What is the Rule 147?

Rule 147 is a rule that can be used by a company to raise funds without actually registering with the Securities and Exchange Commission (SEC). Also known as the “safe harbor” rule, this rule usually only applies to small companies that want to raise money locally without incurring the expensive fees associated with registering with the SEC.

Key Takeaways

  • Rule 147 is the SEC’s interpretation of Section 3(a)11 of the Securities Act, which exempts securities issued locally from regulation, such as required disclosures, under the Act.
  • Rule 147 was originally made in 1974 to provide markets with greater certainty as to how the SEC would apply the Act, and has since been updated as of 2016.
  • The current version of Rules 147 and 147A allow greater flexibility for offering securities through modern technology and institutions, and in areas where companies operate rather than their home state of incorporation.

Understanding Rule 147

More specifically, this rule applies to Section 3(a)11 of the Securities Act of 1933, or the intrastate offering exemption. This section is intended to allow issuers with localized operations to sell securities as part of a plan of local financing. 

To qualify for exemption under Section 3(a)11, the company would have to show that:

  • The issuer is a resident of the state in which the offering occurs and, if the company is a corporation, it is in that state.
  • The issuer does a substantial amount of its business in that state.
  • The proceeds of the offering will be used within that state.
  • All the offerees and purchasers of the securities are residents of that state. 
  • The securities offered come to rest in the hands of persons residing in that state.
  • The entire issue of the securities falls under section 3(a)(11).

The rule was adopted in 1974 with the intent to provide greater certainty to companies on a regular set of conditions, under which the SEC would consider issuance of securities to be exempt under Section 3(a)11. However, at the time the SEC emphasized that its rule was not exclusive; not complying with the rule would not create a presumption against a claim for exemption under Section 3(a)11. Under Rule 147, the SEC interpreted that the requirements of Section 3(a)11 had been met if:

  • The company is incorporated in the state in which it is offering the securities.
  • The company carries out a significant portion of its business in that state (which is defined as at least 80% of its operations).
  • The company must only sell the securities to individuals residing in the state of incorporation.

Recent Changes Made to Rule 147 

In 2016, the SEC amended Rule 147 to modernize it and establish an intrastate offering exemption known as Rule 147A. The amended rule allows for offers of securities to be made available to out-of-state residents, as well as for the exemptions to apply to issuers of securities that incorporated out-of-state. Specifically, the new rules allow companies to advertise or offer the securities online (such as through crowdfunding) or through other media where they might be visible to out-of-state investors and relax the previous requirement that companies be incorporated in the state.

With the changes to the rule came alterations to the requirements. To qualify for Rule 147 and Rule 147A, the company’s officers, partners, or managers must primarily direct, control, and coordinate the business’s activities in-state. Sales of securities by the company must be limited to in-state residents or persons who the company reasonably believes are in-state residents. The company also must meet at least one of the following “doing business” requirements:

  • The company derived at least 80% of its consolidated gross revenues from the operation of a business or of real property located in-state, or from the rendering of services in-state.
  • The company had at least 80% of its consolidated assets located in-state.
  • The company intends to use and uses at least 80% of the net proceeds from the offering towards the operation of a business or of real property in-state, the purchase of real property located in-state, or the rendering of services in-state.
  • A majority of the company’s employees are based in-state.