# Exemptions To Facilitate Intrastate and Regional Securities Offerings > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2016-26348 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** November 21, 2016 - **Citation:** 81 FR 83494 ## Text 17 CFR Parts 200, 230, 239, et al. Exemptions To Facilitate Intrastate and Regional Securities Offerings; Final Rule Federal Register / Vol. 81 , No. 224 / Monday, November 21, 2016 / Rules and Regulations [[Page 83494]] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 200, 230, 239, 240, 249, 270 and 275 [Release Nos. 33-10238; 34-79161; File No. S7-22-15] RIN 3235-AL80 Exemptions To Facilitate Intrastate and Regional Securities Offerings AGENCY: Securities and Exchange Commission. ACTION: Final rules. ----------------------------------------------------------------------- SUMMARY: We are adopting amendments to modernize Rule 147 under the Securities Act of 1933, which provides a safe harbor for compliance with the Section 3(a)(11) exemption from registration for intrastate securities offerings. We are also establishing a new intrastate offering exemption under the Securities Act, designated Rule 147A, which will be similar to amended Rule 147, but will have no restriction on offers and will allow issuers to be incorporated or organized outside of the state in which the intrastate offering is conducted provided certain conditions are met. The amendments to Rule 147 and new Rule 147A are designed to facilitate capital formation, including through offerings relying upon intrastate crowdfunding provisions under state securities laws, while maintaining appropriate investor protections and providing state securities regulators with the flexibility to add additional investor protections they deem appropriate for offerings within their state. We also are adopting amendments to Rule 504 of Regulation D under the Securities Act to facilitate issuers' capital raising efforts and provide additional investor protections. The amendments to Rule 504 will 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. In light of these amendments to Rule 504, we are also repealing Rule 505. DATES: Effective date: Revised 17 CFR 230.147 (Rule 147) and new 17 CFR 230.147A (Rule 147A) will be effective on April 20, 2017. The amendments to 17 CFR 230.504 (Rule 504) and 17 CFR 200.30-1 (Rule 30-1) will be effective on January 20, 2017. The removal of 17 CFR 230.505 (Rule 505) will be effective on May 22, 2017. All other amendments in this rule will be effective on May 22, 2017. Comment date: Comments regarding the collection of information requirements within the meaning of the Paperwork Reduction Act of 1995 should be received on or before January 20, 2017. ADDRESSES: Persons submitting comments on the collection of information requirements should direct the comments to the Commission by any of the following methods: Electronic Comments Use the Commission's Internet comment form (http:// www.sec.gov/rules/final.shtml); or Send an email to [email protected]. Please include File Number S7-22-15 on the subject line; or Use the Federal eRulemaking 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. FOR FURTHER INFORMATION CONTACT: With regard to the final rules, Anthony G. Barone, Special Counsel, Jenny Riegel, Special Counsel, or Ivan Griswold, Attorney-Advisor, Division of Corporation Finance, at (202) 551-3460, and with regard to guidance on broker-dealer registration, Timothy J. White, Senior Special Counsel, Division of Trading and Markets, at (202) 551-5550, U.S. Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-3628. SUPPLEMENTARY INFORMATION: We are adopting new Rule 147A and are adopting amendments to Rule 147 \1\ and Rule 504 \2\ of Regulation D \3\ under the Securities Act of 1933 (the ``Securities Act'').\4\ We are repealing Rule 505 \5\ of Regulation D. --------------------------------------------------------------------------- \1\ 17 CFR 230.147. \2\ 17 CFR 230.504. \3\ 17 CFR 230.500 through 230.508. \4\ 15 U.S.C. 77a et seq. \5\ 17 CFR 230.505. --------------------------------------------------------------------------- Table of Contents I. Introduction and Background II. Amendments to Rule 147 and New Rule 147A A. Explanation of Amendments to Rule 147 and New Rule 147A 1. Manner of Offering 2. Elimination of Residence Requirement for Issuers B. Common Requirements of the Amendments to Rule 147 and New Rule 147A 1. Requirements for Issuers ``Doing Business'' In-State 2. Reasonable Belief as to Purchaser Residency Status 3. Residence of Entity Purchasers 4. Limitation on Resales 5. Integration 6. Disclosures to Investors 7. State Law Requirements C. Additional Considerations 1. Notice Filings 2. Intrastate Broker Dealer Exemption 3. Section 12(g) Registration 4. Exclusion of Investment Companies 5. Trust Indenture Act 6. Other Requirements III. Amendments to Rules 504 and 505 of Regulation D A. Overview of Rules 504 and 505 B. Amendments to Rule 504 C. Repeal of Rule 505 IV. Other Matters V. Economic Analysis A. Baseline 1. Current Market Participants 2. Alternative Methods of Raising up to $5 Million of Capital B. Analysis of Final Rules 1. Broad Economic Considerations 2. Analysis of Amendments to Existing Rule 147 and New Rule 147A 3. Analysis of Amendments to Rule 504 4. Analysis of Repeal of Rule 505 VI. Paperwork Reduction Act A. Rules 147(f)(1)(iii) and 147A(f)(1)(iii) B. Amendments to Rule 504 of Regulation D VII. Final Regulatory Flexibility Act Analysis VIII. Statutory Basis and Text of Final Amendments I. Introduction and Background On October 30, 2015, we proposed amendments to Rule 147 and Rule 504 under the Securities Act to assist smaller companies with capital formation consistent with other public policy goals, including investor protection.\6\ In developing final rules, we considered recommendations by the Advisory Committee on Small and Emerging Companies (``ACSEC'') \7\ and the most recent SEC Government-Business Forum on Small Business [[Page 83495]] Capital Formation (``Small Business Forum'') \8\ and comment letters received on the Proposing Release.\9\ Today we are amending Rule 147 and establishing a new Securities Act exemption, designated Rule 147A. We are also amending Rule 504 of Regulation D. We believe the final rules will facilitate capital formation by smaller companies by increasing the utility of the current Securities Act exemptive framework for smaller offerings while maintaining appropriate protections for investors. The final rules complement recent efforts by the U.S. Congress,\10\ state legislatures,\11\ and state securities regulators \12\ to modernize existing federal and state securities laws and regulations to assist smaller companies with capital formation. We believe our amendment to Rule 504 to increase its aggregate offering ceiling from $1 million to $5 million will significantly diminish the utility of Rule 505 and we are therefore repealing that rule. --------------------------------------------------------------------------- \6\ See SEC Rel. No. 33-9973 [80 FR 69786] (Nov. 10, 2015) (``Proposing Release''). \7\ See Recommendation to the Commission by the Advisory Committee on Small and Emerging Companies to Modernize Rule 147 under the Securities Act of 1933 (Sept. 23, 2015) (``2015 ACSEC Recommendation''), available at http://www.sec.gov/info/smallbus/ acsec/acsec-recommendation-modernize-rule-147.pdf. The Commission established the ACSEC in 2011 with the objective of providing the Commission with advice on its rules, regulations and policies with regard to its mission of protecting investors, maintaining fair, orderly and efficient markets and facilitating capital formation, as they relate to: (1) Capital raising by emerging privately-held small businesses (emerging companies) and publicly traded companies with less than $250 million in public market capitalization (smaller public companies) through securities offerings, including private and limited offerings and initial and other public offerings; (2) trading in the securities of emerging companies and smaller public companies; and (3) public reporting and corporate governance requirements of emerging companies and smaller public companies. Advisory Committee on Small and Emerging Companies, SEC Rel. No. 33- 9258 (Sept. 12, 2011) [76 FR 57769 (Sept. 16, 2011)]. \8\ See Final Report of the 2015 SEC Government Business Forum on Small Business Capital Formation (April 2016) (``2015 Small Business Forum Recommendations''), available at http://www.sec.gov/ info/smallbus/gbfor34.pdf. The Small Business Investment Incentive Act of 1980 directed the Commission to conduct an annual government- business forum to undertake an ongoing review of the financing problems of small businesses. 15 U.S.C. 80c-1. The Small Business Forum has met annually since 1982 to provide a platform to highlight perceived unnecessary impediments to small business capital formation and address whether they can be eliminated or reduced. Each forum seeks to develop recommendations for government and private action to improve the environment for small business capital formation, consistent with other public policy goals, including investor protection. Information about the Small Business Forum is available at http://www.sec.gov/info/smallbus/sbforum.shtml. \9\ The comment letters received in response to the Proposing Release are available at http://www.sec.gov/comments/s7-22-15/ s72215.shtml. \10\ Congress enacted the Jumpstart Our Business Startups Act of 2012 (``JOBS Act''), which was signed into law by President Obama on April 5, 2012. Public Law 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. See SEC Rel. No. 33-9741 (Mar. 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''). Congress also enacted the Fixing America's Surface Transportation Act of 2015 (``FAST Act''), which was signed into law by President Obama on December 4, 2015. Public Law 114-94, Sec 129 Stat. 1312 (2015). The FAST Act includes several amendments to the federal securities laws, including a new exemption to Section 4 of the Securities Act for secondary sales of securities that are purchased by an accredited investor, among other requirements (Section 76001), and changes to facilitate initial public offerings by emerging growth companies (Sections 71001 through 71003). \11\ See, e.g., Ala. Code Sec. 8-6-11 (2014); Ariz. Rev. Stat. Ann. Sec. 44-1844 (2015); Colo. Rev. Stat. Sec. 11-51-304(6) (2014); Fla. Stat. Sec. 571.021, 517.061, 517.0611, 517.12, 517.121, 517.161, 626.9911; Ind. Code Sec. 6-3.1-24-14 (2014); Ky. Rev. Stat. Ann. Sec. 292.410-292.415 (2015); Me. Rev. Stat. Ann. tit. 32, Sec. 16304, sub-Sec. 6-a (2014). \12\ See, e.g., D.C. Mun Regs. tit. 26-B, Sec. 250 (2014); Ga. Comp. R. & Regs. 590-4-08 (2011); Idaho Code Ann. Sec. 30-14-203 (providing an exemption by order on a case-by-case basis); Kan. Admin. Regs. Sec. 81-5-21 (2011). --------------------------------------------------------------------------- Consistent with commenters' suggestions \13\ and the recommendations of the 2015 Small Business Forum,\14\ we are retaining and modernizing Rule 147 under the Securities Act as a safe harbor for intrastate offerings exempt from registration pursuant to Securities Act Section 3(a)(11). These amendments will modernize the safe harbor, while keeping within the statutory parameters of Section 3(a)(11), so that issuers may continue to rely upon the rule for offerings pursuant to state law exemptions, including crowdfunding provisions, that are conditioned upon compliance with Section 3(a)(11) and Rule 147. --------------------------------------------------------------------------- \13\ Letter from David M. Lynn, Chair, Federal Regulation of Securities Committee, Business Law Section, American Bar Association, April 8, 2016 (``ABA Letter''); Letter from Christopher D. Miller, Economic and Downtown Development Director, City of Adrian, Michigan, January 8, 2016 (``City of Adrian Letter''); Letter from Keith Paul Bishop, Former California Commissioner of Corporations, December 30, 2015 (``Bishop Letter''); Letter from Deborah L. Gunny and Cathryn S. Gawne, Co-Chairs, Corporations Committee, Business Law Section, State Bar of California, January 8, 2016 (``California Bar Letter''); Letter from Kim Wales, CEO, Wales Capital, and Executive Board Member, CrowdFund Intermediary Regulatory Advocates, January 11, 2016 (``CFIRA Letter''); Letter from Reps. Tom Emmer, Gwen Moore, Patrick McHenry, John Carney, Scott Garrett, Denny Heck, Randy Neugebauer, Terri Sewell, Luke Messer, Keith Ellison, Peter T. King, Robert Hurt, Robert Pittenger, Roger Williams and Stephen Fincher, U.S. House of Representatives, October 7, 2016 (``Congressional Letter''); Letter from Sara Hanks, CEO, CrowdCheck, Inc., January 2, 2016 (``CrowdCheck Letter''); Letter from Samuel S. Guzik, Securities Attorney, Guzik Associates, January 18, 2016 (``Guzik Letter''); Letter from Brian Knight, Associate Director, Financial Policy, and Staci Warden, Executive Director; Center for Financial Markets, Milken Institute, January 11, 2016 (``Milken Letter''); Letter from Judith M. Shaw, President, North American Securities Administrators Association, Inc. (``NASAA'') and Maine Securities Administrator, January 11, 2016 (``NASAA Letter''); Letter from Youngro Lee, Esq., Co-founder/CEO, NextSeed TX LLC, January 7, 2016 (``NextSeed Letter''); Letter from Amy E. Pearl, Founder and Executive Director, Hatch Innovation Inc., January 10, 2016 (``Pearl Letter''); Letter from Joe M. Wallin, Attorney, January 11, 2016 (``Wallin Letter''); Letter from Kristin Wolff, January 11, 2016 (``Wolff Letter''); Letter from Howard Orloff, CMO, ZacksInvest, November 19, 2015 (``Orloff Letter''); Letter from Anthony J. Zeoli, Partner, Freeborn & Peters LLP, November 5, 2016 (``Zeoli Letter''). No commenters supported the proposed elimination of Rule 147 as a safe harbor under Section 3(a)(11). \14\ See 2015 Small Business Forum Recommendations. --------------------------------------------------------------------------- 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.'' \15\ 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).