The SEC has proposed changes to Rule 147. You can find the proposed amendments here.
Rule 147 is one of the federal securities law rules that makes state-level equity crowdfunding more difficult.
The reason? Rule 147 is the rule issued pursuant to Section 3(a)(11) of the Securities Act of 1933. Section 3(a)(11) is the statutory basis for avoiding the application of the federal Securities Act in a state-level equity crowdfunding.
Rule 147 says that if you offer your securities across state lines, your offering is no longer “intrastate.” It has been interpreted by the SEC to mean you can’t post anything on the Internet that might be read in another state. Because if you do, you have “offered” the security in that other state, your offering is no longer intrastate, and then your offering doesn’t qualify for the 3(a)(11) exemption.
The SEC issued guidance right after states started enacting state-level equity crowdfunding laws. Here is this guidance from the SEC, which is issued before it issued the proposed Rule 147 amendments.
Question: If an issuer plans to conduct an intrastate offering pursuant to the Section 3(a)(11) exemption, may the issuer engage in general advertising or a general solicitation?
Answer: Securities Act Rule 147 does not prohibit general advertising or general solicitation. Any such general advertising or solicitation, however, must be conducted in a manner consistent with the requirement that offers made in reliance on Section 3(a)(11) and Rule 147 be made only to persons resident within the state or territory of which the issuer is a resident. [April 10, 2014]
Question: An issuer plans to use a third-party Internet portal to promote an offering to residents of a single state in accordance with a state statute or regulation intended to enable securities crowdfunding within that state. Assuming the issuer met the other conditions of Rule 147, could it rely on Rule 147 for an exemption from Securities Act registration for the offering, or would use of an Internet portal necessarily entail making offers to persons outside the relevant state or territory?
Answer: Use of the Internet would not be incompatible with a claim of exemption under Rule 147 if the portal implements adequate measures so that offers of securities are made only to persons resident in the relevant state or territory. In the context of an offering conducted in accordance with state crowdfunding requirements, such measures would include, at a minimum, disclaimers and restrictive legends making it clear that the offering is limited to residents of the relevant state under applicable law, and limiting access to information about specific investment opportunities to persons who confirm they are residents of the relevant state (for example, by providing a representation as to residence or in-state residence information, such as a zip code or residence address). Of course, any issuer seeking to rely on Rule 147 for the offering also would have to meet all the other conditions of Rule 147. [April 10, 2014]
Question: Can an issuer use its own website or social media presence to offer securities in a manner consistent with Rule 147?
Answer: Issuers generally use their websites and social media presence to advertise their market presence in a broad and open manner so that information is widely disseminated to any member of the general public. Although whether a particular communication is an “offer” of securities will depend on all of the facts and circumstances, using such established Internet presence to convey information about specific investment opportunities would likely involve offers to residents outside the particular state in which the issuer did business.
We believe, however, that issuers could implement technological measures to limit communications that are offers only to those persons whose Internet Protocol, or IP, address originates from a particular state or territory and prevent any offers to be made to persons whose IP address originates in other states or territories. Offers should include disclaimers and restrictive legends making it clear that the offering is limited to residents of the relevant state under applicable law. Issuers must comply with all other conditions of Rule 147, including that sales may only be made to residents of the same state as the issuer. [October 2, 2014]
So, the trouble with trying to raise money in a state-level equity crowdfunding is that you want to let people know about your offering. You would, if you could, like to post about the offering on Internet, without having to “implement technological measures to limit communications that are offers only to those persons whose Internet Protocol, or IP, address originates from a particular state or territory and prevent any offers to be made to persons whose IP address originates in other states or territories.”
Now the SEC appears ready to modernize Rule 147. This is good. Interested parties should read the proposed rule carefully and put their comments into the SEC.
I like this statement from the proposed rules.
The proposed amendments to Rule 147 would amend these requirements and revise the rule to allow an issuer to engage in any form of general solicitation or general advertising, including the use of publicly accessible Internet websites, to offer and sell its securities, so long as all sales occur within the same state or territory in which the issuer’s principal place of business is located, and the offering is registered in the state in which all of the purchasers are resident or is conducted pursuant to an exemption from state law registration in such state that limits the amount of securities an issuer may sell pursuant to such exemption to no more than $5 million in a twelve-month period and imposes an investment limitation on investors.
And here is another quote from the explanatory materials in the proposed rules:
Rule 147, as proposed to be amended, would require issuers to limit sales to in-state residents, but would no longer limit offers by the issuer to in-state residents. 40 Accordingly, amended Rule 147 would permit issuers to engage in general solicitation and general advertising that could reach out-of-state residents in order to locate potential in-state investors using any form of mass media, including unrestricted, publicly available websites, to advertise their offerings, so long as all sales of securities so offered are made to residents of the state or territory in which the issuer has its principal place of business
Yesterday was a good day for crowdfunding.
What should Congress or the SEC do next? We need Congress or the SEC to extend the same exemption from ’34 Act reporting for companies that crowdfunding under state law that Congress extended to companies crowdfunding under Title III.