SEC Advised to Modernize Rule 147

Intra-state crowdfunding rules may be about to get an overhaul. Intra-state crowdfunding is crowdfunding where all activities – promotion, offer, and sale – happen within a single state.

The increasing number of states enacting their own state-based crowdfunding provisions and the changing nature of business and capital raising, have prompted the Securities and Exchange Commission’s Advisory Committee on Small and Emerging Companies to recommend that the SEC modernize Rule 147.

What is Rule 147
Rule 147 finds its orgins with Section 3(a)(11) of the Securities Act of 1933.  Section 3(a)(11) is often referred to as the intrastate exemption and is one of the tools that can be used by small companies raising relatively small amounts of money that would like to avoid having the pay the often-hefty fees related to registering with the Securities and Exchange Commission.  Rule 147 is essentially a safe harbor provided by the SEC’s in order to give more certainty as to the parameters of Section 3(a)(11).

Who Qualifies
Companies must meet the following criteria and some others in order to qualify for an exemption under Rule 147:

• The securities offering is in the same state in which the company is incorporated and the principal office is located in that state
• At least 80 percent of the company’s revenue must come from business activity in the state in which it is incorporated, at least 80% of the compay’s assets must be in that state, and at least 80% of the capital raised must be used in that state
• Securities are only sold to residents of the same state  

The Catch
The requirement that both the offering and the sale must be restricted to intra-state is the problem. Crowdfunding anticipates the use of the internet, which makes it difficult for a company to truly crowdfund while taking advantage of the Rule 147 exemption.  At the time Rule 147 was created, the implications of the Internet weren’t considered.

The Fix
The Advisory Committee recommended that the SEC modernize Rule 147. Although there was not specific guidance as to what exactly the SEC should modernize, the committee addressed a few concepts.  For example, one idea was to revise Rule 147 to remove the current violation for “offering” securities outside of the company’s home state, while retaining the requirement that the “sale” of said securities remain intra-state.

Whether the SEC itself accepts the Advisory Committee’s recommendation, and if so, what exactly the modernization will entail, remains to be seen.

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