Changes In Intrastate Crowdfunding SEC Rules: Will They Make A Difference?
On October 26, 2016, the Securities and Exchange Commission amended its existing safe harbor rule for intrastate investing, Rule 147, and added a new intrastate safe harbor, Rule 147A in an effort to reflect the realities of modern business. While these changes could provide a useful tool for small businesses, the SEC’s evolving stance on nationwide crowdfunding and lack of coordination with existing state law may hinder their usefulness to any business beyond those looking for local or niche investors.
Under the old Rule 147, a business could offer and sell securities to investors in its state of formation and operation without the necessity of registering with the SEC, provided that certain requirements were met. Rule 147, however, did not permit a business to make general offers, such as on the company’s website, a social media page or through a crowdfunding platform. With its new rules relating to intrastate offerings, the SEC took steps aimed at ameliorating Rule 147’s shortfalls.
Part of the action taken by the SEC was to create Rule 147A. Under this new rule, a business that has its principal place of business in a jurisdiction other than that of its formation may take advantage of a safe harbor substantially similar to Rule 147. This reflects the reality that many companies are formed in jurisdictions like Delaware and Nevada, which are favored by practitioners, rather than the state in which they operate.
The SEC also loosened the reins on the types of offers that could be made under both Rule 147 and Rule 147A to allow for crowdfunding initiatives. Under both rules, a business can make offers on the Internet, which would have previously disqualified the business from the safe harbor – since the crowdfunding campaign would have potentially been accessible to out-of-state investors. The catch is that the amended rules still require that the securities only be sold to investors from a single state.
There are a bevy of issues and drawbacks awaiting those businesses that try to take advantage of the amended Rule 147 or new Rule 147A when the rules go into effect in Spring 2017. Notably, the rules only allow securities to be sold to investors in a single state. With the SEC’s introduction of Rule 506(c) – which allows general solicitation on a national scale (although sales must be made only to accredited investors) – the usefulness of intrastate offering exceptions is limited.
In addition, an offering made pursuant to Rules 147 and 147A would still be subject to regulation in the state in which the sale is made, which varies greatly state-by-state. Moreover, Rule 147A is a separate rule independent from Rule 147, which likely requires individual states to amend their securities laws to account for the additional safe harbor. As a result, only time will tell as to whether the SEC’s initiatives on intrastate offerings truly impact the United States market for non-registered offerings.