SEC Provides Guidance on Complying with Rule 147 in Crowdfunding Transactions

January 6, 2015

CrowdfundingSection 3(a)(11) of the Securities Act, which is generally known as the “intrastate offering exemption”, is intended to facilitate the financing of local business operations by providing an exemption from the registration requirements of the Securities Act for issuers that are organized in the state where it is offering securities, carry out a significant amount of its business in that state (the “doing business” requirement), and make offers and sales only to residents of that state.  The intrastate offering exemption does not limit the size of the offering or the number of purchasers; however, issuers must carefully determine the residence of each offeree and purchaser since an offer or sale to even one non-resident will destroy the exemption and expose the issuer to potential liability for violation of the Securities Act

SEC Rule 147 [17 C.F.R. § 230.147] is an attempt to give objective content to some of the critical concepts of the intrastate offering exemption such as “resident” and “doing business.” The residence of an offeree or purchaser is the principal office, if a business, or principal residence, if an individual. An issuer is deemed to be “doing business” in the state if the principal office of the issuer is in the state and the state is the situs of 80% of each of the issuer’s gross revenues, assets and proceeds from the offering. The requirement that the securities actually come to rest within the state in which the offering occurs is satisfied if resales are limited to residents of the state for a period of nine months from the date of the last sale by the issuer of the offered securities. Rule 147 is not exclusive and reliance may still be placed on the exact statutory language of Section 3(a)(11), as interpreted by the courts and the SEC. However, given that prior interpretations of Section 3(a)(11) have been largely restrictive, it is generally prudent to rely on Rule 147 and in so doing it is recommended that issuers follow the guidance of the SEC with respect to ensuring that disclaimers and restrictive legends are used that make it clear that the offering is limited to residents of the relevant state and that procedures are put in place to limit access to information about specific investment opportunities to persons who confirm that they are residents of the relevant state by, for example, providing representations as to their state of residence and/or in-state resident information (e.g., a zip code or a residence address in the state).

SEC compliance and disclosure interpretations relating to Rule 147 have attempted to address how issuers can structure “crowdfunding” transactions in a single state so as to take advantage of the safe harbor offered by the Rule and such interpretations have made it clear that issues would not be deemed to have violated the requirements and conditions of Rule 147 by: (1) 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; (2) 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; or (3) 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.