Rule Change Updates

Two recent SEC Rule updates have changed issue limits that apply to small issuers.

Rule 147  Updates 

Rule 147 was implemented in 1974 to provide an exemption from registration for issuers doing business within a single state, and offering and selling securities only to residents of that same  state.   The recent updates reflect  modern business practices and current communications technology.

Effective April 20, 2017, issuers need to meet only one requirement of the four below to be considered doing business in a state:

  • Derive at least 80% of its gross revenues from the operation of a business or of real property located in or from the state or territory;
  • At least 80% of its consolidated assets are located within the state or territory;
  • Uses at least 80% of the net proceeds from sales within the state or territory; or
  • A majority of the issuer’s employees are based in the state or territory.

There is also a significant change to the resale limitation of the rule.  Instead of a 9-month limitation on resale, the amendments to the rule shorten the period to a 6-month period, triggered by the date of purchase by each purchaser. Issuers are required to have a “reasonable belief” that purchases are residents of the state, and purchasers must verify their residency in writing.

Rule 147A, which is virtually identical to Rule 147, allows  issuers to make offers to out-of-state residents provided sales are made only to in-state residents. This change facilitates the use of social media or an unrestricted website in offering the securities.

Reg D Changes

As of January, 2017, Rule 504 has a new cap on the aggregate amount of securities that can be offered and sold during any 12-month period. Issuers can now raise $5,000,000 (instead of $1,000,000) under Rule 504. With this increase, Rule 505 became redundant, and will be repealed on May 22, 2017.

Below is a brief summary of the current Reg D rules:

  • Rule 504 permits issuers to raise up to $5 million and can be sold to an unlimited number of investors of any type, including non-accredited investors.
  • Rule 506(b), which has not been changed, permits issuers to raise an unlimited amount of money through sales to an unlimited number of accredited investors, and no more than 35 non-accredited investors. Non-accredited investors must be financially sophisticated or have sufficient knowledge and experience in financial and business matters to evaluate the investment. This sophistication requirement may be satisfied by a purchaser representative acting on behalf of the investor. General solicitation is not permitted under this rule.
  • Rule 506(c), also unchanged, likewise permits issuers to raise an unlimited amount of money, but can be sold only to accredited investors. Public solicitation is permitted, so advertising on television, in newspapers, and over the internet is permitted.

Effect on Licensing Exams

The rule changes to Rule 147 and Reg D impact all FINRA licensing exams administered after April 20, 2017.

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