What to Consider for Rule 147: “Intrastate Offering Exemption”
Are you tired of trying to decipher complicated SEC regulations? Do you feel like you need a law degree just to understand the basics of securities law?
We completely understand. That’s why in this post we're going to break down one of the more confusing SEC exemptions - Rule 147 - and show you how to qualify for it. Don't worry, we promise to make it fun and informative, so grab a cup of coffee (or whatever you’re having…) and let's dive in!
Section 3(a)(11) of the Securities Act is generally known as the “intrastate offering exemption.” This exemption seeks to facilitate the financing of local business operations. It’s a great way to avoid SEC registration if you can qualify for this safe harbor provision, and that’s exactly what a real estate syndication attorney can help you do. Remember, the SEC is your friend. You just need to know how to work with them to protect yourself!
1. Designate Your Location
According to the laws on the books, “the issuer of the securities shall at the time of any offers and sales be a person resident and doing business within the state or territory in which all of the offers and sales are made.” The issuer is a resident of the state where 1) it is incorporated or organized, and has its principal place of business if an entity organized under state law (e.g. corporation, limited partnership, limited liability company, etc.); 2) it has its principal place of business if not organized under state law (e.g. general partnership); or 3) its principal residence is located, if an individual. Additionally, the issuer must carry out a significant amount of its business in the state of residency and must limit its securities offering only to residents of that state.
So what does that mean for you? It means that the first step to obtaining this exemption will require you to organize a legal business entity in any state that you want to raise capital in for a deal. You’ll need to legitimately operate most of your syndication business out of the state (or territory) in which you are issuing securities. So, if you want to qualify for this exemption on a major deal in Texas, you’ll need to have your attorney help you ensure you are legally operating the majority of your business in Texas.
2. Organize Your Revenue
The law also states that “the issuer must derive at least 80% of its revenues from operations in the state where the offering is made.” So in addition to what we mentioned above, the majority - in this case, 80% - of your revenues from operations must be generated in the state or territory where you are issuing securities. And when we say issuing securities, we mean managing a deal for your investors to earn passive income while you do most of the work.
3. Identify Buyers’ Residences
Next, the law states that “the securities must be sold only to residents of the state where the offering is made.” So if you’re going for the Rule 147 Offering Exemption, you’ll want to seek out local investors. Social media can be a great way to target investors that are located where you need them! The bottom line is that you will need to know where your investors are located, and that they really do reside there. If any sales take place to non-residents, the entire offering loses its exemption. It is incumbent upon the issuer to obtain a written statement from each buyer that they reside in that state.
Amended Rule 147
In 2016, the SEC amended Rule 147 to modernize it and establish an intrastate offering exemption known as Rule 147A. The amended rule allows for issuers to be incorporated or organized out-of-state, however, the securities may only be sold to investors who are residents of the state where the issuer’s principal place of business is located. For example, a Wyoming limited liability company that is headquartered in North Carolina can utilize Rule 147A’s exemption when raising funds from North Carolina residents. Additionally, the new rules lifted the ban on general solicitation found in Rule 147 thus allowing companies to advertise or offer the securities online (such as through crowdfunding) or through other media where they might be visible to out-of-state investors as long as securities are only sold to in-state investors.
To summarize, in order to qualify for Rule 147 and Rule 147A, the company’s officers, partners, or managers must primarily direct, control, and coordinate the business’s activities in-state. Sales of securities by the company must be limited to in-state residents or persons who the company reasonably believes are in-state residents. And the company also must meet at least one of the following “doing business” requirements.
As with any investment opportunity, it’s important to consult with an attorney before setting it up to ensure you’re going to be compliant with the SEC and any applicable state securities laws. At Premier Law Group, we’re here to help. We’d love to hear from you and learn about your deal so we can help you determine the best way to set it up and ensure you comply with the exemption requirements. Schedule a free discovery call to get the answers to your questions now!