Tag Archives: SEC Rule 147

Intrastate Crowdfunding After Title III

CF WordclouldOn one hand, the SEC just proposed several changes to Rule 147 that will make intrastate Crowdfunding easier:

  • We used to worry, at least a little, about the language in Rule 147 saying that you couldn’t offer securities to anyone outside the state. How does this work when your offers are made with the Internet, we wondered? The SEC just proposed eliminating that requirement.
  • If you were doing an intrastate offering in Texas, Rule 147 used
    to require using a Texas entity – not Delaware, for example. No more.
  • If you’re doing an intrastate offering in Texas, you have to show you’re doing business in Texas. The new proposals would make that easier.
  • The new proposals would also simplify and rationalize the rules around (1) the “integration” of offerings (combining an intrastate offering with other offerings), (2) verifying that investors are residents of the state, and (3) re-sales of securities purchased in an intrastate offering.

All that is great, and should really help the intrastate Crowdfunding market (although I take to heart Anthony Zeoli’s excellent caveat here.)

On the other hand, the SEC also proposed a $5 million cap on intrastate offerings, which seems very important in light of Title III.

Title III Crowdfunding allows any issuer anywhere to raise up to $1 million from non-accredited investors who live anywhere in the world. With Title III Crowdfunding available, why would an issuer use intrastate Crowdfunding? There are only two possible reasons:

  • You’re allowed to raise more money in the intrastate offering
  • The process of the intrastate offering is faster/cheaper/easier

Once the hi-tech folks get their hands around Title III, I think we’re going to see the process becoming faster, cheaper, and easier than it looks now, making Title III comparable (maybe even superior) to intrastate Crowdfunding from that perspective.

Then it just comes down to how much you can raise. If I am a small issuer – raising less than $1 million, for example – why would I use the intrastate law of my state when I can use Title III instead and appeal to the whole universe of investors? Case in point:  New Jersey enacted an intrastate Crowdfunding law just this week – with a $1 million limit. Why would a New Jersey business use that law, with Title III on the books and the gold and silver of Manhattan right across the Hudson River?

And if I’m a software developer wondering what kind of platform to build, isn’t the scale tipped in favor of Title III?

The scales will tip further that way when Congress increases the limit of Title III from $1 million to something higher. Although the SEC can always raise the limit for intrastate Crowdfunding as well, the future probably belongs to Title III.

Questions? Let me know.

THE FEDERAL BASIS FOR INTRA-STATE CROWDFUNDING

Texas is the latest of a half dozen states to propose an intra-state Crowdfunding law. Typically, these laws allow issuers to raise money from non-accredited investors, even before Title III of the JOBS Act comes into effect, as long as all the investors are residents of the state in question and the offering satisfies requirements that vary from state to state.

At the Austin event, an audience member asked a very good question: If I comply with the Texas law, do I also have to comply with a Federal law? The answer is a qualified Yes.

Federal law begins with the proposition that securities may not be issued unless registered under the Securities Act of 1933. However, section 3(a)(11) of the Act provides an exemption for:

Any security which is a part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within or, if a corporation, incorporated by and doing business within, such State or Territory.

Thus, Federal law includes an exemption for some purely intrastate offerings.

SEC Rule 147 (17 CFR 230.147) provides a “safe harbor” under section 3(a)(11). Where all the conditions of Rule 147 are satisfied, the SEC will assume that the offering is exempt from Federal registration:

  • The issuer may neither offer nor issue any securities within the six month period before the first offer or sale of the intrastate offering nor within six months after the last offer or sale of the intrastate offering.
  • The issuer must be incorporated in the state where the offering is made. (Caution: Many lawyers use Delaware entities as a matter of course. Unless you’re in Delaware, don’t.)
  • At least 80% of the issuer’s revenues must come from business within the state.
  • At least 80% of the issuer’s assets must be located in the state.
  • At least 80% of the money raised in the offering must be used in the state.
  • All of the investors in the offering must be residents of the state.
  • While the offering is being conducted and for nine months thereafter, all resales must be to state residents.
  • The issuer must place a legend on stock certificates referencing these restrictions, and take other steps to ensure that the offering remains intrastate only.

Rule 147 is just a “safe harbor.” An intrastate offering that does not satisfy all of these conditions might still qualify for the statutory exemption under section 3(a)(11), depending on all the facts.

Some State Crowdfunding exemptions, Texas included, require that that the issuer satisfies Rule 147. In those States, by definition, an issuer that satisfies the requirements of the State exemption satisfies the Federal requirements as well. In other States, an issuer that dots all the I’s and crosses all the T’s of an intrastate Crowdfunding offering has a very good chance of qualifying under the Federal statutory exemption as well, even if the State exemption does not refer to Rule 147 explicitly.

That’s why the answer is a qualified Yes. An issuer that complies with the Crowdfunding rules of a State still has to qualify for the Federal exemption, but that shouldn’t be hard.

Questions? Contact Mark Roderick.

 

 

 

 

 

 

 

 

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