Last week, the SEC issued three new interpretations related to the so-called “intrastate offering exemption,” which is a registration exemption that facilitates the financing of local business operations. An intrastate offering is exempt because it does not involve interstate commerce, and is therefore, outside the scope of the Securities Act.
We have received a few calls this week from startup companies who mistakenly believed that these new interpretations were creating a new registration exemption. Largely, the mistaken belief is caused by the confusion stemming from some recent state law changes that allow for intrastate crowd funding. While the new SEC interpretations were prompted by the recent state law changes, the intrastate offering exemption has been around since 1933, but for many reasons, it is not heavily relied upon. And, despite the three new interpretations, we still advise against using the intrastate offering exemption.
What is this intrastate offering exemption?
The intrastate offering exemption is actually two separate exemptions, Section 3(a)(11) and a safe harbor Rule 147. Although the two exemptions differ slightly, generally, if the (i) issuer is incorporated or organized in the same state in which it is offering securities; (2) a substantial portion of the issuer’s business occurs within that state; (3) each offeree and purchaser is a resident of the state; (4) the offering proceeds are used primarily within that state; and (5) the securities come to rest within that state, then your offering would be exempt from federal registration requirements. The investors do not need to be accredited (unlike Regulation D offerings), there is no limitation on the manner of offering, there are no prescribed disclosures, there is no maximum amount that can be raised (unlike Rule 504, Rule 505, or Regulation A), and the shares are freely transferable to other residents of the state. In other words, it is a fairly broad exemption that allows a lot of flexibility to issuers, especially to startup companies who need as much flexibility as possible when raising capital.
Ok, so what is such a problem with the intrastate offering exemption?
While there is lots of flexibility with the exemption, the intrastate offering exemption Continue Reading Don’t cross the border!: Intrastate offering exemption still not useful despite new interpretations