Intrastate Offering Exemption Under Rule 147

The intrastate offering exemption under Rule 147 permits small companies to offer and sell securities exclusively to residents of the company’s home state without registering with the SEC, provided the company operates primarily in that state and the offering meets specific residency and resale restrictions.

The statutory foundation

Section 3(a)(11) of the Securities Act of 1933 exempts “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 … such State or Territory.” This language creates an intrastate offering exemption in the statute itself; Rule 147 and Rule 147A simply elaborate on and provide safe harbors for meeting it.

The exemption’s logic is that a company raising capital exclusively from local investors and operating only locally does not pose the interstate commerce risks that federal registration is meant to address. Local investors may have direct access to the company’s management, local knowledge of the business, and community ties that reduce information asymmetries. The SEC’s oversight is therefore less critical.

However, the exemption is narrowly construed. An offering that fails any prong—if a single non-resident buys in, or if the company also sells to residents of another state, or if the company does not operate locally—the exemption is lost entirely, and the offering becomes an unregistered non-exempt distribution, potentially exposing the issuer and its agents to liability.

Rule 147 vs. Rule 147A

The SEC has two safe harbor rules. Rule 147, adopted in 1974, applies to offerings by corporations and certain other entities incorporated in the state and having principal offices there. Rule 147A, adopted in 2016, is a somewhat more flexible alternative that applies to companies operating primarily in the state, even if incorporated elsewhere.

For simplicity, most of the discussion below uses Rule 147 terminology, but Rule 147A operates similarly. An issuer may choose to rely on whichever rule better fits its circumstances.

The issuer requirement

Under Rule 147, the issuer must be (a) incorporated (or organized) in the state and (b) have its principal place of business in that state. “Principal place of business” is typically demonstrated by showing that most business activities occur in the state: offices, employees, revenue generation, and assets are concentrated there.

Rule 147A is more lenient. It allows an issuer organized out-of-state, provided that the company derives at least 80% of its revenue from within the state and has at least 80% of its assets in the state. This flexibility helps companies that may be incorporated in Delaware or another business-friendly jurisdiction but operate primarily in one state. For example, a Colorado plumbing company incorporated in Delaware could still use Rule 147A if it meets the 80% revenue and asset tests.

The residency requirement

The intrastate offering exemption applies only if all offerees and purchasers are residents of the same state. This is an absolute, objective test. A single offer to a non-resident—even an innocent one, such as a mailed prospectus to someone who has just moved out of state—can destroy the exemption.

Residency is established by the person’s principal residence. A person with a winter home in Arizona and a summer home in Colorado is a resident of whichever state is his principal residence (usually determined by driver’s license, voter registration, and other objective indicators). A non-resident who temporarily works in the state (e.g., a consultant) is still a non-resident and cannot participate.

Issuers typically obtain written representations from all investors stating that they are residents of the home state. Some use affidavits or notarized statements. The issuer’s burden is to have reasonable care to ensure compliance; the SEC does not expect absolute certainty but does expect documented due diligence.

The 6-month resale restriction

Purchasers in an intrastate offering may not resell the securities to a non-resident for at least 6 months. This restriction prevents a quick flip that would undermine the local-investor purpose. A rule 147 investor who buys shares may hold them and resell to other in-state residents immediately, but resales to out-of-state parties must wait 6 months.

To enforce this, issuers often place stop-transfer instructions on the securities (if they are certificated) or maintain legends on book-entry securities prohibiting transfers outside the state for 6 months. The issuer’s transfer agent cooperates by refusing to register transfers that violate the restriction.

In practice, this 6-month lock creates illiquidity and risk. A purchaser committed to a local company may gladly accept this, but institutional investors or those needing liquidity typically avoid intrastate offerings.

Business operations in the state

An issuer must be “doing business” in the state, not merely incorporated there. “Doing business” means substantive, ongoing operations: sales, services, hiring employees, maintaining offices, generating revenue. A Delaware corporation with a mailbox in the state but no actual operations would not qualify.

The SEC looks at the nature and extent of the company’s local presence. A retail business with stores in the state, a manufacturer with a plant in the state, or a service provider with offices and staff in the state clearly qualifies. A holding company that owns businesses in multiple states may not qualify for an intrastate offering unless its primary operations are in the home state.

The use of proceeds

Unlike some exemptions, there is no federal restriction on how the issuer uses the proceeds from an intrastate offering. The company may use funds for working capital, acquisitions, equipment, or any business purpose. However, many states impose their own limits or require disclosure about intended use, so the issuer should check state-law requirements.

State-level compliance

The intrastate offering exemption exempts the issuer from federal registration under the Securities Act. However, it does not exempt the offering from state securities laws (“blue sky laws”). Nearly every state requires that offerings of securities to state residents be registered or qualified at the state level, or else exempt under a state exemption.

Some states have mirrored the intrastate exemption in their own securities laws, making compliance straightforward. Others require state-level notice, filing, or registration, even if the offering is exempt from federal registration. An issuer must research its home state’s requirements and comply with them.

Who can conduct intrastate offerings

The exemption applies to the issuer’s primary offering, but issuers typically work with local brokers, accountants, and attorneys to conduct the offering. Brokers involved in intrastate offerings may be subject to state registration requirements, even though the offering itself is federally exempt.

Issuers should not attempt to use out-of-state underwriters or nationally marketed offerings in connection with an intrastate exemption claim. The SEC views widespread advertising or use of national networks as inconsistent with the local-offering intent.

Integration and the risk of dual offerings

If an issuer conducts an intrastate offering and also offers securities in another state or through another exemption, the SEC may integrate the two offerings. Integration destroys the intrastate exemption because the combined offering is not exclusively to in-state residents.

For example, if a company raises capital intrastate in Colorado and then, three months later, sells to investors in Wyoming, the SEC may integrate the two rounds and deem the aggregate offering non-exempt. Issuers must space out offerings temporally, differ the terms, or obtain SEC guidance to avoid integration concerns.

Modern alternatives: Regulation A+ and crowdfunding

In recent years, Regulation A (Regulation A+) and Regulation Crowdfunding have provided alternatives to intrastate offerings. Reg A+ allows small companies to conduct mini-IPOs with federal registration but lighter disclosure requirements than a full IPO. Reg CF allows companies to raise up to $5 million from the crowd, including non-accredited investors. These alternatives often provide better access to capital and wider investor bases than the intrastate exemption.

However, the intrastate exemption remains valuable for companies that want to avoid any federal registration or filing and that have a strong local stakeholder base willing to invest.

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