\16\ 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.\17\ Rule 147 reflects this Congressional intent and generally relies upon state regulation to effectively protect investors. --------------------------------------------------------------------------- \15\ 15 U.S.C. 77c(a)(11). \16\ See SEC Rel. No. 33-5450 (Jan. 7, 1974) [39 FR 2353 (Jan. 21, 1974)] (``Rule 147 Adopting Release''). See also SEC Rel. No. 33-5349 (Jan. 8, 1973) [38 FR 2468 (Jan. 26, 1973)] (``Rule 147 Proposing Release''). \17\ 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''). --------------------------------------------------------------------------- Notwithstanding the importance of these limitations, due to developments in modern business practices and communications technology in the years since Rule 147 was adopted, we have determined that it is necessary to update the requirements of Rule 147 to ensure its continued utility.\18\ We are also establishing a new intrastate offering exemption under the Securities Act, designated Rule 147A, that will further accommodate modern business practices and communications technology and provide an alternative means for smaller companies to raise capital locally. --------------------------------------------------------------------------- \18\ The Commission has not amended Rule 147 since its adoption, other than in 2013 when the Commission adopted technical amendments to Rules 145, 147, 152 and 155 to update references to Section 4(2) of the Securities Act, which was renumbered as Section 4(a)(2) by Section 201(c) of the JOBS Act, Public Law 112-106, sec. 201(c), 126 Stat. 306, 314 (Apr. 5, 2012). See SEC Rel. No. 33-9414 [78 FR 44730] (July 10, 2013). See also ABA Letter; Milken Letter. --------------------------------------------------------------------------- We are adopting new Rule 147A pursuant to our general exemptive authority under Section 28 of the Securities Act,\19\ and therefore, new [[Page 83496]] Rule 147A will not be subject to the statutory limitations of Section 3(a)(11). Accordingly, Rule 147A will have no restriction on offers, but will require that all sales be made only to residents of the issuer's state or territory to ensure the intrastate nature of the exemption. Rule 147A also will not require issuers to be incorporated or organized in the same state or territory where the offering occurs so long as issuers can demonstrate the in-state nature of their business, which we believe will expand the number of businesses that will be able to seek intrastate financing under Rule 147A, as compared to amended Rule 147. Certain provisions of existing Rule 147 concerning legends and mandatory disclosures to purchasers and prospective purchasers will apply to offerings conducted pursuant to amended Rule 147 and Rule 147A.\20\ --------------------------------------------------------------------------- \19\ 15 U.S.C. 77z-3. For the reasons discussed throughout this release, we find that the Rule 147A exemption being adopted today is necessary and appropriate in the public interest and consistent with the protection of investors. \20\ See Rules 147(f) and 147A(f). --------------------------------------------------------------------------- As in current Rule 147, nothing in either amended Rule 147 or new Rule 147A will obviate the need for compliance with any applicable state law relating to the offer and sale of securities. Thus, states will retain the flexibility to adopt requirements that are consistent with their respective interests in facilitating capital formation and protecting their resident investors in intrastate securities offerings, including the authority to impose additional disclosure requirements regarding offers and sales made to persons within their state or territory, or the authority to limit the ability of certain bad actors from relying on applicable state exemptions. In addition, both federal and state antifraud provisions will continue to apply to offers and sales made pursuant to amended Rule 147 and new Rule 147A. The staff will seek to collaborate with state regulators in gathering information about intrastate crowdfunding offerings and, based on the sharing of this information and other relevant inputs, the staff will undertake to study and submit a report to the Commission, no later than three years following the effective date of amended Rule 147 and new Rule 147A, on capital formation and investor protection in offerings under these rules. The report will include, but not be limited to, a review of information about: (1) The use of amended Rule 147 and new Rule 147A; (2) repeat use by the same issuers of amended Rule 147 or new Rule 147A; (3) the use by issuers of alternative federal offering exemptions concurrently or close in time to an offer or sale under amended Rule 147 or new Rule 147A; (4) fraud associated with, or issuer non-compliance with provisions of, amended Rule 147 or new Rule 147A; (5) the role of intrastate broker-dealers and other intermediaries in offerings conducted pursuant to amended Rule 147 or new Rule 147A; and (6) the application of state bad actor disqualification provisions in offerings conducted pursuant to amended Rule 147 or new Rule 147A to inform whether the Commission should consider including bad actor disqualification provisions in amended Rule 147 and new Rule 147A. We also are amending 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 higher offering ceiling amount will promote capital formation by increasing the flexibility of state securities regulators to implement coordinated review programs to facilitate regional offerings.\21\ The bad actor disqualification provisions will provide for greater consistency across Regulation D. We believe these amendments to Rule 504 will significantly diminish the utility of Rule 505, which historically has been little utilized in comparison to Rule 506 of Regulation D.\22\ We, therefore, are repealing Rule 505. --------------------------------------------------------------------------- \21\ The state registration of securities offerings under coordinated review programs is an example of the efforts being 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. 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. More information on coordinated review programs is available at http://www.nasaa.org/industry-resources/corporation- finance/coordinated-review/. \22\ For the period 2009 through 2015, 132,091 Forms D were filed. Of these Forms D, 3,758 reported an offering made in reliance upon Rule 505 of Regulation D, representing approximately 3% of all offerings made in reliance upon Regulation D and 5% of all Regulation D offerings raising less than $5 million. During this time period, 1,548 Forms D reported reliance only on Rule 505, and 2,210 Forms D reported reliance on Rule 505 and another Regulation D exemption. By contrast, for the period 2009 through 2015, 5,532 filings reported an offering made in reliance upon Rule 504, representing approximately 4% of all offerings made in reliance upon Regulation D and 13% of all Regulation D offerings raising less than $1 million. During this time period, 4,308 Forms D reported reliance only on Rule 504, and 1,224 Forms D reported reliance on Rule 504 and another Regulation D exemption. All other Form D filings during this period reported an offering made in reliance on Rule 506. --------------------------------------------------------------------------- II. Amendments to Rule 147 and New Rule 147A A. Explanation of Amendments to Rule 147 and New Rule 147A Numerous commenters \23\ and the 2015 Small Business Forum \24\ recommended retaining Rule 147 as a safe harbor under Section 3(a)(11). Many of these commenters also recommended adopting a substantially similar new exemption pursuant to the Commission's general exemptive authority under Section 28 as an alternative to the Section 3(a)(11) exemption and safe harbor for companies that wish to conduct intrastate offerings under slightly broader conditions than contemplated by Section 3(a)(11). After considering the comments, we are amending Rule 147 to modernize the rule to incorporate most of our proposed amendments, except for the two proposed amendments that do not fit within the statutory limits of Section 3(a)(11)--allowing issuers to make offers accessible to out-of-state residents and to be incorporated out-of-state. These two provisions are the distinguishing features of the new Rule 147A exemption that we are establishing pursuant to our general exemptive authority under Section 28. Aside from these two provisions, the remaining provisions of new Rule 147A are substantively the same as the provisions of amended Rule 147. --------------------------------------------------------------------------- \23\ ABA Letter; City of Adrian Letter; Bishop Letter; California Bar Letter; CFIRA Letter; Congressional Letter; CrowdCheck Letter; Guzik Letter; Milken Letter; NASAA Letter; NextSeed Letter; Pearl Letter; Wallin Letter; Wolff Letter; Orloff Letter; Zeoli Letter. No commenters supported the proposed elimination of Rule 147 as a safe harbor under Section 3(a)(11). \24\ 2015 Small Business Forum Recommendations. --------------------------------------------------------------------------- 1. Manner of Offering a. Proposed Amendments Rule 147, as proposed, would have required issuers to limit sales to in-state residents, but would no longer have limited offers by the issuer to in-state residents.\25\ Accordingly, under our proposal, amended Rule 147 would have permitted 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 Internet Web sites, to advertise their offerings, so long as all sales of [[Page 83497]] securities so offered were made to residents of the state or territory in which the issuer has its principal place of business. In the Proposing Release, the Commission noted that market participants and commenters have indicated that the combined effect of the statutory limitation on offers in Section 3(a)(11) and the prescriptive threshold requirements of Rule 147 unduly limits the availability of the exemption for local companies that would otherwise conduct intrastate offerings.\26\ --------------------------------------------------------------------------- \25\ See proposed Rule 147(d). \26\ See Proposing Release at text accompanying note 18. --------------------------------------------------------------------------- Given that proposed Rule 147 would have allowed offers to be made to or be accessible by out-of-state residents, including advertising offers on publicly-available Internet Web sites, the proposal would have required 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.\27\ This proposed disclosure requirement was 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. --------------------------------------------------------------------------- \27\ See proposed Rule 147(f)(3). --------------------------------------------------------------------------- As proposed, Rule 147 would no longer have remained a safe harbor for conducting a valid intrastate exempt offering under Section 3(a)(11). An issuer that attempted to comply with Rule 147, as proposed to be amended, but failed to do so, could rely on any other available exemption. Failure to satisfy the requirements of Rule 147, as proposed to be amended, however, would also have likely resulted 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) would be more restrictive than under Rule 147, as proposed to be amended. b. Comments on Proposed Amendments All commenters that addressed the issue expressed support for eliminating the limitation on offers to in-state residents while continuing to require that all sales be made to in-state residents.\28\ Many of these commenters also expressed support for retaining existing Rule 147 as a safe harbor under Section 3(a)(11), in order to allow issuers to take advantage of existing state crowdfunding provisions.\29\ As explained by one commenter, if the Commission eliminated the Rule 147 safe harbor, state legislative and/or rulemaking action would be required, since almost all of the state crowdfunding exemptions are premised on the offering qualifying under Section 3(a)(11) and its Rule 147 safe harbor.\30\ The commenter noted that eliminating the Rule 147 safe harbor would leave these state crowdfunding exemptions unavailable until states modified their exemptions to accommodate the removal of Rule 147 as a safe harbor to Section 3(a)(11).\31\ In order to avoid this problem, some commenters recommended that the Commission interpret Section 3(a)(11) and Rule 147 to allow for offers to be viewed by out-of-state residents.\32\ A few of these commenters stated that Section 3(a)(11) should be interpreted to allow for offers to be viewed by out-of-state residents, so long as such offers indicate that they are being made to residents of a single state.