The Securities and Exchange Commission (S.E.C.) did it! After months of reading articles about proposals and submitting my own public comments, the S.E.C. finally has adopted what I think are epic changes to Rules 147 and Rule 504. (See S.E.C. press release) Both of these changes are meant to provide more access to capital for entrepreneurs under the 2012 JOBS Act and the SEC’s Regulation CF.
The updates to Rule 147 will continue to be a safe harbour under Section 3(a)(11) of the Securities Act so that issuers that engage in securities offerings through intrastate offerings (“within a state only”) in reliance on state law exemptions will be protected. The new Rule 147A is similar to Rule 147 BUT….BUT it will allow offers to be accessible to out-of-state residents and for companies to be incorporated or organized out-of-state. THIS IS HUGE—no longer will issuing companies only be able able to raise money within the state they are incorporated if they are using an intrastate offering exemption.
DISCLAIMER (like any good attorney): The information contained below is a brief summary of the rules. As always, please consult a knowledgeable securities attorney before attempting any capital raising or dealing with investors. They will be able to provide you with more details about the rules. You are responsible for your own due diligence in this matter and this blog cannot be relied upon as specific legal advice.
Rule 147 Changes: No longer bound by borders!
New Rule 147A and updates to Rule 147 are meant to modernize the existing intrastate offering framework that permits companies to raise money from investors within their state without having to register and report on the federal level. As many of you know, Georgia was one of the first of 33 current states to adopt intrastate offerings which is called the Invest Georgia Exemption or “IGE”. (See blog and see rules) IGE has been successful in providing over 38 companies the opportunity to raise money from investors that reside inside of the state of Georgia, GroundFloor being one of the most famous examples.
Here are HIGHLIGHTS of the New Rule 147A and the updates to Rule 147:
- The issuer must have its “principal place of business” in-state and satisfy at least one “doing business” requirement that would demonstrate the in-state nature of its business;
- A new “reasonable belief” standard for issuers to rely on when determining the residence of a securities purchaser at the time of sale;
- A requirement that issuers obtain a written representation from each purchaser regarding residency;
- A limit on resales to persons residing within the state or territory of the offering for a period of six months from the date of the sale by the issuer to the purchaser;
- An integration safe harbor that includes prior offers or sales of securities by the issuer made under another provision, as well as certain subsequent offers or sales of securities by the issuer occurring after the completion of the offering; and
- Legend requirements to offerees and purchasers about the limits on resales.
In essence, what the new updates to rule 147 and new Rule 147A mean is that Georgia will be able to expand its existing intrastate offering program so that companies can raise capital from investor OUTSIDE of the State of Georgia! This is a step in the right direction towards expanding access to capital in a highly competitive fundraising market. Many times companies do not use intrastate offerings because of the limitation of investors to within a certain state—-especially when most investors officially reside in California, New York or Boston. This will open up more options for issuing companies to raise funds but also better competition amongst the states that do offer intrastate offerings. Note that the Georgia Secretary of State’s office will have to update the rules in order to take advantage of the S.E.C. rules but is a less onerous process than a legislative update (believe me…I know!)
Amendments to Rule 504 (which in effect repeal Rule 505): Say goodbye to $1MM.
The S.E.C. has 3 rules under Regulation D that exempts companies from S.E.C. registration: Rules 504, 505 and 506. Rule 504 exempts companies from registering with the S.E.C. for offers and sales of up to $1MM in a 12 month period (with some additional exemptions—see my disclaimer above). The change to Rule 504 raises the amount of capital that can be raised from $1MM to $5MM. The main distinction between a Rule 504 exemption and Rule 505 exemption was the amount of capital that could be raised. Under Rule 505, there were similar requirements under Rule 504 but a company could raise up to $5MM. Since the S.E.C. allows raising under Rule 504 up to to the same level and Rule 505, Rule 505 is unnecessary and useless and therefore is being repealed.
Other Information to Note:
I know that you are as EXCITED as I am about these new and updated rule changes—but remember that there is a “holding period” by which S.E.C. rules must be published in the Federal Register before the rules become effective so that the public has adequate notice. Updates to Rule 147 and new rule 147A will become effective 150 days after publication in the Federal Register and updates to Rule 504 will become effective 60 days after publication. Rule 505 will be repealed and become effective 180 days after publication in the Federal Register.
I am Dar’shun Kendrick, Private Securities Attorney and Owner of Kendrick Law Practice, helping businesses raise capital the LEGAL way. We work with “for profit” companies seeking to raise $250,000 or more through private capital (including crowdfunding) that have a line item budgeted for legal services. We do NOT find investors or introduce companies to investors; that is the job of “broker-dealers” and we are prohibited under federal securities law from doing so. I have 2 B.A.s from Oglethorpe University, a law degree from the University of Georgia and an M.B.A. from Kennesaw State University. View past and upcoming speaking engagements and request me to speak to your organization. I have been elected to the Georgia House of Representatives (East DeKalb/South Gwinnett) since 2011 and I serve on the committees of Juvenile Justice, Interstate Cooperation, Judiciary Non-Civil and as the ranking Democrat on the Small Business and Job Creation Committee.
You may be interested in my non-profit organization as well to EDUCATE and EMPOWER minorities called Minority Access to Capital, Inc. Please visit our website to learn about events and sign up for our enewsletter.
We are ONLY authorized to practice law in Georgia and therefore any legal advice in this blog only pertains to Georgia based businesses. Please visit us online to sign up for a time to discuss services or for our 1 hour consultation.
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