The Securities & Exchange Commission on Wednesday unanimously adopted proposed changes to rules aimed at facilitating intrastate and regional crowdfunding offerings. Most notably, it created a new rule, 147A, that eliminates the ban on general advertising that has stymied intrastate crowdfunding offerings. That ban effectively killed any marketing over the Internet or social media.
The existing 147 safe harbor will remain in effect with the advertising restriction, so states that want to make use of Rule 147A will have to modify their laws. That will affect most of the 34 states that have adopted intrastate crowdfunding laws to date (see map above) and delay implementation of the new rule. (It will not affect the few states that have based their laws upon Regulation D Rule 504).
The new Rule 147A and amended Rule 147 will go into effect 150 days from publication in the Federal Register—or roughly March or April 2017.
Observers were waiting for the release of the final rules by the SEC later this week, but early reaction was positive.
“This is good news and should make intrastate and regional offerings a lot easier for small companies,” said Andrew Stephenson, vice president of product management & strategy at CrowdCheck. “These rules will allow companies to better utilize social media and other online communications forums to support their capital raising efforts.”
Here are highlights from today’s decision:
Current Rule 147 lives on: Rule 147, the safe harbor that underlies most of the 34 or so intrastate crowdfunding laws, will remain in effect with the current ban on general solicitation. That means existing intrastate offerings can continue uninterrupted.
New Rule 147A: The SEC created Rule 147A which is not linked to Section 3(a)(11) of the Securities Act, which contains the ban on interstate communications. Under 147A, issuers may advertise their offerings to out of state residents, but (as with the old rule) they can only sell their securities to residents of that state or territory, based upon a new “reasonable belief” standard.
The following amendments apply to both Rules 147 and 147A.
Principal Place of Business: The SEC no longer requires an issuer to be incorporated in the state where it conducts its intrastate offering; instead, it has adopted a four-part test that recognizes the realities of modern business. To be eligible for an intrastate offering, a company must meet one of the following criteria:
1. 80% of its consolidated gross income comes from the state
2. at least 80% of its consolidated assets are located in the state
3. the company intends to use, or actually uses, at least 80% of its sales within the state
4. the majority of its employees are based in the state
In-state residents: The SEC adopted a more forgiving stance on how issuers determine the residence of investors. The new rules allow issuers to apply a “reasonable belief” standard. They must also obtain written representation from each investor attesting to their state of residence.
No offering limits imposed: The SEC initially had proposed capping intrastate offerings at $5 million. Bowing to public comments, it eliminated that restriction and will leave offering limits to the states.
Integration: The SEC suggested that intrastate crowdfunding offerings could be conducted alongside or concurrent with offerings under other exemptions.
Rule 504: In addition, the SEC adopted changes to Regulation D Rule 504, raising the cap on offerings to $5 million from $1 million and disqualifying “bad actors.”
For more, see this SEC fact sheet.
The SEC decision concludes a long wait for intrastate crowdfunding advocates. “The SEC’s adoption of new and expanded rules for local, intrastate offerings, has been long overdue —and eliminates one of the few remaining vestiges of our decades old securities laws, which are at odds with today’s internet-based world,” said Sam Guzik, a securities lawyer with Guzik & Associates. “This is an important win for community-based businesses, especially those in the ‘flyover states,’ who will have improved access to broad community financial support.”
“The only fly in the ointment—a small, but annoying one—is that most state legislatures will need to reconvene and update their intrastate crowdfunding exemption to take full advantage of the ability of an issuer to advertise their offering on the Internet,” says Guzik.
Related coverage: Will Intrastate Crowdfunding Finally be Fixed?