SEC Approves Intrastate Offerings and Increasing the Rule 504 Cap

The Securities and Exchange Commission (the “SEC”) approved, on October 26, 2016, amendments to its Securities Act of 1933 (the “Securities Act”) Rule 147 and the creation of Rule 147A, amendments to its Rule 504, and the repeal of the limited use Rule 505.  See press release, here.  The final rules apparently largely follow the proposed rules.  See proposed rules, here.

Rule 147 was adopted as a safe harbor under Securities Act Section 3(a)(11) to exempt from the securities registration requirements the securities of companies established in a state and offering and selling securities in the same state.  The offer in the same state could be seen as an issue in the internet era.  The SEC, under other authority than Section 3(a)(11), has amended Rule 147 to, among other things, remove the restriction on to whom offers can be made, although sales can only be made to residents of the same state.  Moreover, the amended rule allows sales to a company established in another state (like Delaware) but with its principal place of business in-state (like New York), where the company’s activities are effectively directed, controlled and coordinated and it meets certain financial requirements.  Rule 147A follows Rule 147 and allows a company to be established in another state if the issuer has a “reasonable belief” that it has a principal place of business in the state where the securities sales are taking place.  Amended Rule 147 and Rule 147A go into effect 150 days after publication in the Federal Register.

Rule 504 of Regulation D allows a private sale of $1 million of securities in any 12-month period if certain other requirements are met.  The rule is amended to increase this to $5 million and to disqualify certain bad actors from using it.  At the same time, Rule 505, with its $5 million cap and complicated rules and which is little used, is deleted in favor of the new Rules 147 and 147A and recently amended Rule 506 under Regulation D.  The amended Rule 504 goes into effect 60 days after Federal Register publication, and the repeal of 505 goes into effect 180 days after publication.