Recently the SEC released new Compliance and Disclosure Interpretations (“CDIs”) relating to exempt securities offerings made pursuant to Rule 147 and Section 3(a)(11) of the Securities Act of 1933 (a/k/a the “intrastate offering exemption”). The purposes of CDIs 141.03, 141.04 and 141.05 were to provide some clarification on the use of the federal intrastate offering exemption in connection with the numerous recent state enacted crowdfunding exemptions.
As a refresher, the intrastate offering exemption provides an exemption from federal registration for securities offered by a company organized and/or transacting business in a particular state which are offered and sold only to residents of the same state (e.g. a sale of securities offered by a company organized and doing business in Illinois which are offered and sold only to Illinois residents). Further there is no prohibition in connection with an intrastate offering exemption regarding general advertising or solicitation so long as it complies with applicable state law and does not result in an offer or sale to nonresidents. The intrastate offering exemption is also the basis of exemptions for offerings of securities made under each of the recently enacted state crowdfunding exemptions.
The new CDIs are intended to provide some clarification with respect to the requirements of the intrastate offering exemption and the character and the selling of the securities via a crowdfunded offering (particularly through an internet portal). You can read each of the CDIs for yourself but here is a summary of each:
- CDI 141.03 – This CDI reiterates that while Rule 147 does not prohibit general advertising or solicitation, it must be done in a manner that is consistent with the requirement that offerings be made only to residents of the target state. Put more simply, when engaging in general advertising and/or solicitation it should be done in a way that is primarily focused on reaching residents of the target state.
- CDI 141.04 – This CDI relates to the use of a third-party internet portal to facilitate the offer and sale of the subject securities as well as the transfer of information in connection with the same. The CDI provides that the use of such an internet portal would be acceptable provided that the internet portal maintains “adequate measures” (as defined in CDI 141.04) to ensure that offers and sales are made only to residents of the target state. The CDI further clarifies that “adequate measures” include, at a minimum providing disclaimers and restrictive legends on all information (making it clear that it is intended for residents of the target state only) and limiting access to information to persons who confirm they are residents of the target state (though no guidance is given as to what is acceptable proof of a person’s residence). It should be noted that, unlike in CDI 141.03 where the issuer is only required to advertise in a manner that is consistent with the requirements of the intrastate offering exemption (alluding to the assumption that information may arrive in the hands of nonresidents if not done on purpose), here the CDI makes it clear that the intent is to make sure information provided through an internet portal is given only to residents of the target state.
- CDI 141.05 – This CDI relates to the use of an Issuer’s own website/social media presence to provide information about the securities being offered/sold. While the SEC provides that such communications may be acceptable in limited circumstances (as determined by the SEC on a case by case basis), generally an Issuer should avoid using such advertising channels as it would most likely result in “offers” being made to residents outside the target state.
As the current use of the intrastate offering exemption (and related state crowdfunding exemptions) continues to grow, we will most likely see more CDIs being issued by the SEC to help alleviate some of the growing pains associated with the use of internet portals and social media.