwhelmingly elected to rely upon Rule 506 instead of 505, including in offerings of up to $5 million.

195

As discussed more fully in Section V below, data from Forms D filed with the Commission suggest that the preemption of state securities law registration and qualification requirements available only to issuers relying upon Rule 506 may offset the unique features of Rule 504 or 505 offerings.

196

194

Unlike Rule 504, Rule 505 is available to companies that are subject to the requirements of Section 13 or 15(d) of the Exchange Act, as well as to development stage companies that either have no specific business plan or purpose or have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies. Data suggests, however, that less the 4% of all issuers during the 2009-2014 period that conducted Rule 505 offerings were Exchange Act reporting companies (50 companies out of a total of 1337 companies).

195

For the period 2009 through 2014, 65,514 offerings on Form D were filed for offerings raising less than $5 million, of which 1,368 filings reported an offering made in reliance upon Rule 505 of Regulation D, representing only 2% of all offerings made in reliance upon Regulation D during this time period, and 60,427 Form D filings reported an offering made in reliance upon Rule 506, representing approximately 92% of all offerings reporting reliance upon Regulation D during this time period. Variations in percentages are due to reporting errors and issuers ability to claim more than one exemption on the Form D. Issuers also overwhelmingly relied upon Rule 506 instead of Rule 504 when undertaking offerings for $1 million or less.

See

discussion on the use of Rule 504 in Section V.B.4 below.

196

See

note 175 and related text in the discussion above. For the period 2009 through 2014, $5.773 trillion was raised under Regulation D of which 0.1% was raised in reliance on Rule 504, 0.1% was raised in reliance on Rule 505, and at least 99.2% was raised in reliance on Rule 506 (we do not have data with respect to the remaining 0.6% of aggregate capital raised under Regulation D). During the same time period, there were 118,846 new and continuing offerings under Regulation D of which 3.3% were made in reliance on Rule 504, 1.2% were made in reliance on Rule 505, and at least 94.8% were made in reliance on Rule 506 (we do not have data with respect to the remaining 0.7% of new and continuing offerings made under Regulation D during this time period). In 2014, Rule 505 offerings represented 1.48% of all new Regulation D offerings and 0.04% of all aggregate capital raised under Regulation D.

Amending Rule 504 to allow for a larger aggregate offering amount of up to $5 million may reduce the incentives to use Rule 505 by issuers contemplating an exempt offering. Absent additional amendments to Regulation D, if we were to eliminate Rule 505, Regulation D would be limited to two offering exemptions, Rule 504 and Rule 506. Rule 504 would be available only to non-reporting issuers

197

that are not investment companies

198

or development stage companies

199

for offerings of up to $5 million in a twelve-month period and would permit general solicitation and the issuance of unrestricted securities in certain limited situations. Rule 506 would be available to all issuers without any aggregate offering limitations and would permit the issuance of only restricted securities, while allowing general solicitation under certain limited circumstances.

200

We are seeking comment on the utility of Rule 505 in light of the proposed changes.

197

See

17 CFR 230.504(a)(1).

198

See

17 CFR 230.504(a)(2).

199

See

17 CFR 230.504(a)(3).

200

In such scenario, Rule 505 of Regulation D would be repealed and reserved.

Request for Comment

62. Should we repeal Rule 505? Why or why not?

63. If Rule 505 is retained, should it be modified in some manner? For example, if we amend the manner in which the aggregate offering amount limitation is calculated in Rule 504 offerings, should we make a corresponding change to the manner in which the Rule 505 aggregate offering amount limitation is calculated?

201

What additional changes, if any, should be made to the rule?

201

See

discussion in Section III.B and request for comment 0 above.

