Risk & Compliance

SEC Eases Restrictions on Intrastate Offerings

By allowing issuers to solicit capital out of state, the commission recognized the "tremendous expansion of internet communications."
Matthew HellerOctober 28, 2016
SEC Eases Restrictions on Intrastate Offerings

The U.S. Securities and Exchange Commission has updated its rules on intrastate offerings of securities to allow issuers to solicit financing outside of their states while still avoiding the burdens of federal registration.

The commission acted in response to concerns that its Rule 147 was out of sync with modern finance practices such as “crowdfunding” over the internet. The rule excluded from federal registration only offers and sales of securities to residents of the same state or territory in which the issuer is resident and doing business.

Under the amended rule approved this week by the SEC, an issuer can make offers accessible to out-of-state residents as long as sales are made only to in-state residents.

“The new exemption from registration under the federal securities laws for local and regional offerings eliminates an existing restriction on offers that has been outmoded by the tremendous expansion of internet communications,” SEC Chair Mary Jo White said.

An issuer that is incorporated out of state can also qualify for the intrastate exemption if it can show its principal place of business is in-state.

Jim Toes, president of the Security Traders Association, said the new rule is critical for small businesses who struggle to attract capital investment in the current economic and regulatory environment.

“Getting banks to commit resources to doing [initial public offerings] on companies that are small … the incentives are just not there,” he told The Hill. The rule “enables companies that only have an idea to get some meaningful financing in the early stages to turn that idea into a reality.”

SEC Commissioner Kara M. Stein, however, expressed concern that the new rule does not include a “bad actor” provision.

“These provisions serve as a check before an offering ever commences,” she noted in a statement. “They prohibit people who have committed fraud or engaged in other serious misconduct from being involved in an offering of securities pursuant to these exemptions from registration.”