United States

New rules facilitate intrastate and regional securities offerings

FINANCIAL REPORTING INSIGHTS  | 

On October 26, 2016, the SEC adopted final rules that update and expand how smaller companies can raise capital. The new rules are summarized as follows:

  • To facilitate capital formation through regional offerings, the final rules amend Rule 504 of Regulation D under the Securities Act to increase the aggregate amount of securities that may be offered and sold from $1 million to $5 million. Rule 504 is an exemption from registration under the Securities Act for offers and sales of securities in a 12-month period, provided that the issuer is not an Exchange Act reporting company, investment company or blank-check company.
  • The new rules also apply bad actor disqualifications to Rule 504 offerings to provide additional investor protection, consistent with other rules in Regulation D.  
  • In light of the changes to Rule 504, the final rules repeal Rule 505 of Regulation D, which permitted offerings of up to $5 million annually that must be sold solely to accredited investors or no more than 35 non-accredited investors.
  • The final rules amend Securities Act Rule 147 to modernize the safe harbor under Section 3(a)(11) of the Securities Act, so issuers may continue to use state law exemptions that are conditioned upon compliance with both Section 3(a)(11) and Rule 147. The final rules also establish a new intrastate offering exemption, Securities Act Rule 147A, that further accommodates offers accessible to out-of-state residents and companies that are incorporated or organized out-of-state.

Amended Rule 147 and new Rule 147A will become effective 150 days after publication in the Federal Register. Amended Rule 504 will become effective 60 days after publication in the Federal Register. The repeal of Rule 505 will become effective 180 days after publication in the Federal Register.