\33\ --------------------------------------------------------------------------- \28\ ABA Letter; NASAA Letter; Letter from Kurt N. Schacht, CFA, Managing Director, Standards and Advocacy, and Linda L. Rittenhouse, Director, Capital Markets Policy, CFA Institute, January 11, 2016 (``CFA Letter''); CrowdCheck Letter; CFIRA Letter; Guzik Letter; NextSeed Letter; Milken Letter; Zeoli Letter; Bishop Letter; Wolff Letter; City of Adrian Letter; Pearl Letter; Finn Terdal, Technology Coordinator, Hatch Innovation, January 11, 2016 (``Terdal Letter''); Letter from Simon R. Love, Managing Director, Hatch Lab, January 11, 2016 (``Love Letter''); Letter from John MacDougall, Founder & CEO, MacDougall & Sons Bat Co. Inc., January 10, 2016 (``MacDougall Letter''); Letter from Erin Ely, January 10, 2016 (``Ely Letter''); Letter from Jim Newcomer, Ph.D., 4mation Advisers, January 10, 2016 (``Newcomer Letter''); Brandon P. Romano, Content Director, Brelion, LLC, January 6, 2016 (``Brelion Letter''); Letter from Sean Shepherd, CrwdCorp LLC, December 30, 2015 (``CrwdCorp Letter''). See also Congressional Letter (expressing general support for the proposed amendments to Rule 147). \29\ See ABA Letter; CFIRA Letter; Congressional Letter; CrowdCheck Letter; NASAA Letter; California Bar Letter; Guzik Letter; Milken Letter; NextSeed Letter; Zeoli Letter; Bishop Letter; Wolff Letter; Pearl Letter; City of Adrian Letter; Orloff Letter; Wallin Letter. \30\ NASAA Letter. According to the NASAA Letter, as of January 2016, of the 29 states plus the District of Columbia that adopted or were finalizing rulemaking implementing crowdfunding exemptions, 29 were premised on the offering qualifying under Section 3(a)(11) and its Rule 147 safe harbor: Alabama, Arizona, Colorado, District of Columbia, Georgia, Florida, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Montana, Nebraska, New Jersey, New Mexico, Oregon, South Carolina, Tennessee, Texas, Vermont, Virginia, Washington, and Wisconsin. As of January 2016, the exemptions were effective in 27 of the 30 jurisdictions: Minnesota and New Jersey were finalizing rulemaking, and New Mexico was working on draft regulations. Of the states with state crowdfunding exemptions, only Iowa and Vermont do not explicitly reference Rule 147, and Maine relies on Rule 504 rather than Section 3(a)(11). \31\ Id. \32\ ABA Letter; Guzik Letter; Zeoli Letter; Milken Letter; Pearl Letter. \33\ ABA Letter; Guzik Letter; Zeoli Letter. --------------------------------------------------------------------------- One commenter also noted that issuers currently rely on Section 3(a)(11) and Rule 147 to conduct forms of intrastate offerings other than pursuant to state crowdfunding provisions.\34\ In the view of this commenter, removal of Rule 147 as a safe harbor under Section 3(a)(11) would also present problems for these exempt offerings, thereby severely restricting other local capital raising options.\35\ --------------------------------------------------------------------------- \34\ NASAA Letter. For example, issuers may rely upon Section 3(a)(11) and Rule 147 for offerings registered under state securities laws, or pursuant to exemptions from state registration other than state crowdfunding provisions. \35\ Id. --------------------------------------------------------------------------- Although commenters overwhelmingly supported retaining existing Rule 147 as a safe harbor to Section 3(a)(11), many commenters also supported adopting a substantially similar new exemption under the Commission's general exemptive authority under Section 28 for companies that conduct an intrastate offering but may not qualify for the Section 3(a)(11) exemption.\36\ Similarly, the 2015 Small Business Forum recommended that the Commission take a ``side-by-side'' approach in introducing a new Rule 147--as it did with Rule 506 and Regulation A \37\--keeping old Rule 147 in place as a safe harbor under Section 3(a)(11) (but amending it to the extent permissible given the statutory limitations of Section 3(a)(11)) while also adopting a new exemption.\38\ Several commenters stated that establishing a new exemption under Section 28, in addition to retaining existing Rule 147, would afford the states time to amend their existing state crowdfunding provisions, as well as to adopt new state crowdfunding provisions.\39\ One commenter supported leaving the existing Rule 147 as a safe harbor to Section 3(a)(11) while adopting the proposed new exemption as new Rule 505.\40\ --------------------------------------------------------------------------- \36\ ABA Letter; City of Adrian Letter; Bishop Letter; California Bar Letter; CFIRA Letter; Congressional Letter; CrowdCheck Letter; Guzik Letter; Milken Letter; NASAA Letter; NextSeed Letter; Pearl Letter; Wallin Letter; Orloff Letter; Zeoli Letter. \37\ For example, pursuant to Title II of the JOBS Act, the Commission adopted the Rule 506(c) exemption that permits an issuer to engage in general solicitation under certain circumstances while retaining Rule 506(b) as a safe harbor, which prohibits general solicitation. Pursuant to Title IV of the JOBS Act, the Commission also adopted Tier 1 and Tier 2 categories under Regulation A. \38\ 2015 Small Business Forum Recommendations. \39\ See, e.g., Pearl Letter; Orloff Letter. \40\ Orloff Letter. --------------------------------------------------------------------------- Several commenters supported our proposal to require 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 [[Page 83498]] the issuer.\41\ One commenter supported the proposed prominent disclosure requirement, but only to the extent it is required on all general solicitation and advertising materials.\42\ Two other commenters noted that appropriate accommodations should be made to permit use of space-constrained social media communications such as Twitter.\43\ Two commenters noted that the Commission's efforts to modernize these requirements should preserve state authority over intrastate offerings, including the authority to impose additional disclosure requirements.\44\ --------------------------------------------------------------------------- \41\ CFA Letter; CFIRA Letter; CrowdCheck Letter; NASAA Letter. \42\ NASAA Letter. \43\ CFIRA Letter; CrowdCheck Letter. \44\ Congressional Letter; NASAA Letter. --------------------------------------------------------------------------- c. Final Rules After considering these comments and the recommendations of the 2015 Small Business Forum, we are adopting new Rule 147A to allow issuers to make offers accessible to out-of-state residents, so long as sales are limited to in-state residents. We are also retaining amended Rule 147 as a safe harbor under Section 3(a)(11) to preserve the continued availability of existing state exemptive provisions that are specifically conditioned upon issuer reliance on Section 3(a)(11) and Rule 147. Issuers relying on amended Rule 147 as a safe harbor under Section 3(a)(11) must continue to limit all offers and sales to in- state residents.\45\ --------------------------------------------------------------------------- \45\ See Rule 147(b). --------------------------------------------------------------------------- We believe offers made over the Internet that can be viewed by a significant number of out-of-state residents are not consistent with Section 3(a)(11) and Rule 147, even if such offers include prominent disclosure stating that sales will be made only to residents of the same state or territory as the issuer.\46\ When Section 3(a)(11) was enacted in 1934, Congress noted, 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.'' \47\ Further, in 1937 the Commission released guidance on the nature of the Section 3(a)(11) exemption in the form of a letter from the Commission's General Counsel.\48\ The letter stated 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).'' \49\ 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.'' \50\ We do not read the legislative history for Section 3(a)(11) and the prior Commission statements as envisioning widespread out-of-state offers, but rather as recognition that some media of communication, such as a local newspaper or periodical, could only be imperfectly targeted to residents of a particular state. The Internet, however, is not similarly targeted to residents of a particular state, making it difficult for issuers to keep the distribution of such offers local in nature. --------------------------------------------------------------------------- \46\ Cf. ABA Letter; Guzik Letter; Zeoli Letter; Milken Letter; Pearl Letter. \47\ 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 redesignating Section 5(c) as Section 3(a)(11). \48\ See SEC Rel. No. 33-1459 (May 29, 1937) [11 FR 10958 (Sept. 27, 1946)] (``1937 Letter of General Counsel''). \49\ Id. \50\ 1961 Release; see also 1937 Letter of General Counsel (stating that Section 3(a)(11) is ``limited to cases in which the entire issue of securities is offered and sold exclusively to residents of the state in question''). --------------------------------------------------------------------------- Given the foregoing, we believe that the most appropriate means to permit the offer and sale of securities on Internet Web sites, or using any other form of mass media likely to reach significant numbers of out-of-state residents, is to adopt a new intrastate offering exemption pursuant to the Commission's general exemptive authority under Section 28. Accordingly, new Rule 147A will require issuers to limit sales to in-state residents, but will not limit offers by the issuer to in-state residents. New Rule 147A thereby will permit issuers to engage in general solicitation and general advertising of their offerings, using any form of mass media, including unrestricted, publicly-available Internet Web sites, so long as sales of securities so offered are made only to residents of the state or territory in which the issuer is resident. Consistent with the proposal, both Rule 147A and amended Rule 147 will require issuers to include prominent disclosure with all offering materials stating that sales will be made only to residents of the same state or territory as the issuer.\51\ We believe this disclosure will help alert potential investors that only residents of the state in which the issuer is located are eligible to participate in the offering. Nothing in this disclosure requirement, however, will prevent state authorities from imposing additional disclosure requirements or other requirements on offers or sales made to persons within their states. --------------------------------------------------------------------------- \51\ See Rules 147(f)(3) and 147A(f)(3). --------------------------------------------------------------------------- Two commenters noted that appropriate accommodations should be made to permit use of space-constrained social media communications such as Twitter.\52\ To accommodate space-constrained social media communication, when offering materials are distributed through a communications medium that has technological limitations on the number of characters or amount of text that may be included in the communication and including the required statements in their entirety, together with the other information, would cause the communication to exceed the limit on the number of characters or amount of text, an issuer could satisfy the disclosure requirement by including an active hyperlink to the required disclosure that otherwise would be required by the rules.The communication should prominently convey, through introductory language, that required information is provided through the hyperlink. We believe this guidance will accommodate advancements in social media, while still providing potential investors with the disclosure required by the rules. Where an electronic communication is capable of including the entirety of the required disclosure, along with the other information, without exceeding the applicable limit on the number of characters or amount of text, the use of a hyperlink to the required statements should not be used. --------------------------------------------------------------------------- \52\ CFIRA Letter; CrowdCheck Letter. --------------------------------------------------------------------------- 2. Elimination of Residence Requirement for Issuers a. Proposed Amendments For corporations, limited partnerships, trusts, or other forms of business organizations, we proposed to eliminate the current requirement in Rule 147 that limits the availability of the rule to issuers incorporated or [[Page 83499]] organized in the state in which an offering takes place. Our proposed amendments would have expanded 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.\53\ --------------------------------------------------------------------------- \53\ See proposed Rule 147(c)(1). See also discussion on principal place of business in Section II.B.1 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. --------------------------------------------------------------------------- The proposed amendments also would have replaced the current rule's ``principal office'' \54\ requirements for an issuer with a ``principal place of business'' requirement.\55\ The proposed rule defined 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.