Securities Act Registration Exemptions

Intrastate offering - §3(a)(11)• “part of issue”• “only to residents within a single state”• “issuer doing business within such state”• Rule 147: safe harbor

(last updated 27 Feb 13)

Regulation A

Section 4(2) Section 3(b) - Safe harbor

Rule 506 Rule 504 Rule 505 Reg A

Issuer Any issuer***No 34 Act, inv cos, blank ch

No inv cos, “bad boys”

No ‘34 Act, “bad boys”

$$ limits None$1 MM

(12 months)$5 MM

(12 months)$50 MM**** (12 months)

MarketingNo general solicitations

No general solicitations*

Varies**** “test waters”

# of investors35 non-

accredited***No limits

35 non-accredited***

No limits

Type of investorAccredited / non-

accred**No limits

Accredited / non-accred

No limits

DisclosureOnly to non-accredited

NoneOnly to non-accredited

Offer circular (unaudited)

Resales “restricted” “restricted”* “restricted” None

SEC filing Yes Yes Yes Yes

* N/A – if offering state-registered or subject to state exemption for accredited investors** Non-accredited must be sophisticated or have purchaser rep*** amended by Dodd-Frank // **** amended by JOBS Act

Use of Reg D (2008-2010)

Rutherford Campbell, Jr., Wreck of Reg D, 66 Bus. Law. 919 (2011)

* Based on sample of 1,000 Reg D offerings** Extrapolated from 2005-2011 data (23/year)

  Number Percentage Only AI*

Reg D 27,234    

Rule 504 1,196 4.4% 59.3%

Rule 505 447 1.6% 56.5%

Rule 506 25,591 94.0% 91.2%

Reg A 46**    

Use of Reg D (2008-2010)

Rutherford Campbell, Jr., Wreck of Reg D, 66 Bus. Law. 919 (2011)

* Based on sample of 1,000 Reg D offerings

Size of offering Percent Only AI* Fin Interm*

< $1MM 7,880 30.8% 82.4% 5.8%

Rule 504 1,125 14.3%    

Rule 505 559 7.1%    

Rule 506 6,196 78.6%    

$1MM - $5MM 7,059 27.6% 88.3% 12.7%

Rule 505 276 3.9%    

Rule 506 6,487 91.9%    

>$5MM 12,295 48.0% 91.2% 13.8%

Rule 506 12,295 100.0%    

When would you useintrastate offering?

Compare §4(2) to §3(a)(11) and Rule 147 safe harbor …

Statute Statute Safe harbor

§4(2) §3(a)(11) Rule 147

Issuer Any issuerResident / incorp

“within” stateOrg / princ office

“80% test”

$$ limits None None None

MarketingNo offers to “unqualified”

Only offer to “in state residents”

“principal office / residence”

# of investors No limits No limits No limits

Type of investorOnly “qualified

investors”“in state

residents”“principal office /

residence”

Disclosure“access”

(sliding scale)None (*) None (*)

ResalesOnly to “qualified

investors”Only “in state”

until come to rest9-month safe

harbor / restrict

SEC filingNone

(until file RS)No

(until file RS)No

(until file RS)

(*) State blue sky laws

§ 3(a) Exempted securities

(11) Any security which is a part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within, or if a corporation, incorporated by and doing business within, such State or Territory.

And the intrastate exemption details …(5 hypotheticals)

Hypothetical #1

E-B Corp, a furniture retailer planning to expand to online sales, wants to raise $5 million in a stock offering. Management thinks there will be enough investor interest in North Carolina to do the deal. 

E-B is incorporated in North Carolina; its showroom, warehouse and order center are in North Carolina.

Identify problems:• E-B buys 60% of its furniture from North

Carolina manufacturers.  Most of its orders come from out-of-state buyers.

• E-B will use the proceeds of the offering to build a new warehouse in South Carolina and to create an order center in High Point.

