Two weeks ago, the dream was realized, our wish came true: the SEC finally came through with Title III. Hooray! That, and the glaringly obvious flaw regarding the issue of unaccredited investors (reifa.org/MustFixT3 ), has been the major talk for the past couple of weeks, allowing the proposed changes to Rule 147 to slip by more or less unnoticed. Which brings us to today’s topic: Rule 147.
As it stands now, Rule 147 provides exemption from federal registration for any intrastate crowdfunding (well, securities offered, technically, but in the frame of this article, crowdfunding will suffice). This is how it has been since 1974 and, as you can imagine simply by the date, the Rule is in need of some “quality of life” improvement. These changes include but are not limited to:
- Manner of Offering – basically would enable issuers to use the internet (whereas previously they would be out of compliance for using methods that could be seen outside their state)
- Residence Requirement – residence would be determined by principal place of business, rather than where they are literally located
- Qualifications for “Doing Business” – 4 ways (3 of them old, 1 new) to meet the requirements and you only need to meet one to qualify
- Verification of Investor Residency Status
This sounds great and all, but the one update we haven’t mentioned yet is the crux of the problem. The issue? The SEC has proposed to make Rule 147 function outside of Section 3(a)(11) of the Act. Okay, but what does that mean, what’s the issue? The problem is that most states that allow intrastate crowdfunding require that the issuer be Section 3(a)(11) compliant. If you take Rule 147 out of Section 3(a)(11) to make it its own entity, that means Section 3(a)(11)’s regulations still stand, making the nice improvements to Rule 147 literally useless. Only following Rule 147 will, in fact, cause the issuer to be non-compliant with Section 3(a)(11).
What a mess. If you’d like a more in depth discussion, please see Anthony Zeoli’s Comment Letter to the SEC or read the original article. Also, reach out to the SEC if you feel this is an problem you would like to avoid!
