The Rule 147 Intrastate Exemption – Securities Exemptions for Startups and Business

By Drew Stevens - June 30, 2019 - Securities

If you’re an Ohio startup or growing business, finding the proper securities exemption for your fundraise can be time consuming. If you’ve never talked to a Columbus securities lawyer before, choosing the right exemption can be confusing. While there are a number of securities exemptions out there, certain exemptions come with a number of restrictions, such as limiting the overall amount you can raise, limitations concerning solicitation, and limiting how many investors you can receive money from.

One great exemption for startups with extensive local ties lies in Section 3(a)(11), often referred to as the intrastate offering exemption. Under Section 3(a)(11), a business is allowed to fundraise from an unlimited number of investors, and the exemption does not impose any kind of restrictions on the total amount of money that can be raised.

Rule 147 Safe Harbor

To qualify for the securities exemption under Section 3(a)(11), a business must meet the safe harbor criteria of Rule 147. Rule 147 requires the following:

  1. Domicile and Principal Place of Business. A startup must be domiciled (registered) and have its principal places of business in a given state. Looking at an Ohio example, the business would have to be an Ohio corporation or an Ohio LLC and have its principal place of business in Columbus.
  1. In-State Offers and Sales. All offers to sell securities and all actual sales of the securities must be to in-state residents. Before the amendment to Rule 147, touched on below, even a single offer to an out-of-state resident could result in the loss of the exemption.

In the case of offerings to an entity, residency of the entity is determined by where the principal place of business is for the entity. In the case of an individual, residency is determined by where the individual’s principal residence is at the time of the sale of securities.

  1. Placing the specific legend prescribed in Section 230.147(f)(1)(i) of the Securities Act of 1933 on any document that evidences ownership of the securities.
  1. Obtain a written representation from each purchaser of the securities as to the purchaser’s residence.
  1. Meet at least one of the four “doing business” in-state requirements:
  1. The issuer 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.
  1. The issuer had at least 80% of its consolidated assets located in-state.
  1. The issuer 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.
  1. A majority of the issuer’s employees are based in-state.

Rule 147A Changes

A few years ago, Rule 147A was enacted that features two key differences from Rule 147.

The first difference is that the issuer of the securities no longer has to be registered and doing business in the same state. This recognizes the trend of businesses to form in one state for particular benefits while actually operating in another state. For example, if you’re an Ohio business operating in Cleveland, but you formed a Delaware corporation, you would qualify under Rule 147A.

The other key change recognizes soliciting and networking in the digital age. While all actual sales must still be to in-state residents, offers can be viewed by out-of-state residents.

Rule 147 and 147A Restrictions

Issuers relying on the intrastate exemption must keep in mind one primary restriction – any securities that are offered pursuant to Rule 147 or Rule 147A can only be resold to purchasers in the same state within the first six months of the original sale. These limitations must be disclosed in the offer and purchase and must be incorporated into the legend referenced above.

No SEC Registration

The end result of compliance with Rule 147 or Rule 147A is that issuers do not have to do any type of registration, file any information, or pay any kind of fee to the SEC.

Compliance with State Securities Laws

Relying on the intrastate exemption, however, does not remove the need for state securities compliance. Startups and businesses that use Rule 147 or Rule 147A must still comply with the registration and exemption standards for the state in which the securities are sold.

In Ohio, if the offering has ten or fewer purchasers, startups can utilize the exemption found in Ohio Revised Code Section 1707.03(O). If the criteria of Section 1707.03(O) are met, no registration or filing fee is necessary with the Ohio Department of Commerce’s Division of Securities.

Securities Attorney Columbus Ohio

If you think that your business or startup could use the assistance of a securities lawyer, do not hesitate to contact our firm today.


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