Raising capital is a critical step for any startup or small business. One of the most common ways to raise money is by selling securities, aka syndication. There are several regulations that companies can use to raise capital, including Rule 147A (amended Rule 147), Section 4(a)(2), and Reg D. Both of these regulations provide an exemption from the registration requirements of the Securities and Exchange Commission (SEC), but they have different rules, limitations, and advantages. In this article, we’ll take a closer look at Rule 147A and Reg D, compare the two, and help you determine which option may be best for your company.
Rule 147A
What is Rule 147a?
Rule 147A is a safe harbor provision under the Securities Act of 1933 that provides an exemption from the registration requirements for certain intrastate offerings of securities (often called an intrastate offering exemption). The rule is intended to help small businesses and startups raise capital from investors within their state of incorporation or organization. It allows companies to offer and sell securities to investors within their state without having to register the offering with the SEC.
To qualify for the exemption under Rule 147A, companies must meet several conditions, including:
- The company must be incorporated or organized in the state where the securities are offered and sold
- The company must conduct a substantial portion of its business in the state where the securities are offered and sold
- The company must reasonably believe that all purchasers of the securities are residents of the state where the securities are offered and sold
- The company must not offer or sell securities to more than 35 non-accredited investors
- The company must file a notice of the offering with the securities commissioner of the state where the securities are offered and sold
- The company must comply with any state securities law requirements
It’s worth noting that Rule 147A is a federal regulation and it is intended to complement state securities laws, not replace them. Companies that use Rule 147A must comply with any state securities laws in addition to federal regulation. Additionally, Rule 147A is also called the Amended Rule 147.
How is Rule 147A different than Reg D?
Rule 147A and Reg D are both exemptions from the registration requirements of the SEC for securities offerings, but they have some key differences.
- Eligibility: Rule 147A is limited to intrastate offerings, which means that the securities must be offered and sold within the same state where the company is incorporated or organized, and a substantial portion of its business is conducted. Reg D, on the other hand, applies to any company regardless of location, as long as they meet the requirements of the specific exemption used.
- Investor Participation: Rule 147A is limited by individual state Blue Sky Laws and is not open to out of state residents, while Reg D allows companies to raise an unlimited amount of money from up to 35 non-accredited investors in a 90-day period (Rule 506b only) and an unlimited number of accredited investors.
- Advertising and Solicitation: Rule 147A often prohibits general solicitation and advertising but is defined by individual state Blue Sky Laws, while Reg D does not have this restriction (Rule 506c only).
- Ongoing Reporting: Rule 147A is often subject to ongoing reporting requirements similar to Reg CF as prescribed by the laws of the individual state, while companies using Reg D are not subject to the same ongoing reporting requirements.
- Limitations: Rule 147A is subject to limitations set by state securities laws, while Reg D is subject to limitations set by federal securities laws.
In summary, Rule 147A is a federal regulation that applies only to intrastate offerings and allows for a limited number of non-accredited investors, with additional limitations and restrictions. Reg D, on the other hand, is a federal regulation that applies to any company regardless of location and allows an unlimited amount of money to be raised from accredited investors only, with a variety of exemptions to choose from.
What are the advantages of using Rule 147A?
Here are some advantages of using Rule 147A:
- Local focus: As the ‘intrastate offering exemption’ Rule 147A is limited to intrastate offerings, which means that the securities must be offered and sold within the same state where the company is incorporated or organized, and a substantial portion of its business is conducted. This allows companies to raise capital from a more local investor base (while excluding out of state residents), which can be beneficial for companies that are focused on a specific geographic area.
- Less regulatory burden: Rule 147A is subject to fewer regulatory requirements than a full SEC registration, which can be less time-consuming and less expensive for companies to comply with.
- Fewer disclosure requirements: Rule 147A requires less extensive disclosures than other exemptions, which can make it less costly and time-consuming for companies to prepare the necessary paperwork.
- Complementary to state securities laws: Rule 147A is a federal regulation and it is intended to complement state securities laws, not replace them. Companies that use Rule 147A must comply with any state securities laws in addition to the federal regulation.
- A viable alternative for smaller companies: Rule 147A allows companies to raise a limited amount of money while being subject to less regulatory burden than other exemptions, making it a viable alternative for smaller companies that are looking to raise capital from a more local investor base.
What are the eligibility requirements for companies to use Rule 147A?
To qualify for the exemption under Rule 147A, companies must meet several conditions, including:
- Incorporation or organization in the state: The company must be incorporated or organized in the state where the securities are offered and sold.
- Substantial portion of business in the state: The company must conduct a substantial portion of its business in the state where the securities are offered and sold.
- Reasonable belief of purchaser residence: The company must reasonably believe that all purchasers of the securities are residents of the state where the securities are offered and sold.
- Notice filing with state securities commissioner: The company must file a notice of the offering with the securities commissioner of the state where the securities are offered and sold.
- Compliance with state securities laws: The company must comply with any state securities law requirements.
How to choose between Rule 147A and Reg D
Choosing between Rule 147A and Reg D depends on a company’s specific needs and circumstances. Here are some factors to consider when making a decision:
- Location: If a company is incorporated or organized in a specific state and conducts a substantial portion of its business in that state, Rule 147A may be a better option because it is limited to intrastate offerings. Reg D, on the other hand, applies to any company regardless of location.
- Investor base: If a company wants to raise capital from a more local investor base, Rule 147A may be a better option. However, if a company wants to raise capital from a more experienced and financially sophisticated investor pool, Reg D may be a better option because it allows companies to raise an unlimited amount of money from up to 35 non-accredited investors in a 90-day period (Rule 506b only) and an unlimited number of accredited investors.
- Advertising and Solicitation: If a company wants to use general solicitation and advertising to attract investors, Reg D Rule 506c may be a better option because it does not have the same restrictions as Rule 147A.
- Ongoing reporting: If a company is comfortable with ongoing reporting and compliance requirements, Rule 147A is a possible choice. However, if a company wants to avoid ongoing reporting and compliance requirements, Reg D may be a better option.
- Compliance with state securities laws: If a company wants its offering to be subject to state securities laws rather than federal, Rule 147A may be a better option.
It’s important to note that each option has its own set of advantages and limitations, and it’s recommended to consult with syndication attorneys to understand the specific requirements and limitations of each option before making a decision.
Tilden Moschetti, Esq., is a highly sought-after syndication attorney with nearly two decades of experience. His clientele ranges from real estate developers and startups to established businesses and private equity funds. Tilden’s expertise in syndication law comes not only from his knowledge of syndication and securities law but from real, hands-on experience as an active syndicator himself in every real estate product type and nearly all markets in the US. His knowledge and experience set him apart and established him as the Reg D legal services leader.