\56\ As noted in the Proposing Release, an issuer would have been able to have a ``principal place of business'' within only one state or territory and would have therefore been able to conduct an offering pursuant to amended Rule 147 only within that particular state or territory. We also proposed to restrict the ability of an issuer that has changed its principal place of business from conducting an intrastate offering in a different state for a period of nine months from the date of the last sale in the prior state,\57\ which was consistent with the duration of the resale limitation period specified in proposed Rule 147(e).\58\ --------------------------------------------------------------------------- \54\ See 17 CFR 230.147(c)(1)(ii) and 17 CFR 230.147(c)(2)(iv). \55\ See proposed Rule 147(c)(1). \56\ See proposed Rule 147(c)(1). \57\ See Note 1 to proposed Rule 147(c)(1). \58\ 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). --------------------------------------------------------------------------- b. Comments on Proposed Amendments Commenters were divided on the proposal to eliminate the requirement in Rule 147 that entities be incorporated or organized under the laws of the state or territory in which the offering takes place. Several commenters supported eliminating this requirement and stated that the jurisdiction of entity formation should not affect the ability of an issuer to be considered resident for purposes of an intrastate offering and that there are valid business reasons for incorporating or organizing in states, such as Delaware, which do not detract from an issuer's connection to the state in which its principal place of business is located.\59\ Other commenters opposed eliminating the requirement that entities be incorporated or organized under the laws of the state in which the offering takes place,\60\ and some of these commenters stated that the intrastate exemption should promote state and local economic development goals in addition to capital formation--goals that, in their view, would be curtailed in the absence of an in-state organization requirement.\61\ --------------------------------------------------------------------------- \59\ See Bishop Letter (``The application of state securities laws is not dependent upon the state of incorporation or organization of the issuer. Rather, the application of these laws depends upon whether an offer or sale is being made within the state.''); CFIRA Letter; CFA Letter (the proposed approach ``continues the issuer-state connection through the actual business activities and employment aspects that accompany a principal place of business and recognizes the lack of connection between state of incorporation and actual business activities.''); CrowdCheck Letter; NASAA Letter; NextSeed Letter. \60\ Love Letter; MacDougall Letter; Newcomer Letter; Pearl Letter; Wolff Letter. \61\ Love Letter (``If the company is incorporated in the state where sales occur, it is another way to encourage local funds to be retained locally''); MacDougall Letter (stating that incorporating out of state to avoid state taxes ``goes against the `spirit' of the law and sends the wrong message''); Pearl Letter (``intrastate laws are focused on state economic development in addition to capital formation for entrepreneurs and financial return for investors, and therefore the retention of capital within the state is a necessary component of the successful spread of benefits''); Wolff Letter (stating that local investing confers benefits that extend beyond financial return and seeks to encourage the spread of such social, economic, and other benefits while lifting the restriction on state incorporation entirely changes the nature of the intrastate crowdfunding). --------------------------------------------------------------------------- Commenters also were divided on replacing the current in-state organization requirement in Rule 147(c)(1) with a principal place of business requirement. While two commenters viewed the principal place of business standard along with a ``doing business'' test as sufficiently demonstrating the in-state nature of an issuer's business,\62\ two other commenters opposed the proposed principal place of business requirement.\63\ One commenter noted that the jurisdictional reach of state securities laws is independent of whether an issuer is conducting any business within the state and indicated that a state's jurisdiction is established by the offer or sale of a security within the state.\64\ Another commenter stated that the principal place of business requirement is ``anti-competitive in nature and disruptive in spurring economic growth for small businesses.'' \65\ --------------------------------------------------------------------------- \62\ NASAA Letter; NextSeed Letter. \63\ Bishop Letter; Letter from David L. Sjursen, CEO & Founder, Exante Regulatory Compliance Consultants Inc., December 2, 2015 (``Exante Letter''). \64\ Bishop Letter (``[T]he Commission's proposed `presence' requirements would not augment California's ability to enforce its securities laws for the protection of resident investors as assumed by the Commission. If a state believes that its existing qualification or exemption requirements inadequately protect offerees and purchasers, it can amend those requirements. . . . [I]t is far more logical to require only that the issuer be organized in the state or territory or qualified to transact intrastate business in the state or territory''). \65\ Exante Letter.USGPO Galley End:?> --------------------------------------------------------------------------- Several commenters supported the proposed nine-month waiting period until the offering comes to rest, consistent with the requirements of proposed Rule 147(e), before an issuer may change its principal place of business to another state or territory and make a subsequent offering of securities in that new state or territory in reliance on proposed Rule 147.\66\ No commenters opposed the proposed waiting period. --------------------------------------------------------------------------- \66\ CFIRA Letter; CrowdCheck Letter; NASAA Letter. --------------------------------------------------------------------------- c. Final Rules We are adopting changes to the residency requirements for issuers conducting exempt intrastate offerings largely as proposed, but with certain modifications to reflect our decision to retain existing Rule 147 as a safe harbor to the Section 3(a)(11) exemption. Since we are retaining Rule 147 as a safe harbor and since Section 3(a)(11) expressly requires that if the issuer is a corporation that it be ``incorporated by and doing business within, such state or territory,'' we are not eliminating the ``residence'' requirement in current paragraph (c)(1) of Rule 147, as proposed. Instead, we are retaining the requirement that an issuer shall be deemed a resident of a state or territory in which it is incorporated or organized for issuers that are incorporated or organized under state or territorial law, such as corporations, limited partnerships and trusts. In addition, for consistency between the provisions of Rule 147 and new Rule 147A,\67\ throughout amended Rule 147, we are replacing the ``principal office'' requirement with the proposed ``principal place of business'' requirement.\68\ Instead of ``principal [[Page 83500]] office,'' amended Rule 147 and new Rule 147A will refer to 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.\69\ We do not expect this change will significantly alter the scope of existing Rule 147 as we believe ``principal place of business'' is conceptually similar to principal office location. --------------------------------------------------------------------------- \67\ See Rules 147(c)(1), 147(d)(1), 147A(c)(1) and 147A(d)(1). The 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). \68\ For example, as proposed, we are amending paragraph (d)(1) of Rule 147 to replace the ``principal office'' requirement with ``principal place of business.'' See also Section II.B.3 below discussing the use of the ``principal place of business'' standard for the residence of entity purchasers. \69\ See Rules 147(c)(1), 147(d)(1), 147A(c)(1) and 147A(d)(1). --------------------------------------------------------------------------- Under amended Rule 147, issuers that are incorporated or organized under state or territorial law will be deemed a ``resident'' of a particular state or territory in which they are both incorporated or organized and have their ``principal place of business.'' \70\ Specifically, the ``principal office'' requirement contained in current Rule 147(c)(2)(iv) \71\ will be updated and replaced with the ``principal place of business'' requirement in amended Rule 147(c)(1)(i). Similarly, issuers that are general partnerships, or in the form of another business organization not organized under any state or territorial law, shall be deemed to be a ``resident'' of the state or territory in which they have their ``principal place of business.'' \72\ --------------------------------------------------------------------------- \70\ See 17 CFR 230.147(c)(1)(i). \71\ See 17 CFR 230.147(c)(1)(iv). \72\ See 17 CFR 230.147(c)(1)(ii). --------------------------------------------------------------------------- Consistent with the proposal, new Rule 147A(c)(1) will rely solely on the principal place of business requirement to determine the state or territory in which the issuer shall be deemed a ``resident,'' not only for corporate issuers, but for all issuers, including issuers that are not organized under any state or territorial law, such as general partnerships.\73\ Although commenters were divided on whether to retain the requirement that entities be incorporated or organized under the laws of the state in which the offering takes place, we continue to believe that using a principal place of business requirement in lieu of an in-state formation requirement to establish the issuer's residency is more consistent with modern business practices in which issuers are permitted to 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.\74\ We continue to believe that, outside the statutory requirements of Section 3(a)(11), the jurisdiction of entity formation should not affect the ability of an issuer to be considered ``resident'' for purposes of an intrastate offering exemption at the federal level. While we recognize that some commenters supported retaining an in-state formation requirement as a means of ensuring that the economic and social benefits of the offering remain within the state, the objectives of our rulemaking in this area are more broadly focused on facilitating capital formation by small businesses.\75\ We believe that retaining an in-state formation requirement in new Rule 147A would be unnecessarily restrictive and limit the usefulness of the exemption, potentially to the detriment of local economic development. --------------------------------------------------------------------------- \73\ See note 56 above. \74\ For example, data provided by issuers in Form D filings with the Commission indicates that approximately 37% of Rule 504 offerings and 39% of Rule 505 offerings indicated in their Form D filings that they had different states of incorporation and principal places of business. Form D data also indicates that approximately 65% of all Rule 506 offerings initiated during 2009- 2015 reported different states of incorporation and operations. See discussion in Section V.B.2.b.ii below. \75\ See e.g., Rule 147 Adopting Release at text accompanying note 2. --------------------------------------------------------------------------- We are, however, retaining the proposed principal place of business requirement, despite the views of several commenters that such a requirement is unnecessary or inappropriate.\76\ Although, as noted by one commenter, the jurisdictional reach of state securities laws is independent of whether an issuer is conducting any business within the state since a state's jurisdiction is established by the offer or sale of a security within the state,\77\ we believe that states will have a particular interest in regulating intrastate offerings for the protection of investors where there is a meaningful nexus between the state, issuers and investors. --------------------------------------------------------------------------- \76\ Bishop Letter; Exante Letter. \77\ Bishop Letter. --------------------------------------------------------------------------- To ensure an appropriate connection between the state, issuers and investors, amended Rule 147(d) and Rule 147A(d) will require an issuer to be a resident of the same state where purchasers are resident or where the issuer reasonably believes they are resident.\78\ Viewed together, paragraphs (c) and (d) of each of Rules 147 and 147A help to ensure the local intrastate character of the offering by requiring that both issuers and purchasers reside and have their principal place of business (for purchasers, the principal place of business requirement only applies to purchasers who are legal entities) \79\ in the same state or territory where the offering takes place. --------------------------------------------------------------------------- \78\ See Rule 147A(c)(1). \79\ Under both amended Rule 147(d)(2) and Rule 147A(d)(2), the residence of an individual (natural person) is determined by the state or territory in which his or her principal residence is located at the time of the offer and sale to the individual. --------------------------------------------------------------------------- For situations where an issuer changes its principal place of business to another state after conducting an intrastate offering in reliance on Rule 147 or Rule 147A, we are adopting provisions in both rules that limit the ability of an issuer to conduct a subsequent intrastate offering pursuant to Rule 147 or Rule 147A until such time as securities sold in reliance on the exemption in the prior state have come to rest in that state.