Rule 147: Comments to SEC Due Monday

If you want to comment on the SEC’s proposed amendments to Rule 147, the deadline is Monday.

Rule 147: What Has The SEC Proposed

In general, what the SEC has proposed are good improvements to the law. For example:

  • a company using the newly proposed Rule 147 would not have to be incorporated in the state in which it operates and where its investors come from. For example, a Washington headquartered company could be incorporated in Delaware.
  • a company could advertise in a manner that crossed state lines “so long as all sales occur within the same state or territory in which the issuer’s principal place of business is located.”
  • the standards set forth in the current Rule 147 for determining whether a business was local enough would become more reasonable.

This is all good news.

The Hitch

However, the hitch is this–the proposed rules would potentially wreak havoc with state crowdfunding laws.

Let me give you an example.

Washington’s crowdfunding statute says that a company using it has to comply with both Section 3(a)(11) of the Securities Act of 1933 and Rule 147. (Washington’s statute says: “The offering is conducted in accordance with the requirements of section 3(a)(11) of the securities act of 1933 and securities and exchange commission rule 147, 17 C.F.R. Sec. 230.147″.)

The trouble with the SEC’s proposed rules is this: they remove Rule 147 as a safe harbor under Section 3(a)(11) and make Rule 147 its own stand alone exemption–because the newly proposed Rule 147 is not consistent with the Section 3(a)(11) statutory language.

So, if the SEC adopts its proposed rules as proposed, it will set up a quandary under the Washington law. How can a company comply with both Section 3(a)(11) and Rule 147 if they are different exemptions, and not necessarily consistent with one another?

The SEC has indicated in its proposed rules that it thinks that the various states that have enacted state crowdfunding laws (20+ now) can just amend their statutes. This is easier said than done.

Here is what the SEC says:

We recognize that none of the existing state crowdfunding provisions contemplate reliance upon the proposed amendments to Rule 147 and that states that have crowdfunding provisions based on compliance with Section 3(a)(11), or compliance with both Section 3(a)(11) and Rule 147, would need to amend these provisions in order for issuers to take full advantage of these amendments.

True, perhaps this can all be addressed by regulatory action in the various states that have enacted statutes requiring compliance with both Section 3(a)(11) and Rule 147. But it strikes me as fundamentally fair that the SEC’s final rules say something along the lines of the following:

“Existing Rule 147 will continue to be a safe harbor under Section 3(a)(11).”

In other words, let’s put a clause in that doesn’t require state legislatures to amend their statutes as a result of new SEC rules.

And the SEC asks for comments just along these lines. See questions 49 and 50:

Request for Comment

49. Should we leave existing Rule 147 in place and unchanged as a safe harbor for compliance with Section 3(a)(11) while adopting the proposed revisions to Rule 147 as a new rule instead? For example, if we were to repeal Rule 505 of Regulation D, should the Commission adopt the proposed revisions to Rule 147 as new Rule 505 of Regulation D? If so, are there any additional changes to the proposed rule that should be made if it were to be adopted instead as a new rule? If so, please explain what changes are needed and why.

50. States that have adopted crowdfunding provisions based on current Rule 147 may need to consider the import of any final rule amendments at the federal level. How would the proposed amendments to Rule 147 impact these provisions? Would the Commission’s rulemaking process, which in this case provides for a 60-day comment period, and the additional time before any final rules potentially would be adopted and thereafter become effective, provide sufficient time for states to consider and address the impact of the proposed amendments on their state law provisions? Why or why not? Please explain.

Here is what one commentator said:

3. The Commission should retain existing Rule 147.
As noted in the Proposing Release, the proposed amendments would no longer satisfy the parameters of Section 3(a)(11) of the Securities Act. Therefore, the Commission must adopt the proposed rule pursuant its authority under Section 28 of the Securities Act. At the same time, the Commission does not claim that current Rule 147 is inconsistent with either Section 3(a)(11) or judicial interpretations of the statute. Although the Proposing Release states that issuers may continue to “to rely on judicial and administrative interpretive positions on Rule 147 issued prior to the effectiveness of any such final rules”, the Commission is silent on reliance on current Rule 147. Nothing in the Commission’s proposal suggests that current Rule 147 is incorrect and issuers should be able to continue to rely upon it as a safe harbor. The Commission should avoid creating unnecessary uncertainty by retaining existing Rule 147.

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