Statute Statute Safe harbor

§4(2) §3(a)(11) Rule 147

Issuer Any issuerResident / incorp

“within” stateOrg / princ office

“80% test”

$$ limits None None None

MarketingNo offers to “unqualified”

Only offer to “in state residents”

“principal office / residence”

# of investors No limits No limits No limits

Type of investorOnly “qualified

investors”“in state

residents”“principal office /

residence”

Disclosure“access”

(sliding scale)None (*) None (*)

ResalesOnly to “qualified

investors”Only “in state”

until come to rest9-month safe

harbor / restrict

SEC filingNone

(until file RS)No

(until file RS)No

(until file RS)

(*) State blue sky laws

Hypothetical #2

While pursuing its in-state offering, E-B looks for other sources of financing:

• a VC firm from California that will buy $2 million in common stock, but not as part of the North Carolina offering

• Edgar (E-B’s CEO) lines up his wealthy uncle, Senator Jim, who lives in North Carolina to buy $1 million of Edgar's own personal holdings in E-B

Rule 147(b)(2) For purposes of this rule only, an issue shall be deemed not to include offers … or sales of securities of the issuer pursuant to the exemption provided by section 3 or section 4(2) of the Act or pursuant to a registration statement filed under the Act, that take place prior to the six month period immediately preceding or after the six month period immediately following any offers, offers for sale or sales pursuant to this rule, …

Introduction to Rule 147: … in determining whether offers and sales should be regarded as part of the same issue and thus should be integrated any one or more of the following factors may be determinative:

    (i)  Are the offerings part of a single plan of financing;     (ii)  Do the offerings involve issuance of the same class

of securities;     (iii) Are the offerings made at or about the same time;     (iv)  Is the same type of consideration to be received;

and     (v)  Are the offerings made for the same general

purpose.

Rule 147

The rule provides an exemption for offers and sales by the issuer only. It is not available for offers or sales of securities by other persons. Section 3(a)(11) of the Act has been interpreted to permit offers and sales by persons controlling the issuer, if the exemption provided by that section would have been available to the issuer at the time of the offering. See Securities Act Release No. 4434.

Hypothetical #3

First Lynch Securities will be a “firm commitment” (somewhat unusual) underwriter for E-B’s intrastate offering.  

• First Lynch is a regional securities firm, incorporated in Delaware with its headquarters in Atlanta.

• First Lynch will mail offering circulars to selected in-state investors and follow up with phone calls by reps working in First

Lynch’s Charlotte office.

Hypothetical #4

First-Lynch distributes the E-B offering circular to various investors. Problems?  

• Ann, a doctor whose office is in Charlotte, actually resides in South Carolina.

• Ginny, who recently moved to Virginia, gives a notarized promise to be subject to North Carolina jurisdiction.

• Carl spends 6 months each year in Hilton Head, SC -- his mailing address remains in North Carolina.

• First Lynch has its customers fill out a form stating they are NC residents and attaching a photo-copy of their NC driver's license.

Statute Statute Safe harbor

§4(2) §3(a)(11) Rule 147

Issuer Any issuerResident / incorp

“within” stateOrg / princ office

“80% test”

$$ limits None None None

MarketingNo offers to “unqualified”

Only offer to “in state residents”

“principal office / residence”

# of investors No limits No limits No limits

Type of investorOnly “qualified

investors”“in state

residents”“principal office /

residence”

Disclosure“access”

(sliding scale)None (*) None (*)

ResalesOnly to “qualified

investors”Only “in state”

until come to rest9-month safe

harbor / restrict

SEC filingNone

(until file RS)No

(until file RS)No

(until file RS)

(*) State blue sky laws

Hypothetical #5

In October Carl buys 1000 shares in the offering.  

• In April Carl's daughter is admitted to a prestigious private law school.  To raise cash for this emergency, Carl sells his shares to Ginny in Virginia.

• Advise E-B what precautions it should take to avoid Securities Act registration and the liability “put” exposure under § 12(a)(1).

The end