\80\ This is consistent with the view that securities sold in an intrastate offering in one state should have to come to rest within such state before purchasers may resell their securities to out-of-state residents.\81\ Accordingly, both rules provide that issuers who have previously conducted an intrastate offering pursuant to Rule 147 or Rule 147A will not be able to conduct another subsequent intrastate offering pursuant to either rule in a different state for a period of six 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 our amendments to Rule 147(e) and new Rule 147A(e).\82\ The use of a six-month period is a change from the proposed nine-month period, and aligns these provisions with changes being made to amended Rule 147(e) and new Rule 147A(e), consistent with commenters' suggestions to reduce the nine-month resale limitation period to six months.\83\ --------------------------------------------------------------------------- \80\ See Rules 147(e) and 147A(e). \81\ See 1961 Release at 4. \82\ See Instruction to paragraph (c)(1) of Rule 147 and Instruction to paragraph (c)(1) of Rule 147A. \83\ See Section II.B.4.c below. --------------------------------------------------------------------------- B. Common Requirements of the Amendments to Rule 147 and New Rule 147A Our amendments to Rule 147 and the provisions of new Rule 147A are substantially identical, except that, as discussed above, new Rule 147A allows an issuer to make offers accessible to out-of-state residents and to be incorporated or organized out-of-state.\84\ Under the rules we adopt today, both amended Rule 147 and new Rule 147A will include the following provisions: --------------------------------------------------------------------------- \84\ See Sections II.A.1and II.A.2 above. --------------------------------------------------------------------------- A requirement that the issuer satisfy at least one ``doing business'' requirement that will demonstrate the in-state nature of the issuer's business. [[Page 83501]] A new ``reasonable belief'' standard for issuers to rely upon in determining the residence of the purchaser at the time of the sale of securities. A requirement that issuers obtain a written representation from each purchaser as to his or her residency. The residence of a purchaser that is a non-natural person, such as a corporation, partnership, trust or other form of business organization, will be defined as the location where, at the time of the sale, the entity has its ``principal place of business.'' A limit on resales to persons resident within the state or territory of the offering for a period of six months from the date of the sale by the issuer to the purchaser of a security sold pursuant to the exemption. An integration safe harbor that will 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 after the completion of the offering. Disclosure requirements, including legend requirements, to offerees and purchasers about the limits on resales. 1. Requirements for Issuers ``Doing Business'' In-State a. Proposed Amendments Under the proposed rules, an issuer would be required to meet at least one of the following requirements in order to be considered ``doing business'' in-state: 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; \85\ --------------------------------------------------------------------------- \85\ 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; \86\ --------------------------------------------------------------------------- \86\ 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; \87\ or --------------------------------------------------------------------------- \87\ See proposed Rule 147(c)(2)(iii). --------------------------------------------------------------------------- A majority of the issuer's employees are based in such state or territory.\88\ --------------------------------------------------------------------------- \88\ See proposed Rule 147(c)(2)(iv). --------------------------------------------------------------------------- b. Comments on the Proposed Amendments Several commenters supported our proposed amendments to the current ``doing business'' requirements in Rule 147(c)(2).\89\ One commenter specifically favored the proposed disjunctive approach, requiring an issuer to satisfy one of four threshold tests, thereby enabling different types of issuers (e.g., a brick-and-mortar business versus an online business) to confirm local residency and demonstrate the in- state nature of their business.\90\ Another commenter, although noting that the proposed requirements and thresholds appropriately reflect characteristics that are in keeping with establishing a local presence, was concerned that having to meet only one requirement may not establish the local connection of the issuer to the state to the degree anticipated by Section 3(a)(11) and encouraged a close review of this issue in a Commission study.\91\ --------------------------------------------------------------------------- \89\ CFA Letter; CFIRA Letter; CrowdCheck Letter; NASAA Letter. \90\ NASAA Letter. \91\ CFA Letter (``If the Commission determines to adopt the proposed approach, however, we encourage a close review in the study the Commission intends to undertake within three years of the adoption of the amendments.''). See note 106. --------------------------------------------------------------------------- Two commenters supported our proposed amendment to the ``doing business'' test to add an alternative threshold requirement based on the location of a majority of an issuer's employees.\92\ Several commenters supported using this additional criterion, but with different percentage thresholds.\93\ Some of these commenters recommended requiring that at least 80% of the issuer's employees be based in the state,\94\ while another commenter supported requiring that at least 75% of the issuer's employees be based in the state.\95\ --------------------------------------------------------------------------- \92\ Milken Letter; NASAA Letter. \93\ Ely Letter; MacDougall Letter; Pearl Letter; Terdal Letter; Wolff Letter. \94\ Ely Letter; MacDougall Letter; Pearl Letter; Terdal Letter. \95\ Wolff Letter. --------------------------------------------------------------------------- Several commenters opposed our proposed ``doing business'' requirements in favor of alternative standards.\96\ For example, some of these commenters supported the use of five alternative criteria in order for an issuer to be deemed a ``state business,'' specifically: the issuer's main office be located in-state, and at least 80% of the funds raised be used in-state, work is done in-state, employees live in-state and owners reside in-state.\97\ Another commenter supported generally these same criteria, but using 75% thresholds as opposed to 80% thresholds.\98\ Other commenters recommended a more flexible standard that would move away from the strict 80% thresholds in favor of majority requirements that would harmonize the current ``doing business'' tests with the proposed test for number of employees.\99\ Finally, another commenter suggested a periodic review by the Commission to evaluate the 80% thresholds to determine whether the exemption succeeds in facilitating the goal of small business capital formation while protecting investors.\100\ --------------------------------------------------------------------------- \96\ Ely Letter; MacDougall Letter; Pearl Letter; Terdal Letter. \97\ Ely Letter; MacDougall Letter; Pearl Letter (recommending that an issuer be required to satisfy ``at least three'' of these five criteria or from an alternative ``reasonable list''). Cf. Terdal Letter (``A more appropriate test of a ``local company'' would be one that has at least 80% of the employees' wages paid in state, or perhaps 80% of the work (i.e. manufacturing, producing, brewing, etc.) be done in state.''). \98\ Wolff Letter (recommending 75% thresholds for use of funds, work done in-state, and number of employees residing in-state but that the rules require only a majority of the owners' primary residences be located in-state). \99\ Milken Letter (stating that the requirement for a precise 80% threshold ``can be confusing and difficult for issuers to assess. Additionally, the high and precise threshold can exclude issuers that rationally should qualify.''); Pearl Letter. \100\ NASAA Letter. --------------------------------------------------------------------------- c. Final Rules After considering the comments, we are adopting, as proposed, updated and modernized ``doing business'' requirements in Rule 147 and new Rule 147A to comport with contemporary small business practices.\101\ We believe these updated requirements will expand the universe of issuers that may rely on Section 3(a)(11) and the amended Rule 147 safe harbor, as well as new Rule 147A, to conduct exempt intrastate offerings, while continuing to require issuers to have an in-state presence sufficient to justify reliance on these provisions. Given the increasing ``interstate'' nature of small business activities, we believe it has become increasingly difficult for companies, even smaller companies that are physically located within a single state or territory, to satisfy the issuer ``doing business'' requirements of current Rule 147(c)(2).\102\ Accordingly, we believe these issuer ``doing business'' requirements, identical for both amended Rule 147 and new Rule 147A, will provide issuers with greater flexibility in conducting intrastate offerings and expand the availability of [[Page 83502]] these two intrastate offering provisions.\103\ --------------------------------------------------------------------------- \101\ See Rules 147(c)(2) and 147A(c)(2). \102\ See discussion in Section II.A.2 above. \103\ See, e.g., Transcript of Record 82-91, SEC Advisory Committee on Small and Emerging Companies (June 3, 2015). --------------------------------------------------------------------------- As proposed, we are adopting amendments to Rule 147(c)(2) and including provisions in new Rule 147A(c)(2) that will provide issuers with greater flexibility to satisfy the current ``doing business'' requirements by adding an alternative test based on the location of a majority of the issuer's employees while retaining the three 80% threshold tests in current Rule 147(c)(2).\104\ Furthermore, while the substance of the three 80% threshold requirements of current Rule 147(c)(2) is being retained in the final rules, compliance with any one of the 80% threshold requirements (or the additional test based on the majority of employees) will be sufficient to demonstrate the in-state nature of the issuer's business, as proposed. This is a change from current Rule 147(c)(2), which requires issuers to satisfy all three 80% threshold requirements. --------------------------------------------------------------------------- \104\ See Rules 147(c)(2) and 147A(c)(2). --------------------------------------------------------------------------- We recognize that commenters had various alternative views on these requirements. While some commenters sought to require issuers to meet additional criteria, other commenters sought to lower the percentage thresholds in the criteria to ease the issuer requirements. We believe that the approach we are adopting in the final rules will provide issuers with additional flexibility to satisfy the requirements, while continuing to function as meaningful indicia of the in-state nature of the issuer's business. In light of the fact that issuers will need to meet only one of the threshold tests, we are not changing the current 80% threshold tests to a majority requirement as one commenter suggested.\105\ We believe it is appropriate to first observe how the updated doing business in-state requirements are used by issuers in practice before making any further changes.\106\ Except as discussed below, we also are not adopting alternative criteria for the doing business in-state requirements, as suggested by several commenters.\107\ We believe the existing criteria have generally served states, issuers and investors well by being easy to understand and apply, and when updated as discussed above, will appropriately reflect characteristics in keeping with a local business presence.\108\ --------------------------------------------------------------------------- \105\ See Milken Letter. \106\ As we indicated in the Proposing Release, we expect the staff to undertake to study and submit a report to the Commission no later than three years following the effective date of the final rules on whether this new framework appropriately provides assurances that an issuer is doing business in the state in which the offering takes place. \107\ See Ely Letter; MacDougall Letter; Pearl Letter; Terdal Letter. \108\ See CFA Letter. --------------------------------------------------------------------------- We are also making certain technical revisions to the three current 80% thresholds, as proposed, that we believe will simplify the structure and application of the rules.\109\ In light of our amendments to require issuers to satisfy only one of the threshold tests, we are eliminating 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.