64. Should Rule 505 be replaced with a new Securities Act exemption having, any, or all, of the following features:

• Early-stage capital formation as its primary purpose;

• eligibility only for non-Exchange Act reporting issuers;

• subject to the anti-fraud provisions of the federal securities laws and the civil liability provisions of Section 12(a)(2) of the Securities Act;

• exempting holders of the securities from the registration requirements of Section 12(g) of the Exchange Act;

• a relatively low maximum aggregate offering amount over a 12-month period, such as $100,000;

• a limit on the maximum investment amount per investor, such as $2,000;

• a higher maximum investment amount for more sophisticated investors, based on criteria, such as net worth, net income or some other proxy for investment sophistication;

• “covered security” status under Section 18 of the Securities Act by either enacting a new “safe harbor” pursuant to Securities Act Section 4(a)(2) or by defining purchasers of securities issued in an offering pursuant to the exemption as “qualified purchasers,” pursuant to Securities Act Section 18(b)(3);

• additional or alternative criteria?

65. Alternatively, whether or not we repeal Rule 505 and if, as proposed, we increase the aggregate offering amount that may be raised pursuant to Rule 504 to $5 million of securities in a twelve-month period, should the amendments to Rule 504 include some of the provisions currently required by Rule 505? If so, which ones and why? Should any such requirement of current Rule 505 only be required if the Rule 504

offering exceeds a certain aggregate offering amount of securities, such as the Rule 504 current annual offering limit of $1 million or some other amount?

IV. General Request for Comment

We solicit comment, both specific and general, on each component of the proposals. We request and encourage any interested person to submit comments regarding:

• the proposals that are the subject of this release;

• additional or different revisions to the rules discussed above; and

• other matters that may have an effect on the proposals contained in this release.

Comment is solicited from the point of view of both issuers and investors, as well as of capital formation facilitators, such as broker-dealers, and other regulatory bodies, such as state securities regulators. Any interested person wishing to submit written comments on any aspect of the proposal is requested to do so. With regard to any comments, we note that such comments are of particular assistance to us if accompanied by supporting data and analysis of the issues addressed in those comments. We urge commenters to be as specific as possible.

V. Economic Analysis

This section analyzes the expected economic effects of the proposed amendments relative to the current baseline, which is the regulatory framework and state of the market

202

in existence today, including current methods available to potential issuers to raise capital up to $5 million. We are mindful of the costs imposed by, and the benefits obtained from, our proposed amendments. Relative to this baseline, our analysis considers the anticipated benefits and costs for market participants affected by the proposed amendments as well as the impact of the proposed amendments on efficiency, competition, and capital formation.

203

We also analyze the potential benefits and costs stemming from alternatives to the proposed rule amendments that we considered. Many of the benefits and costs discussed below are difficult to quantify, especially when analyzing the likely effects of the proposed amendments on efficiency, competition, and capital formation. For example, it is difficult to precisely estimate the extent to which the proposed amendments to Rule 147 would promote future reliance by issuers on this exemption, or the extent to which future use of Rule 147 would affect the use of other offering methods. Similarly, it is difficult to quantify the effect of the proposed amendments on investor protection. Therefore, much of the discussion in this section is qualitative in nature. However, where possible, we have attempted to quantify the expected effects of the proposed amendments.

202

The term “market” as used throughout this economic analysis refers to capital markets in general, and where discussed in the context of a specific rule, relates to the provisions of the relevant exemption or safe harbor. We refer, for example, to the Rule 147 and Rule 504 exemptions as the Rule 147 and Rule 504 markets because each of those rules' provisions prescribe requirements that determine who can participate and how the participants (issuers/investors/intermediaries) can engage in transactions under each exemption. Participants face different trade-offs when choosing between the markets created by each of the exemptions and safe harbors.

203

Securities Act Section 2(b) requires us, when engaging in rulemaking that requires us to consider or determine whether an action is necessary or appropriate in the public interest, to consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation.

See

15 U.S.C. 77b(b).

A. Baseline

The proposed amendments would primarily impact the financing market for startups and small businesses.

