What Is Rule 147A?

Rule 147A is a federal securities exemption introduced by the U.S. Securities and Exchange Commission (SEC) that allows companies to raise capital through intrastate offerings while incorporating modern business realities, such as internet-based marketing and incorporation out of state. It is a companion to the older Rule 147 exemption but introduces greater flexibility for issuers, particularly with respect to issuer incorporation and general solicitation.

This rule is part of the broader effort to facilitate capital formation for small businesses while maintaining investor protections. Rule 147A was adopted in 2016 as part of the SEC's response to market developments and feedback from state regulators and market participants regarding the limitations of the original Rule 147.

Historical Context and Purpose

The original Rule 147 was adopted in 1974 under the Securities Act of 1933 to provide a safe harbor for Section 3(a)(11), the intrastate offering exemption. It allowed companies to offer and sell securities within a single state without registering them federally, provided they met strict criteria about issuer location, investor residency, and use of proceeds. However, Rule 147 was tied to the requirement that the issuer be incorporated or organized in the same state where the offering took place, which increasingly became a constraint in a business environment where companies often incorporate in states like Delaware regardless of their operational headquarters.

Rule 147A addresses this issue by decoupling the place of incorporation from the location of the issuer's principal place of business. The change acknowledges the practical considerations of modern corporate structuring while still ensuring that the offering is primarily confined to residents of one state.

Key Provisions

Rule 147A allows issuers to conduct offerings to in-state residents without federal registration if they meet certain conditions:

1. Principal Place of Business: The issuer must have its principal place of business within the state where the offering occurs and carry out a significant portion of its business activities there. Unlike Rule 147, incorporation in the state is not required.
2. In-State Sales Requirement: Sales of securities must be made only to residents of the same state where the issuer’s principal place of business is located.
3. General Solicitation: Unlike Rule 147, Rule 147A permits general solicitation and advertising (including internet use), provided that the actual sales are limited to in-state residents. This provision reflects changes in how companies market offerings and communicate with potential investors.
4. Resale Restrictions: Securities sold under Rule 147A are “restricted securities.” They cannot be resold to non-residents for a period of six months from the date of purchase. This restriction is designed to ensure the offering remains local in nature and to discourage arbitrage or immediate out-of-state flipping.
5. Disclosures: The issuer must include specific disclosures about resale restrictions and the limitations of the exemption in offering materials and other written communications.

Comparison with Rule 147

While Rule 147A closely resembles Rule 147, the key differences are:

• State of Incorporation: Rule 147 requires issuers to be incorporated or organized in the state of the offering. Rule 147A allows companies incorporated elsewhere as long as their principal place of business is in the offering state.
• General Solicitation: Rule 147 prohibits general solicitation that could reach non-residents. Rule 147A permits it, recognizing that digital communication is now standard and often cannot be effectively restricted by geographic boundaries.

These changes make Rule 147A a more practical choice for startups and small businesses looking to raise capital from local investors while benefiting from more flexible communication tools.

Compliance Considerations

Although Rule 147A provides a federal exemption from registration, issuers must still comply with state securities laws, often referred to as “blue sky” laws. This typically means filing documents with the state’s securities regulator, paying a fee, and ensuring proper disclosure is provided to investors.

Because Rule 147A is not a complete exemption from all regulatory requirements, companies should work with legal counsel or compliance professionals to ensure that both federal and state rules are satisfied before proceeding with an offering. Noncompliance could result in enforcement actions or require rescission of the offering.

Use in Modern Capital Formation

Rule 147A is often used in combination with state crowdfunding laws. Many states have adopted their own crowdfunding exemptions to promote local investment, and Rule 147A helps bridge the gap between federal exemptions and these state-level frameworks. It is particularly useful for smaller issuers that wish to take advantage of their community presence and relationships without bearing the full cost and complexity of federal registration.

For example, a local food cooperative or a tech startup with a strong regional customer base might use Rule 147A to raise funds from residents in their home state. The ability to use general solicitation makes it easier to reach prospective investors via social media, email, or local media, as long as the final sales are made only to in-state residents.

The Bottom Line

Rule 147A provides a streamlined and flexible path for businesses to raise capital from in-state investors while aligning with contemporary methods of communication and business structuring. By removing the requirement for in-state incorporation and allowing general solicitation, it expands the utility of intrastate offerings without undermining investor protection. However, careful adherence to state and federal compliance obligations remains essential.