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SEC Adopts Amendments to Rules 147 and 504, Adopts Rule 147A and Repeals Rule 505

On October 26, the Securities and Exchange Commission adopted final rules amending (1) Rule 147 promulgated under the Securities Act of 1933 (Securities Act) to modernize the existing safe harbor under Section 3(a)(11) of the Securities Act for intrastate securities offerings and (2) Rule 504 of Regulation D under the Securities Act to assist capital raising and to provide additional protections to investors. The SEC also adopted new Rule 147A to establish a new intrastate offering exemption and, in connection with the amendments to Rule 504, repealed Rule 505 under Regulation D. The SEC’s proposal for these Rules was discussed in the November 6, 2015 edition of the Corporate & Financial Weekly Digest.

The SEC’s amended Rule 147 provides a safe harbor under the Section 3(a)(11) exemption from the registration requirements of Section 5 of the Securities Act for issuers that are both organized and principally doing business in the same state to make offers and sales of securities to purchasers that are resident in that state. Although the SEC also adopted the new exemption for intrastate offerings discussed below, the SEC elected to keep and modify Rule 147 as a safe harbor under Section 3(a)(11) to allow issuers to continue to rely on state law exemptions that are conditioned upon compliance with Section 3(a)(11) and Rule 147.

Rule 147A provides a similar exemption from the Section 5 registration requirements, which will also permit issuers that are incorporated in a different state to offer and sell securities in the state of their principal place of business, so long as sales are limited to residents of that state. For example, Rule 147A will allow an issuer that is organized in Delaware, but whose business is principally conducted in New York, to make offers and sales of securities to New York residents. Additionally, Rule 147A will allow issuers to make offers of securities across state lines, including via the internet, so long as sales are limited to residents of the state of their principal place of business.

Both amended Rule 147 and new Rule 147A include:

  • a requirement that the issuer has its “principal place of business” in the state of the offering and that the issuer satisfies at least one “doing business” requirement demonstrating the nature of the its business in the state of the offering;

  • a new “reasonable belief” standard in the determination of residence of a purchaser at the time of the sale of securities, which will allow an issuer to rely on the Rules so long as the issuer has established a reasonable belief as to each purchaser’s state of residence, even if it is ultimately determined that one or purchasers did not reside in the state of the offering;

  • a requirement that issuers obtain a written representation from each purchaser as to the purchaser’s residency;

  • for a period of six months following the sale by the issuer to the purchaser, a restriction on resales of the securities to persons that were not resident within the state or the territory of the offering at the time of the offering;

  • a safe harbor preventing the integration of the applicable offering with prior or certain future offers and sales of securities; and

  • disclosure requirements to offerees and purchasers about the limitations on resales.

Prior to the amendments, Rule 504 provided certain private issuers with an exemption from registration for offers and sales of up to $1 million of securities, subject to certain restrictions. Rule 504 allows companies to solicit or advertise their securities to the public and sell securities that are not restricted if the issuer (1) registers the offering exclusively in one or more states that require a publicly filed registration statement and delivery of a substantive disclosure document to investors; (2) registers and sells the offering in a state that requires registration and disclosure delivery and also sells in a state that does not have such requirements, so long as the issuer delivers the disclosure documents required by the state where the issuer registered the offering to all purchasers, including those purchasers in states that have no such requirements; or (3) sells solely according to state law exemptions that permit general solicitation and advertising, so long as sales are made only to accredited investors.

The amendments to Rule 504 increase the aggregate amount of securities that may be offered and sold by an issuer in a 12-month period from $1 million to $5 million. In addition, the amendments apply to Rule 504 the “bad actor” disqualifications of Rule 506 of Regulation D. In light of the changes to Rule 504, the SEC repealed Rule 505 of Regulation D (which permits offerings of up to $5 million annually, subject to specified conditions). The SEC noted that by increasing the size of offerings under Rule 504, it was decreasing the incentives to use Rule 505, which was not widely utilized prior to the amendments to Rule 504.

Amended Rule 147 and new Rule 147A will be effective 150 days following publication in the Federal Register, amended Rule 504 will be effective 60 days following publication in the Federal Register and the repeal of Rule 505 will be effective 180 days following publication in the Federal Register.

The SEC’s amendments are available here.

©2021 Katten Muchin Rosenman LLPNational Law Review, Volume VI, Number 309
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About this Author

Jonathan D. Weiner, securities, transactional lawyer, Katten Muchin Law firm
Associate

Jonathan Weiner concentrates his practice in securities, transactional and general corporate matters. He has represented investors and issuers in public and private financings (including private investments in public equity), tender offers, recapitalizations and going private transactions, as well as targets and acquirers in mergers and acquisitions. He also advises clients on a day-to-day basis regarding corporate governance, securities law compliance, disclosure and other general corporate matters. Jonathan has counseled a wide array of businesses, ranging from...

212-940-6349
Mark D. Wood, corporate securities lawyer Katten Muchin Chicago Law firm
Partner

Mark D. Wood is head of Katten's Securities practice and concentrates in corporate and securities law. Mark represents public companies, issuers and investment banks in initial public offerings (IPOs) and other public offerings, private investment in public equity (PIPE) transactions, debt securities and other securities matters.

Mark also represents clients in complex corporate transactions, including tender offers, mergers, acquisitions, dispositions, going-private transactions, private equity investments, joint ventures and...

312-902-5493
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