204

The baseline for our economic analysis of the proposed amendments to Rule 147 and Rule 504—including the baseline for our consideration of the effects of the proposed amendments on efficiency, competition and capital formation—is the regulatory framework and market structure in existence today, in which startups and small businesses seeking to raise capital through securities offerings must register the offer and sale of securities under the Securities Act, unless they can rely on an existing exemption from registration under the federal securities laws. In addition to a description of the type and number of issuers that currently offer and sell securities in reliance on the Rule 147 and Rule 504 exemptions, our analysis includes a description of investors who purchase or may consider purchasing such securities and a discussion of the role of intermediaries in such offerings.

204

In 2013, there were more than 5 million small businesses defined by the U.S. Census Bureau as having fewer than 500 paid employees.

See

U.S. Department of Commerce, United States Census Bureau,

Business Dynamics Statistics, Data: Firm Characteristics

(2013),

available at

http://www.census.gov/ces/dataproducts/bds/data_firm.html

1. Current Market Participants

As discussed above, existing Rule 147 is a safe harbor for complying with the intrastate offering exemption provided by Section 3(a)(11) of the Securities Act. Consistent with the statutory exemption, Rule 147 imposes no offering amount limit but requires that issuers offer and sell securities to residents of the same state or territory in which the issuer is resident. In addition, issuers seeking to rely on the safe harbor must satisfy certain prescriptive threshold requirements to be considered “doing business” in-state. Existing Rule 504 limits the offering amount to $1 million in a 12-month period and permits general solicitation under certain conditions, such as that offers and sales are made exclusively in one or more states that provide for securities registration and the public filing and delivery to investors of a substantive disclosure document before sale.

205

Table 1 summarizes the main characteristics of Rule 147 and Rule 504.

205

See

Section III.A above.

Table 1—Main Characteristics of Existing Rule 147 and Rule 504

Type of offering

Offering limit

206

Solicitation

Issuer and investor requirements

Filing requirement

Restriction on resale

Blue sky law preemption

Rule 147

None

Only intrastate solicitation

All issuers must be incorporated and “doing business” in state.

All investors must be residents in state.

None

Interstate resales are restricted for nine months from the later of the last sale in, or the completion of, the offering.

207

No.

Rule 504

Regulation D

$1 million

General solicitation permitted in certain cases.

208

Excludes investment companies, blank-check companies, and Exchange Act reporting companies

File Form D.

209

Restricted in some cases.

210

No.

The proposed

amendments to

Rule 147

and Rule

504 would

primarily affect securities issuers, particularly startups and small businesses that rely on unregistered offerings under these and other exemptions to raise capital, and accredited and non-accredited investors in unregistered offerings.

206

Aggregate offering limit on securities sold within a 12-month period.

207

Rule 147(e), 17 CFR 230.147(e). Additional resale restrictions may apply under state securities laws, which typically restrict in-state resales for a period of one-year.

208

No general solicitation or advertising is permitted unless the offering is registered in a state requiring the use of a substantive disclosure document or sold under a state exemption for sales to accredited investors with general solicitation.

209

Filing is not a condition of the exemption, but it is required under Rule 503.

210

Restricted unless the offering is registered in a state requiring the use of a substantive disclosure document or sold under a state exemption limiting sales only to accredited investors.

a. Issuers

i. Rule 147 Issuers

Under current Rule 147, there are no restrictions on the type of issuers that can utilize the safe harbor, and there is no limit on the amount of capital that can be raised. However, there are in-state residency and eligibility requirements that an issuer must satisfy in order to rely on Rule 147. Eligible issuers are those that are incorporated or organized in-state, have their “principal office” in-state, and can satisfy three 80% thresholds concerning their revenues, assets and use of net proceeds.

While we do not have access to data on the number and size of offerings,

211

the amount of capital raised, and the type of issuers currently relying on the Rule 147 safe harbor, the nature of the eligibility requirements leads us to believe that the rule is currently being used by U.S. incorporated firms that are likely small businesses seeking to raise small amounts of capital without incurring the costs of registering with the Commission.