\110\ 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 is necessary under the new disjunctive approach that we are adopting in these rules. --------------------------------------------------------------------------- \109\ For example, in order to streamline the presentation of Rule 147(c)(2), we are re-designating 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 Instruction to paragraph (c)(2)(i) of Rule 147. Similarly, Rule 147A will also include an instruction on how to calculate revenue under Rule 147A(c)(2)(i). \110\ 17 CFR 230.147(c)(2)(i)(B). --------------------------------------------------------------------------- Consistent with the proposal, and as supported by commenters, we are adding an alternative requirement to the three modified 80% threshold requirements. This requirement, which relates to the location of a majority of the issuer's employees, will provide an additional method by which an issuer may demonstrate that it conducts in-state business sufficient to justify reliance on either Rule 147 or new Rule 147A. For these purposes, we are permitting an issuer to satisfy the ``doing business'' requirements by having a majority of its employees based in such state or territory.\111\ An employee would be based in the same state or territory of the issuer for purposes of this test if such employee is based out of offices located within such state or territory.\112\ For example, if an employee provides services in the Maryland, Virginia and Washington, DC metro area out of the offices of a company in Maryland, the employee would be based in Maryland for purposes of this test. While some commenters suggested different thresholds for the employee test (ranging from 75% to 80%), we believe that using a majority of the employees test provides a standard that more accurately captures the increasingly flexible ways that companies structure and conduct their business operations, while still requiring that more employees be located in-state than elsewhere. Current workforce trends, such as telecommuting, whereby employees often work in a different geographical location from their employer, suggest that flexibility is particularly needed in this area. We believe adding this criterion to expand upon the current doing business requirements in Rule 147(c)(2) will provide additional flexibility to issuers by making these requirements more consistent with modern business practices, especially in light of the different roles employees play within smaller companies and the different locations in which employees carry out such roles, while still providing important indicia of the in-state nature of an issuer's business. --------------------------------------------------------------------------- \111\ See Rules 147(c)(2)(iv) and 147A(c)(2)(iv). \112\ The state or territory in which an employee is based may, or may not, be the same state or territory in which the employee resides. --------------------------------------------------------------------------- 2. Reasonable Belief as to Purchaser Residency Status a. Proposed Amendments Consistent with the requirements in Regulation D,\113\ we proposed 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.\114\ 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.\115\ We also proposed to eliminate the requirement in current Rule 147 that issuers obtain a written representation from each purchaser as to his or her residence, as we believed this requirement may be unnecessary in light of the proposed reasonable belief standard.\116\ --------------------------------------------------------------------------- \113\ 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). \114\ See proposed Rule 147(d). \115\ Id. \116\ 17 CFR 230.147(f)(1)(iii). --------------------------------------------------------------------------- b. Comments on the Proposed Amendments Several commenters supported the proposal to include a reasonable belief standard.\117\ One of these commenters [[Page 83503]] stated that a reasonable belief standard will provide more certainty for issuers about the availability of the exemption and increase its utility without sacrificing investor protection.\118\ --------------------------------------------------------------------------- \117\ ABA Letter; City of Adrian Letter; CFA Letter; NASAA Letter. \118\ NASAA Letter. --------------------------------------------------------------------------- Commenters were divided on whether to eliminate the requirement to obtain a written representation from the purchaser as to his or her residence, with two commenters supporting the proposed elimination of the requirement \119\ and two commenters opposing it.\120\ Commenters opposing elimination of the requirement stated that the written representation should not be the sole indication of residency under a facts and circumstances exercise, but asserted that it is a useful indication of residency.\121\ --------------------------------------------------------------------------- \119\ CFIRA Letter; CrowdCheck Letter. \120\ CFA Letter; NASAA Letter. \121\ NASAA Letter (``this requirement should remain in place but may be construed as evidence of, but not be dispositive of, a reasonable belief of purchaser residency.''). --------------------------------------------------------------------------- Several commenters requested that the Commission provide a safe harbor for determining an individual purchaser's residence, based upon certain objective criteria.\122\ Two of those commenters supported the creation of a non-exclusive safe harbor setting out the means by which a reasonable belief may be established, including the circumstances in which an issuer may rely on the steps taken by a third-party, such as a service provider or intermediary.\123\ Another of those commenters stated that Commission staff should work with the states to standardize requirements for determining state of residency for purposes of investor participation in an offering to help ensure compliance with the residency requirement.\124\ In addition, the 2015 Small Business Forum recommended that the Commission create a safe harbor for determining the ``place of business'' of a non-natural person investor in Rule 147 offerings, which could be as simple as a self-certification as to its place of business.\125\ --------------------------------------------------------------------------- \122\ CFIRA Letter; CrowdCheck Letter; Letter from Brandon Smith, Managing Principal, Localstake Marketplace LLC, November 17, 2015 (``Localstake Letter''); Letter from Rose Oswald-Poels, President/CEO, Wisconsin Bankers Association, January 8, 2016 (``WBA Letter''). \123\ CFIRA Letter; CrowdCheck Letter. \124\ Localstake Letter. \125\ See 2015 Small Business Forum Recommendations. --------------------------------------------------------------------------- c. Final Rules Consistent with the proposal, and with the determination of accredited investor status under Regulation D,\126\ we are adopting amendments to Rule 147 and a provision in new Rule 147A that will include a reasonable belief standard for the issuer's determination as to the residence of the purchaser at the time of the sale of the securities.\127\ Under the final rules, an issuer will satisfy the requirement that the purchaser in the offering be a resident of the same state or territory in which the issuer is resident 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.\128\ Under current Rule 147(d), regardless of the efforts an issuer takes to determine that potential investors are residents of the state in which the issuer is resident, the exemption is lost for the entire offering if securities are offered or sold to just one investor that was not in fact a resident of such state. We continue to 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 amended Rule 147 and new Rule 147A by providing issuers with additional certainty about the availability of the exemption under Section 3(a)(11) or new Rule 147A while still providing appropriate investor protections.\129\ --------------------------------------------------------------------------- \126\ See note 113 above. \127\ See Rules 147(d) and 147A(d). \128\ Id. \129\ The burden will continue to be on the issuer to establish that the purchaser is an in-state resident or that the issuer had a reasonable belief as to residency. Otherwise, the sale to a non- resident purchaser would preclude reliance on amended Rule 147 or new Rule 147A. --------------------------------------------------------------------------- In a change from the proposal, both amended Rule 147 and new Rule 147A will include a requirement that issuers obtain a written representation from each purchaser as to his or her residence.\130\ We are persuaded by those commenters who stated that this requirement should be retained and considered as evidence of, but not be dispositive of, the purchaser's residency. In the context of Section 3(a)(11), 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.'' \131\ Whether an issuer has formed a reasonable belief that the prospective purchaser is an in-state resident will be determined on the basis of all facts and circumstances. Obtaining a written representation from purchasers of in-state residency status will not, without more, be sufficient to establish a reasonable belief that such purchasers are in-state residents.\132\ --------------------------------------------------------------------------- \130\ See Rules 147(f)(1)(iii) and 147A(f)(1)(iii). \131\ See 1961 Release at 3. \132\ See Instruction to paragraph (d) of Rule 147 and Instruction to paragraph (d) of Rule 147A. --------------------------------------------------------------------------- In addition to the written representation, other facts and circumstances could include, but will not be limited to, for example, a pre-existing relationship between the issuer and the prospective purchaser that provides the issuer with sufficient knowledge about the prospective purchaser's principal residence or principal place of business so as to enable the issuer to have a reasonable basis to believe that the prospective purchaser is an in-state resident. An issuer may also consider other facts and circumstances when 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, any documentation issued by a federal, state, or local government authority, such as a driver's license or identification card, or a public or private database that the issuer has determined is reasonably reliable, including credit bureau databases, directory listings, and public records. While a few commenters \133\ and the 2015 Small Business Forum recommended that the Commission provide a safe harbor for determining a purchaser's residence, including the circumstances in which a reasonable belief may be established, we are not doing so in the final rules. Our rules do not provide a safe harbor for the reasonable belief determination made under Rule 501(a) of Regulation D for exempt offerings, and we do not believe that the determinations required for amended Rule 147 and new Rule 147A present a more compelling case for having such a provision. In addition, we are concerned that a safe harbor could be viewed as an exclusive or minimum standard. We believe that requiring issuers to consider the facts and circumstances in order to establish a reasonable basis to believe that the purchaser is a resident of the same state or territory in which the issuer is resident is appropriate and will provide sufficient certainty for issuers seeking to satisfy the requirements of the exemption. Commission staff will consider available information on issuer compliance with the ``reasonable belief'' standards in connection with the study [[Page 83504]] of amended Rule 147 and new Rule 147A.\134\ --------------------------------------------------------------------------- \133\ CFIRA Letter; CrowdCheck Letter; Localstake Letter; WBA Letter. \134\ See Section I above. --------------------------------------------------------------------------- 3. Residence of Entity Purchasers a. Proposed Amendments We proposed to 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.\135\ For these purposes, we also proposed to 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 its activities.\136\ --------------------------------------------------------------------------- \135\ 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.'' Current Rule 147 does not define ``principal office.'' 17 CFR 230.147(c)(2)(iv). \136\ See proposed Rule 147(c)(1). --------------------------------------------------------------------------- b. Comments on the Proposed Amendments Two commenters supported the proposed amendments to replace the ``principal office'' requirement for entity purchasers with the ``principal place of business'' standard, consistent with the standard for issuers.\137\ One commenter suggested that the Commission clarify how the residency of non-business trusts should be determined.\138\ --------------------------------------------------------------------------- \137\ NASAA Letter; NextSeed Letter. \138\ Bishop Letter (recommending that Rule 147(d)(1) be amended to add: ``A trust that is not deemed by the law of the state or territory of its creation to be a separate legal entity is deemed to be a resident of each state or territory in which its trustee is, or trustees are, resident.''). --------------------------------------------------------------------------- c. Final Rules Consistent with the proposal, we are adopting amendments to Rule 147 and a provision in new Rule 147A that will 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.