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Rule 147 and Section 3 Exemption

23. What is “Rule 147” and how does it relate to a Section 3 exemption?

Rule 147 of the ’33 Act is a safe harbor for section 3(a)(11). It lays out the strict requirements that the issuer must meet to remain within the confines of the statutory exemption. To qualify for the intrastate offering exemption under SEC Rule 147:

•    the issuer (company) must be incorporated in the state where the offering is made;
•    at least 80% of the issuer’s revenues must come from business within that state;
•    at least 80% of the issuer’s assets must be located in that state; and
•    at least 80% of the proceeds of the offering must be used in that state.

As the name of the exemption implies, the issuer and all purchasers of the security must be primary residents of the state in which the securities are sold. As previously stated, a single offer or sale to an out-of-state individual destroys the exemption. Under the broad definition of an offer under the ’33 Act, any inadvertent contact with an out-of-state investor regarding the intended offering could be considered an offer to sell the securities. Lastly, a purchaser cannot resell the security to an out-of-state purchaser within 9 months of the issuance.

•    Note: Ultimately, the issuer bears the burden of verifying the residency of each offeree or potential investor.

•    Discussion: Why do you think the securities regulations allow for a rule-based exemption (regulation) that is a safeguard against violating the section 3(a)(11) statutory exemption? Do you agree that a purchase who meets the above-referenced characteristics should be considered an in-state purchaser? Why or why not?

•    Practice Question: ABC Corp plans on an instate issuance of securities. They are worried about violating the section 3(a)(11) statutory exemption and losing the exemption. What options are available to ABC Corps to make certain they do not violate the statutory exemption?

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