What Is Rule 147?

Rule 147 is a regulation under the Securities Act of 1933 that provides a registration exemption for certain securities offerings confined within a single U.S. state. Commonly referred to as the "intrastate offering exemption," Rule 147 allows companies to raise capital from investors residing within the same state where the company is doing business, without registering the securities at the federal level. The rule is intended to respect the principle of federalism by deferring oversight of local capital formation activities to state securities regulators.

Although offerings under Rule 147 are exempt from federal registration, they remain subject to state securities laws, often referred to as “blue sky” laws. The issuer must still comply with antifraud provisions under federal law, particularly those found in Rule 10b-5 under the Securities Exchange Act of 1934.

Purpose and Policy Objectives

The Securities Act of 1933 was designed to ensure transparency and protect investors in securities transactions by requiring registration of most public offerings with the SEC. However, not all securities offerings pose the same level of risk, especially those limited to a single state. Rule 147 acknowledges that local businesses seeking funding from in-state investors may not warrant the same level of federal oversight. By removing the federal registration requirement, Rule 147 reduces the regulatory burden on small businesses raising capital locally, while giving state regulators primary enforcement authority.

The rule serves two main policy objectives: to facilitate small business financing at the local level and to preserve the role of state securities commissions in regulating in-state offerings.

Eligibility Requirements

To qualify under Rule 147, the issuer must meet several conditions that ensure the offering remains within a single state. These conditions apply to both the issuer’s business operations and the residency of the investors. The key criteria include:

1. Principal Place of Business: The issuer must have its principal place of business within the state where the securities are being offered and sold. This is typically the location where a majority of the company’s revenue-generating operations or executive functions occur.
2. Doing Business Requirement: The issuer must satisfy at least one of the following "doing business" tests within the state:
3. • Derive at least 80% of its gross revenues from operations within the state.
   • Use at least 80% of the net proceeds from the offering for operations within the state.
   • Have at least 80% of its assets located in the state.
   • Carry out a majority of its employees’ work in the state.
3. In-State Purchasers: Offers and sales of the securities must be made only to residents of the same state. The issuer must take reasonable steps to verify the residency of each investor at the time of the sale.
4. Resale Restrictions: Securities sold under Rule 147 are subject to resale limitations. For a period of six months from the date of sale, the securities may only be resold to other in-state residents. This restriction is critical to maintaining the intrastate character of the offering and avoiding unintended distribution across state lines.

Distinction from Rule 147A

In 2016, the SEC adopted Rule 147A to modernize the intrastate offering exemption. While similar in structure to Rule 147, Rule 147A allows issuers to incorporate or organize outside the state where they conduct business, provided they meet the other in-state business requirements. Additionally, Rule 147A permits general solicitation and advertising, as long as sales are made only to in-state residents. Rule 147, by contrast, requires the issuer to be incorporated or organized in the state and restricts general solicitation to prevent cross-border interest.

As a result, Rule 147 remains available for issuers preferring a more traditional approach, while Rule 147A offers additional flexibility that better aligns with modern business practices and digital communication.

Compliance and Enforcement

While Rule 147 provides an exemption from federal registration, the offering must still comply with federal antifraud provisions and state-level requirements. Issuers are responsible for ensuring that all aspects of the offering—including investor qualification, use of proceeds, and advertising practices—align with both the letter and spirit of the exemption.

Failure to comply with Rule 147 may result in the loss of the exemption, triggering potential enforcement actions by the SEC and civil liability under Section 12(a)(1) of the Securities Act. Furthermore, violating state laws may result in separate penalties or rescission rights for investors.

The Bottom Line

Rule 147 provides a federal registration exemption for securities offerings that take place entirely within a single state, enabling small businesses to raise capital from in-state investors with fewer regulatory hurdles. However, the exemption comes with strict requirements concerning the issuer’s location, business activity, investor residency, and resale limitations. While Rule 147 remains a viable pathway for localized fundraising, it is often used alongside or in comparison to Rule 147A, which offers more flexibility for modern issuers. Businesses considering this exemption must also account for state securities laws and remain diligent in meeting all compliance obligations to maintain the benefits of the exemption.