The SEC has recently issued interpretations regarding Rule 147. This rule provides a safe harbor under Section 3(a)(11) of the Securities Act of 1933, as amended, which exempts from federal registration securities offered and sold only to persons resident within a single state or territory, in which the issuer is also resident. While the exemption is a relatively simple idea at a high level, there can often be challenges in applying it, such as determining where a company resides or where an offer occurs. Rule 147 provides bright line tests that can be critical when structuring an intrastate offering.
The recent SEC interpretations are specifically useful if attempting to structure a crowdfunding transactions solely within a state. The interpretations clarify that an issuer would not violate Rule 147 by:
- engaging in general advertising or general solicitation, provided that offers of securities are made only to persons resident within the state of which the issuer is a resident;
- using an third-party Internet portal to promote an offering to residents of a single state, if the portal implements adequate measures so that offers of securities are made only to persons resident in the relevant state;
- using its own website or social media presence to offer securities, if it implements technological measures to limit communications that are offers only to those persons whose Internet Protocol, or IP, address originates from a particular state and prevent any offers to be made to persons whose IP address originates in other states.
In addressing the challenges of limiting offers of securities to residents of the issuer’s state, the SEC strongly encouraged:
- using disclaimers and restrictive legends making it clear that the offering is limited to residents of the relevant state; and
- limiting access to information about specific investment opportunities to persons who confirm they are residents of the relevant state (for example, by providing a representation as to residence or in-state residence information, such as a zip code or residence address).
It is important to recall that Rule 147 only provides a federal securities registration exemption. An issuer using it must still comply with state securities registration requirements. With the recent crowdfunding rules adopted in Washington (and a few other states), conducting an intrastate crowdfunded securities offering will be possible.
The SEC’s recent interpretations give issuers comfort that, when attempting to use such state crowdfunding exemptions, they will not inadvertently step outside of the federal exemption for intrastate securities offerings.