I wanted to blog on some of the lesser known and relied on securities exemptions.  In certain situations they can be very helpful.  One of these is the federal Intrastate Securities Offering Exemption.  Simply, if you offer and sell in one state and one state only, and some other factors are met, the issuer is exempt from the federal registration requirement.  Blue sky laws will still apply but some states have limited offering exemptions or other exemptions the issuer can rely on.

The Intrastate Securities Offering Exemption is found staturorily in Section 3(a)(11) of the Securities Act of 1933, which exempts the sale of any security offered and sold only to persons residing in the same state as where the issuer resides and does business.  Like most statutory exemptions, there were some grey areas and nebulous cases which caused the SEC to promulgate Rule 147, which provides a safe harbor for intrastate offerings.  If the intrastate offering uses the mails, the issuer must also be sure to comply with the antifraud provisions.  The securities sold cannot be resold out of the state for a period of nine months.

The first factor to determine is which state the issuer is a resident of.  Generally, a company will be a resident of the state where it is incorporated or organized.  If it is an unicorporated general partnership it will be where the principal office of the partnership is located.  The issuer must also be “doing business” in the state, which requires that the issuer:

  1. Derive at least 80% of its gross revenues from a business or property or services rendered in the state;
  2. Must have at least 80% of its assets in the state;
  3. Must plan to and actually use 80% of the proceeds of the offering in the state; and
  4. Must have its principal office in the state.

Lastly, to satisfy Rule 147, the issuer must offer and sell to residents of only one state.  A single offer or sale to a resident of a second state will lose the exemption totally for all securities offered and sold (this is very bad and not hard to do – there may or may not be another exemption that can be relied on and registration would be required).  This is a key  to the whole exemption, an outlier either offered or sold to anyone (before, during or after the offering – see factors below) may be found to be part of the offering (i.e. integrated) and the exemption lost.

When determining when an offer or sale is part of a single offering and should be integrated with that offering, the SEC may rely on one or more of the following factors:

  1. If the offers were components of a single plan of financing (whether a distinction can be made between the outlying offer and the rest, such as being part of a seperate plan or other financing that fell through or was abandoned);
  2. If the offers involved the same class of securities (i.e. same class/series of common stock v. preferred and common v. two different classes of common);
  3. if the offers were made at approximately the same time;
  4. If the same type of payment was made for offers/sales; and
  5. If the offers were made for the same general purpose.

This exemption is not heavily relied upon, but it can be very useful for small companies just starting out, or with localized business models.