Recent Changes to the Intrastate Exemption for Sale of Securities

Securities are governed by a multi-layered framework of federal and state laws. When a security is sold, it must either be registered or be exempt from registration under federal and applicable state law. A state exemption is required in each state in which the security is offered for sale or sold. An issuer that offers to sell or sells an unregistered security that is not exempt from registration commits an illegal act that could result in civil and even criminal penalties.

Section 3(a)(11) of the Securities Act and Rule 147 have historically defined what is commonly known as the federal intrastate exemption, which required, among other things, that the issuer offer to sell and sell only to residents of the state where the company was organized and doing a significant amount of business. Effective April 20, 2017, Rule 147 was amended and Rule 147A was adopted.

To fall within the amended Rule 147 safe harbor, and consistent with the prior version of Rule 147:

• The issuer must be organized and have its “principal place of business” in the state where the securities are offered and sold.
• General advertising and general solicitation to market the securities are allowed only within the state where the securities are offered and sold (and only if allowed by state law).
• There is no limit on the number of securities that may be sold under the safe harbor.

Under amended Rule 147, the issuer must satisfy at least one of four threshold requirements demonstrating the in-state nature of the issuer’s business. Previously, Rule 147 had a significantly more restrictive test for demonstrating that an issuer was “doing business” in a particular state. In addition, issuers may now rely on a “reasonable belief” with respect to the residence of the purchaser at the time of the sale of securities.

The requirements of the Rule 147A safe harbor are consistent with the requirements of amended Rule 147, except that:

• An issuer may be incorporated or organized outside of the state in which it conducts an offering under Rule 147A, provided its principal place of business is in the state and it otherwise complies with the requirements of Rule 147A.
• Issuers relying on Rule 147A may make offers accessible to out-of-state residents (through general solicitation or general advertising on the internet, for example), so long as sales are limited to in-state residents. In contrast, amended Rule 147 requires that issuers make offers and sales only to in-state residents.

The foregoing is only a limited explanation and other legal requirements apply to offers meant to qualify for the federal intrastate exemption. Employing the exemption and safe harbors requires an understanding of the intricacies and procedural components best left to experienced counsel.