What Is a Rule 147 Offering and How Does It Work?

Rule 147 offerings provide companies a way to raise capital through intrastate offerings, which is especially beneficial for small businesses seeking local investment without the complexities of federal registration under the Securities Act of 1933.

Understanding Rule 147 is essential for issuers aiming to use this exemption effectively.

Issuer Eligibility

To qualify, issuers must ensure the offering is confined to one state. The issuer must be incorporated or organized under the laws of that state, with its principal place of business located there. At least 80% of the issuer’s consolidated gross revenues must come from business activities within the state, and 80% of net proceeds from the offering must be used for in-state operations. Additionally, 80% of the issuer’s assets must be located within the state. These requirements emphasize the exemption’s focus on promoting local economic activity. Issuers are also required to comply with state securities laws, which may impose further conditions.

State Residency Requirements

Both issuers and investors must have a strong connection to the state where the offering occurs. Investors must be state residents, verified through documentation like state-issued IDs, voter registration, or utility bills. It is the issuer’s responsibility to confirm residency and monitor compliance throughout the offering period to maintain the exemption.

Intrastate Exemption Criteria

The exemption mandates that the offer and sale of securities occur entirely within the state. Promotional activities must also remain confined to state boundaries, often requiring the use of local media. Issuers must demonstrate a substantial presence in the state, including tangible business operations that contribute to the local economy. State regulators may assess factors such as in-state employees, office locations, and supply chain activities to verify compliance.

Disclosure Requirements

Issuers must provide investors with sufficient information to make informed decisions, typically through a comprehensive offering memorandum. This document includes financial statements prepared according to Generally Accepted Accounting Principles (GAAP), a description of business operations, and management discussions. Material contracts or agreements that could affect the company’s future performance should also be disclosed.

Resale Provisions

Securities sold under Rule 147 cannot be resold to non-residents of the state for six months after the sale by the issuer. To enforce this restriction, issuers often use mechanisms like restrictive legends on stock certificates or digital securities. Investors should be made aware of these limitations at the time of purchase to avoid confusion. Non-compliance with resale restrictions could result in regulatory penalties or loss of the exemption, underscoring the importance of diligent oversight.