211

Unlike Regulation D, which requires the filing of a Form D, Rule 147 does not require any filing with the Commission, and we thus have no source of reliable data about the prevalence and scope of Rule 147 offerings.

Currently, issuers that intend to conduct intrastate crowdfunding offerings are required to use Rule 147 by most of the states that have enacted crowdfunding provisions.

212

Based on information from NASAA,

213

as of September 2015, 29 states and the District of Columbia have enacted state crowdfunding provisions, and more states are expected to promulgate similar provisions in the near future. Since December 2011, when the first state (Kansas) enacted its crowdfunding provisions, 118 state crowdfunding offerings have been reported to be filed with the respective state regulator.

214

Of these offerings, 102 were reported to be approved or cleared, as of August 1, 2015. Most of the cleared offerings were in Georgia, Michigan, Oregon, Kansas and Indiana.

212

See http://www.nasaa.org/industry-resources/corporation-finance/instrastate-crowdfunding-resource-center/intrastate-crowdfunding-directory/

213

See

NASAA's Intrastate Crowdfunding Resource Center at

http://www.nasaa.org/industry-resources/corporation-finance/instrastate-crowdfunding-resource-center/

See also http://www.nasaa.org/industry-resources/corporation-finance/instrastate-crowdfunding-resource-center/intrastate-crowdfunding-directory/

214

Id.

The jurisdictions included in the estimate are Alabama, District of Columbia, Georgia, Idaho, Indiana, Kansas, Maine, Maryland, Massachusetts, Michigan, Oregon, Texas, Vermont, Washington and Wisconsin.

Given that almost all the enacted state crowdfunding provisions currently exclude reporting companies and entities defined as an investment company under the Investment Company Act of 1940, we expect that issuers that rely on Rule 147 are likely operating companies (“non-fund issuers”). While information on the size of these issuers is not available, data from NASAA shows that most issuers are from varied industries such as agriculture, manufacturing, business services, retail, entertainment, and technology.

We anticipate that many potential issuers of securities under proposed Rule 147, particularly those utilizing Rule 147 for intrastate crowdfunding, will continue to be small businesses, early stage firms and start-ups that are close to the “idea” stage of the business venture. Some of these issuers may lack business plans that are sufficiently developed to attract venture capitalists (VCs) or angel investors that invest in high risk ventures, or may not offer the profit potential or business model to attract such investors.

215

In this regard, a study of one large crowdfunding platform revealed that relatively few companies on that platform operate in technology sectors that typically attract VC investment activity.

See

Ethan R. Mollick,

The Dynamics of Crowdfunding: An Exploratory Study

(Working Paper) (June 26, 2013),

available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2088298

ii. Rule 504 and Rule 505 Issuers

Rule 504 of Regulation D provides an exemption from registration under Section 3(b)(1) of the Securities Act for offerings that do not exceed $1 million during a 12-month period. An analysis of Form D filings indicates that reliance on Rule 504 exemptions has been declining over time. As shown in Figure 1, while offerings under Rule 506 of Regulation D grew significantly from 1993 to 2014, offerings under Rule 504 and Rule 505 in 2014 were one quarter of 1993 levels. In addition, while offering activity under Rule 504 has been higher than under the Rule 505 exemption, the number of new Rule 504 offerings peaked in 1999, with 3,402 new offerings initiated, and steeply declined afterward. Compared to the early 1990s when Rule 504 offerings constituted approximately 28% of all

new Regulation D offerings, the proportion of Rule 504 offerings between 2009 and 2014 ranged between 3% and 4% of all new Regulation D

offerings.

216

Data is not readily available for the period 2002-2008 during which Form D was a paper-based filing. The form became available electronically in March 2009. Since the data for year 2009 is only for the period April to December, the number of new Regulation D offerings shown is underestimated for 2009.

EP10NO15.001

The current limited use of the Rule 504 exemption and the predominance of Rule 506 are also evident when we c

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