\139\ The final rules define a purchaser's ``principal place of business,'' consistent with the definition for determining issuer residency contained in paragraph (c)(1) of Rules 147 and 147A, as the location in which the officers, partners, or managers of the entity primarily direct, control and coordinate its activities.\140\ In addition, as suggested by one commenter, \141\ we are adding an instruction to the requirement as to the residency of the purchaser stating that a trust that is not deemed by the law of the state or territory of its creation to be a separate legal entity should be deemed to be a resident of each state or territory in which its trustee is, or trustees are, resident.\142\ --------------------------------------------------------------------------- \139\ See Rules 147(d) and 147A(d). \140\ See Rules 147(c)(1), 147(d)(1), 147A(c)(1) and 147A(d)(1). \141\ Bishop Letter. \142\ See Instruction 1 to paragraph (d)(1) of Rule 147 and Instruction 1 to paragraph (d)(1) of Rule 147A. --------------------------------------------------------------------------- 4. Limitation on Resales a. Proposed Amendments We proposed 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 by a purchaser would need to be made only to residents within the purchaser's state or territory of residence.\143\ In contrast, Rule 147(e) currently requires that during the period in which securities are offered and sold in reliance on the intrastate offering exemption, and for a period of nine months from the date of the last sale by the issuer of such securities, all resales of any securities sold in the offering shall only be made to persons resident within the state or territory of which the issuer is a resident. In the Proposing Release, we explained 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 has taken the securities ``without a view to further distribution or resale to non-residents.'' \144\ In this regard, we believed that a time-based limitation on potential resales to non-residents that relates back to the date of the purchase by a resident investor from the issuer would more precisely address the concern regarding out-of-state resales. --------------------------------------------------------------------------- \143\ Proposed Rule 147(e). \144\ See Proposing Release, at text accompanying note 87. --------------------------------------------------------------------------- We also proposed 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).\145\ We believed 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. As proposed, issuers would remain subject to requirements relating to, for example, in-state sales limitations, legends, 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. Lastly, although we did not propose to amend our rules to provide that securities issued under amended Rule 147 be considered ``restricted securities'' under Rule 144(a)(3), \146\ we requested comments on this question. --------------------------------------------------------------------------- \145\ See proposed Rule 147(b). As proposed, current Rule 147(a) would be re-designated as Rule 147(b). \146\ 17 CFR 230.144(a)(3). --------------------------------------------------------------------------- b. Comments on the Proposed Amendments Several commenters supported the proposed change to the 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.\147\ Commenters, however, had differing views on the length of the holding period from the date of sale. Two commenters supported a nine-month holding period from the date of sale.\148\ One of these commenters reasoned that this period sufficiently demonstrates the purchase was for investment without an intent to distribute out-of-state or avoid registration.\149\ Two other commenters stated that a period of six months is adequate to establish that securities have ``come to rest'' in a state.\150\ Those commenters noted that a nine-month period does not exist in any other securities law requirements, so the potential exists for confusion. One commenter recommended that the Commission clarify that bona fide gifts are not subject to the limitation on resales out-of-state, and that a donee is deemed to have acquired the securities when they were acquired by the donor.\151\ --------------------------------------------------------------------------- \147\ CFA Letter; CFIRA Letter; CrowdCheck Letter; NASAA Letter. \148\ CFA Letter; NASAA Letter. \149\ NASAA Letter. \150\ CrowdCheck Letter; CFIRA Letter. These commenters stated that allowing a six-month period, by analogy to parts of Rule 144, is more appropriate. \151\ Bishop Letter. --------------------------------------------------------------------------- Commenters were divided on whether securities issued under amended Rule 147 should be considered ``restricted securities'' under Rule 144(a)(3). One commenter stated that securities issued under amended Rule 147 should be considered ``restricted securities'' under Rule 144(a)(3).\152\ Two other [[Page 83505]] commenters stated that the securities should not be treated as ``restricted securities'' under Rule 144(a)(3), noting that the ``coming to rest'' in-state purpose of the nine-month restriction is sufficiently distinct from the policy considerations underlying Rule 144.\153\ --------------------------------------------------------------------------- \152\ NASAA Letter. \153\ CFIRA Letter; CrowdCheck Letter. --------------------------------------------------------------------------- In addition, several commenters supported no longer conditioning the availability of the exemption on purchaser compliance with Rule 147(e).\154\ One of those commenters reasoned that if an issuer takes reasonable steps to comply with the limitations on resale, the issuer should not lose the original exemption if a purchaser does not comply with the resale restrictions at a later date.\155\ --------------------------------------------------------------------------- \154\ CFIRA Letter; CrowdCheck Letter; NASAA Letter. \155\ NASAA Letter. --------------------------------------------------------------------------- c. Final Rules After considering the comments, we are adopting a requirement in amended Rule 147 and new Rule 147A providing that for a period of six months from the date of the sale of the security by the issuer any resale of the security shall be made only to persons resident within the state or territory in which the issuer was resident at the time of the sale of the security by the issuer.\156\ We are persuaded by those commenters that indicated that a period of six months is adequate to establish that securities sold in an intrastate offering have ``come to rest'' in a state by analogizing to provisions of Rule 144, in which a six-month holding period is deemed sufficient to establish a requisite investment intent.\157\ In this regard, given the use of a six-month resale restriction in the Rule 144 context, we believe that a similar resale restriction in the intrastate offering context should provide adequate assurance that the securities will come to rest in-state.\158\ --------------------------------------------------------------------------- \156\ Rules 147(e) and 147A(e). \157\ See CFIRA Letter and CrowdCheck Letter. Rule 144 provides a safe-harbor from being deemed a ``statutory underwriter'' under Section 2(a)(11) of the Securities Act. Specifically, Rule 144(d)(1)(i) requires a six-month holding period for restricted securities sold by issuers reporting under the Exchange Act in order for a purchaser to resell such securities and not be deemed an underwriter. \158\ In such circumstances, resales of securities that were initially purchased in an intrastate offering must themselves be registered or exempt from registration pursuant to any state securities laws where such resale takes place. --------------------------------------------------------------------------- We note that bona fide gifts are not subject to the limitation on resales in amended Rule 147 or new Rule 147A.\159\ Since bona fide gifts are not transactions for value, they require no investment decision by the donee and thus do not involve the sale of a security subject to regulation under the Securities Act.\160\ However, we note that subsequent resales of donated securities are subject to the resale restrictions regardless of the state in which the holder of the donated securities resides. To address bona fide gifts of securities to out-of- state donees, as well as the resales of securities that were wrongfully sold to out-of-state purchasers, within the six month re-sale limitation period, we are revising our proposed resale limitation to focus on the state or territory in which the issuer was resident, as opposed to where the last purchaser of the securities may have resided. Accordingly, the resale limitation in the final rules limits resales to ``persons resident within the state or territory in which the issuer was resident . . . at the time of the sale of the security by the issuer'' as opposed to limiting resales to ``persons resident within the purchaser's state or territory of residence,'' as proposed. We believe this revision will address situations in which purchasers in the offering subsequently gift or wrongfully sell their securities to out-of-state residents who then wish to resell their securities within the six month limitation of paragraph (e). This change to the rules makes clear that the six-month limitation on resales applies to all holders of the securities, including holders subsequent to the original purchaser, whether they received the shares as a gift, donation, or by purchase.\161\ --------------------------------------------------------------------------- \159\ See Bishop Letter. \160\ Section 2(a)(3) of the Securities Act defines ``sale'' or ``sell'' to ``include every contract of sale or disposition of a security or interest in a security, for value.'' A lack of monetary consideration, however, does not always mean that there was not a sale or offer for sale for purposes of Section 5. See, e.g., Capital General Corporation, 54 SEC Docket 1714, 1728-29 (July 23, 1993) (Capital General's ``gifting'' of securities constituted a sale because it was a disposition for value, the ``value'' arising ``by virtue of the creation of a public market for the issuer's securities.''). See also SEC v. Harwyn Industries Corp., 326 F. Supp. 943 (S.D.N.Y. 1971). \161\ See Rules 147(e) and 147A(e). --------------------------------------------------------------------------- As proposed, the resale limitation period for both amended Rule 147(e) and new Rule 147A(e) will relate back to the date of purchase by a resident investor from the issuer, in contrast to current Rule 147(e) that does not start the resale limitation period until the offering has terminated (i.e., until all offers and sales have ceased).\162\ We continue to 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 purchase by a resident investor from the issuer would more precisely address the concern regarding out-of-state resales. --------------------------------------------------------------------------- \162\ The resale limitation period may end on different dates for different purchasers if the issuer sold shares on multiple dates. --------------------------------------------------------------------------- In light of our revision to the resale limitation to focus on the state where the issuer is a resident, we are including additional language in amended Rule 147(e) and new Rule 147A(e) to specify that all re-sales during this six month resale limitation period will be restricted to the state or territory in which the issuer was a resident at the time of the sale of the security by the issuer to a purchaser. Accordingly, if an issuer were to change its state or territory of residence during the six month resale limitation period, all resales would, nevertheless, continue to be limited to the state or territory in which the issuer resided at the time of the original sale of securities in reliance upon either Rule 147 or Rule 147A. We believe this additional language will preserve the intent of the proposed resale restriction--to help ensure that the securities offered pursuant to an intrastate offering exemption have come to rest within the state of the offering before being resold. As proposed, an issuer's ability to rely on the respective rules will not be conditioned on a purchaser's compliance with Rule 147(e) and Rule 147A(e).\163\ As discussed in the Proposing Release, the application of current Rule 147(e) in the overall scheme of the safe harbor can cause uncertainty for issuers. We continue to believe that removing the condition on purchaser compliance with Rule 147(e) will increase the utility of the exemption by eliminating the uncertainty created in the offering process for issuers under the current rules. As one commenter noted, if an issuer takes reasonable steps to comply with the limitations on resale, it should not lose the availability of the exemption due to a purchaser not complying with the resale limitations.\164\ We continue to believe that eliminating this uncertainty should not result in an increased risk of issuer non- compliance with the rules, because issuers will remain subject to requirements relating to, for example, in-state sales limitations, legends, stop transfer instructions for transfer agents, and offeree and purchaser disclosures, in order to satisfy the exemption at the federal level.