The Securities and Exchange Commission on Wednesday unanimously adopted new and amended rules to update and modernize companies’ ability to raise money from investors through intrastate and small offerings.
The final rules adopted Wednesday are designed to further facilitate access to capital in cross-state and regional securities offerings.
New rule Rule 147A as well as an amended Rule 147 include the following provisions:
- Requires that the issuer has its “principal place of business” in-state and satisfies at least one “doing business” requirement that would demonstrate the in-state nature of the issuer’s business;
- Institutes a new “reasonable belief” standard for issuers to rely on in determining the residence of the purchaser at the time of the sale of securities;
- Requires that issuers obtain a written representation from each purchaser as to residency;
- Puts 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; and
- Provides for an integration safe harbor that would include any 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.
As SEC Chairwoman Mary Jo White explained in her Wednesday remarks, the agency over the last few years has adopted “several important” new rules to facilitate capital raising by smaller issuers, including new provisions for federal crowdfunding and enhanced Regulation A offerings.
“The rules have given companies new options for funding their businesses within a strong framework of investor safeguards,” White said. “During this time, many state securities regulators have been working to update their regulatory structures to better accommodate how local offerings have evolved, including through crowdfunding and the use of modern information technology.”
She added that the SEC’s rules related to these intrastate offerings have not been updated for decades, “and do not sufficiently take into account how technology and business practices have changed.”
Also passed by the agency Wednesday were amendments to increase the aggregate offering amount in Rule 504 from $1 million to $5 million in any twelve-month period and provide for disqualification of bad actors in a consistent manner across Regulation D.
SEC Commissioner Kara Stein noted that while the new rule and amendments “enhance funding for small and local businesses” and “hopefully will foster new opportunities, like other experimental capital raising rules, only time will tell how well the theory works in practice”
Only time will tell, she said, “if we can relax capital raising,” adding that the new rule amendments also raise investor protection concerns.
The amended rule 147 and new rule 147A “do not contain a bad actor provision, which are a fundamental part” of Regulatio A, Regulation Crowdfunding as well as Reg D. Bad actor provisions “serve as a check before an offering commences,” Stein said, noting that the North American Securities Administrators Association “specifically requested bad actor qauflications be included in these rules.”
She noted that only some states have “some version” of bad actor qualifications.
Despite her misgivings, Stein took comfort in the fact that state regulators will be “closely monitoring” these intrastate offerings, and that SEC staff will study and report to the commission in three years on how the rules are being used and implemented, fraud occurring in the space as well as the effectiveness of state bad actor provisions.
“On balance, I think they [the intrastate rules] are worth the experiment,” Stein said. “We should be able to recalibrate these rules if the experiment isn’t working out as planned.”