As has been widely noted, the Securities and Exchange Commission has proposed amending Rule 147 under the Securities Act of 1933.  That Rule provides a safe harbor for compliance with the Section 3(a)(11) exemption from registration for intrastate securities offerings. Among other things, the SEC is proposing to eliminate the current requirement in Rule 147 that issuers to be incorporated or organized under the laws of the state or territory in which the intrastate offering is conducted.  This has proved to be a problem for states like California that are home to many issuers that choose to incorporate elsewhere.

Under the SEC’s proposal, an issuer must have its principal place of business within the state or territory in which all purchasers of the securities are resident.  An issuer would be deemed to have its principal place of business in a state or territory in which the officers, partners or managers of the issuer primarily direct, control and coordinate the activities of the issuer and in which it meets at least one of four requirements.

If the SEC should ultimately adopt this change, it may further encourage issuers with their principal places of business in California to incorporate elsewhere.  At the same time, the California Department of Business Oversight may see an increase in the number of applications for qualification as many California issuers may suddenly find that Rule 147 is now a viable and available option.  As Preliminary Note 2 to the current rule states:

 Nothing in this rule obviates the need for compliance with any state law relating to the offer and sale of securities.

Thus, an issuer relying on Rule 147 to conduct an offering in California must either rely on an exemption from qualification or qualify the offering.  Because the SEC is also proposing to eliminate the limitation on the manner of offering, issuers may find it to be more advantageous to qualify the offering than to conduct the offering within the constraints of an exemption from qualification.