\165\ In addition, issuers will [[Page 83506]] continue to be subject to the antifraud and civil liability provisions of the federal securities laws, as well as state securities law requirements. --------------------------------------------------------------------------- \163\ See Rules 147(b) and 147A(b). Current Rule 147(a) would be re-designated as Rule 147(b). \164\ NASAA Letter. \165\ Commission staff will seek to review information gathered by state regulators on issuer compliance with the legend requirements in amended Rule 147(f) and new Rule 147A(f) as part of the study of amended Rule 147 and new Rule 147A. See Section I. --------------------------------------------------------------------------- Lastly, while one commenter believed that securities issued under amended Rule 147 should be considered ``restricted securities'' under Rule 144(a)(3), \166\ we believe that limiting the resale of these securities only to persons resident within the same state or territory in which the issuer is a resident for a period of six months from the date of the sale of the security by the issuer to the purchaser is sufficient to assure that the offering has come to rest in the state or territory in which the issuer resides and thereby preserve the local character of the offering. We note that states are free to impose any additional requirements they believe are necessary to protect the residents of their states, including imposing further transfer restrictions on securities issued under amended Rule 147 or new Rule 147A similar to that required under Rule 144(a)(3). In addition, persons reselling securities will need to consider whether they could be an ``underwriter'' if they acquired the securities with a view to ``distribution'' or if they are participating in a ``distribution.'' \167\ A seller that complies with the conditions of the Rule 144 safe harbor will not be deemed to be an underwriter.\168\ --------------------------------------------------------------------------- \166\ Id. \167\ See Section 4(a)(1) of the Securities Act (exempting from registration ``transactions by any person other than an issuer, underwriter, or dealer'') and Section 2(a)(11) of the Securities Act (defining the term ``underwriter''). 15 U.S.C. 77d(a)(1) and 15 U.S.C. 77b(a)(11). \168\ 17 CFR 230.144. --------------------------------------------------------------------------- 5. Integration a. Proposed Amendments The proposed Rule 147 integration 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 proposed paragraph (h) of Rule 147; 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.\169\ --------------------------------------------------------------------------- \169\ See proposed Rule 147(g). --------------------------------------------------------------------------- b. Comments on the Proposed Amendments One commenter supported including registered offers and sales and certain other exempt offerings occurring within six months after completion of the offering in the integration safe harbor, as proposed.\170\ The same commenter did not support providing a safe harbor for any and all prior offers or sales of securities by the issuer, as proposed in paragraph (g)(1) of the amended rule, and instead recommended restricting the safe harbor to cover only offers and sales of securities that take place before the six-month period immediately preceding the Rule 147 offering.\171\ While acknowledging that the proposed integration safe harbor is consistent with the integration safe harbor in Rule 251(c) of Regulation A, the commenter distinguished Regulation A from Rule 147 by noting that ``Regulation A is a quasi-registration subject to regulatory oversight by the Commission and the states while a Rule 147 offering may be exempt at both the federal and state level.'' In determining an integration safe harbor model to follow, the commenter indicated it would be better to look to Rule 502(a) of Regulation D, which limits the safe harbor for private offerings to offers and sales occurring either six months before, or six months after, a Regulation D offering.\172\ --------------------------------------------------------------------------- \170\ NASAA Letter. \171\ Id. \172\ Id. Rule 502(a) provides that ``Offers and sales that are made more than six months before the start of a Regulation D offering or are made more than six months after completion of a Regulation D offering will not be considered part of that Regulation D offering, so long as during those six month periods there are no offers or sales of securities by or for the issuer that are of the same or a similar class as those offered or sold under Regulation D, other than those offers or sales of securities under an employee benefit plan as defined in Rule 405 under the Act.'' 17 CFR 230.502(a). --------------------------------------------------------------------------- On the other hand, two commenters believed that Rule 147 offerings should not be integrated with any other exempt offerings.\173\ One of these commenters recommended that Rule 147 contain language expressly stating that an offering made in reliance on Rule 147 will not be integrated with another exempt offering made concurrently, provided that each offering meets the requirements of the claimed exemption.\174\ --------------------------------------------------------------------------- \173\ NextSeed Letter; Localstake Letter. \174\ NextSeed Letter. --------------------------------------------------------------------------- c. Final Rules After considering the comments, we are adopting amendments to the integration safe harbor under Rule 147 and providing an identical integration safe harbor provision in new Rule 147A, substantially as proposed. The integration safe harbor will cover any prior offers or sales of securities by the issuer, as well as certain subsequent offers or sales of securities by the issuer occurring after the completion of an offering pursuant to Rule 147 or Rule 147A, as applicable. Accordingly, offers and sales made pursuant to Rules 147 and 147A will not be integrated with: Offers or sales of securities made prior to the commencement of offers and sales of securities pursuant to Rules 147 or 147A; or Offers or sales of securities made after completion of offers and sales pursuant to Rules 147 or 147A that are: Registered under the Securities Act, except as provided in Rule 147(h) or Rule 147A(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 Rules 147 or 147A.\175\ --------------------------------------------------------------------------- \175\ See Rules 147(g) and 147A(g). --------------------------------------------------------------------------- As discussed in the Proposing Release, integration safe harbors provide issuers, particularly smaller issuers whose capital needs often change, with greater certainty about their eligibility to comply with an exemption from Securities Act registration.\176\ Consistent with the proposal and the approach taken in Rule 251(c) of Regulation A, the safe harbor from integration provided by Rule 147(g) and Rule 147A(g) will expressly provide that any offer or sale made in reliance on the respective rules will not be integrated with any other offer or sale made either before the commencement of, or more than six [[Page 83507]] months after the completion of, the respective intrastate offerings under either Rule 147 or Rule 147A. For transactions that fall within the scope of the safe harbor, issuers will not have to conduct an integration analysis of the terms of any offering being conducted under the other specified provisions in order to determine whether the two offerings would be treated as one for purposes of qualifying for either exemption.\177\ While one commenter recommended that the Commission adopt a safe harbor more closely aligned with the provisions of Rule 502(a) of Regulation D,\178\ we believe the integration safe harbor in Rule 251(c) of Regulation A is more consistent with the Commission's post-JOBS Act approach to integration that has evolved since the adoption of Regulation D in 1982 to better articulate the principles underlying the integration doctrine in light of current offering practices and developments in information and communication technology.\179\ As we explained in the Proposing Release, we believe that our approach to integration will provide issuers with greater certainty as to the availability of an exemption for a given offering and increase consistency in the application of the integration doctrine among the exemptive rules available to smaller issuers, while preserving important investor protections provided in each exemption.\180\ --------------------------------------------------------------------------- \176\ See Proposing Release at Section II.B.4.d. (Integration); see also 2015 Regulation A Release at Section II.B.5. (Integration). \177\ The issuer will, however, need to comply with the requirements of each exemption that it is relying upon. For example, an offering made pursuant to Rule 506(b) will not be integrated with a subsequent offering pursuant to Rule 147A, but the issuer will need to comply with the requirements of each rule, including the limitation on general solicitation for offers made pursuant to Rule 506(b). \178\ NASAA Letter. \179\ See also, Regulation Crowdfunding Adopting Release. \180\ See Proposing Release at text accompanying note 103. See also Rule 251(c) of Regulation A [17 CFR 230.251(c)]; Rule 701 [17 CFR 230.701]. Each exemption is designed based on a particular type of offer and investor, with corresponding requirements that must be satisfied. --------------------------------------------------------------------------- The bright-line integration safe harbor we are adopting in amended Rule 147(g) and new Rule 147A(g) will assist issuers, particularly smaller issuers, in analyzing certain transactions, but will not address the issue of potential offers or sales that occur concurrently with, or close in time after, a Rule 147 or 147A offering. There is no presumption that offerings outside the integration safe harbors should be integrated. Rather, whether concurrent or subsequent offers and sales of securities will be integrated with any securities offered or sold pursuant to amended Rule 147 or new Rule 147A will depend on the particular facts and circumstances, including whether each offering complies with the requirements of the exemption that is being relied upon for the particular offering.\181\ For example, an issuer conducting a concurrent exempt offering for which general solicitation is not permitted will need to be satisfied that purchasers in that offering were not solicited by means of the offering made in reliance on Rule 147 or new Rule 147A.\182\ If an offer fails to comply with the requirements of the exemption, and the offer is not registered and no other exemption is available, that offer would be in violation of Section 5 of the Securities Act. --------------------------------------------------------------------------- \181\ The integration concept was first articulated by the Commission in 1933 and was further developed in two interpretive releases issued in the 1960s. See SEC Rel. No. 33-97 (Dec. 28, 1933); SEC Rel. No. 33-4434 (Dec. 6, 1961); SEC Rel. No. 33-4552 (Nov. 6, 1962). The interpretive releases stated that determining whether a particular securities offering should be integrated with another offering requires an analysis of the specific facts and circumstances of the offerings. The Commission identified five factors to consider in making the determination of whether the offerings should be integrated. See SEC Rel. No. 33-4552 (Nov. 6, 1962). See also Rule 502(a) of Regulation D. More recently, the Commission has provided additional guidance to help issuers evaluate whether two offerings should be integrated. In 2007, the Commission provided a framework for analyzing how an issuer can conduct simultaneous registered and private offerings. See SEC Release No. 33-8828 (Aug. 3, 2007) [72 FR 45116 (Aug. 10, 2007)]. In 2015, when implementing provisions of the JOBS Act, the Commission applied this framework to concurrent exempt offerings, including situations where one offering permits general solicitation and the other does not. See 2015 Regulation A Release at Section II.B.5 and Regulation Crowdfunding Adopting Release at Section II.A.1.c. In those releases, the Commission noted that an offering made pursuant to Regulation A or Regulation Crowdfunding should not be integrated with another exempt offering made by the issuer, provided that each offering complies with the requirements of the exemption that is being relied upon for the particular offering. Id. \182\ For a concurrent offering under Rule 506(b), purchasers in the Rule 506(b) offering could not be solicited by means of a general solicitation under Rule 147 or new Rule 147A. The issuer would need an alternative means of establishing how purchasers in the Rule 506(b) offering were solicited. For example, the issuer may have had a preexisting substantive relationship with such purchasers. Otherwise, the solicitation conducted in connection with the Rule 147 or Rule 147A offering would very likely preclude reliance on Rule 506(b). See also SEC Rel. No. 33-8828 (Aug. 3, 2007) [72 FR 45116 (Aug. 10, 2007)]. --------------------------------------------------------------------------- Amended Rule 147, as a safe harbor under Section 3(a)(11), will continue to prohibit out-of-state offers to any person not residing in [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2016-26348. Public record. Not legal advice.