SEC Adopts Final Rules
In a refreshing twist of pace from its rule making with Regulation Crowdfunding, the Securities and Exchanges Commission (SEC) did something right and updated its rules regarding how companies can raise money through intrastate and small offerings. In large part, the changes are intended to make it easier to use state based securities crowdfunding laws, which were otherwise constrained by the federal laws.
The final rules:
- Make it easier to use the otherwise sadly not often used Intrastate Offering Exemption in Rule 147, to modernize the safe harbor under Section 3(a)(11) of the Securities Act, so issuers may continue to utilize state law exemptions that are conditioned upon compliance with both Section 3(a)(11) and Rule 147.
- Create a new Intrastate offering exemption, Rule 147A, to accommodate offers that are accessible to out-of-state residents and companies that are incorporated or organized out-of-state. This is aimed at helping companies that advertise broadly on social media use Intrastate offerings. These two rules become effective in approximately 150 days.
- Amend Rule 504 of Regulation D to raise the dollar amount to $5 million from $1 million. This rule becomes effective in approximately 60 days.
- Apply bad actor disqualifications to Rule 504 offerings, thereby increasing investor protections to levels consistent with Rule 506.
- Repeal the almost never used Rule 505 of Regulation D. Rule 505 is repealed in approximately 180 days, though no one ever uses it, so no one cares.
Commentary & Next Steps
After the rules were adopted SEC Chair, Mary Joe White, stated “There is a great deal of enthusiasm in the marketplace for crowdfunding, and I believe these rules and proposed amendments provide smaller companies with innovative ways to raise capital and give investors the protections they need. With these rules, the Commission has completed all of the major rulemaking mandated under the JOBS Act.”
From my perspective, the Intrastate offering exemption now available under Rules 147 and 147A are greatly underutilized by companies with a strong local presence. For years, my colleagues and I have helped rural and agriculture based companies use the Intrastate exemption under Rule 147 to raise large amounts of money from many local investors. When combined with a state based registration, an Intrastate offering also has the great advantage over state and federal crowdfunding rules in that most, if not all, of the limitations placed by the crowdfunding rules do not apply. Companies that find the federal and state crowdfunding rules too restrictive and difficult should seriously consider an Intrastate offering.
For more information, see this SEC publication outlining the final rules.