Recently, the Securities & Exchange Commission (SEC) released new Q&A interpretations discussing ways in which an issuer can use its own website or social media presence to offer securities in a manner consistent with Rule 147. Rule 147 is the safe harbor rule related to Section 3(a)(11) of the Securities Act, which is often referred to as the “intrastate offering exemption.” The easiest, most reliable way to qualify for the intrastate offering exemption is by satisfying the requirements of the Rule 147 safe harbor, which generally requires an issuer to:
- Be organized in the state where it is offering the securities;
- Carry out a significant amount (greater than or equal to 80%) of its business in that state; and
- Make “offers” and sales only to residents of the state in which it is organized.
In this most recent Compliance & Disclosure Interpretations (C&DI), the SEC explained that an issuer’s use of its own website or social media presence to convey information about specific investment opportunities (i.e. make an offer) would typically take the offering outside the intrastate offering exemption. This result would occur because, on these platforms, issuers typically advertise their market presence in a broad and open manner so that information is widely disseminated to any member of the general public, not restricted to members of a certain state or territory. Thus, these communications would likely be distributed to residents outside the particular state in which the issuer is conducting the offering, causing it to fall outside the exemption.
However, the SEC clarified that an issuer’s use of its own website or social media platforms to offer securities would satisfy the exemption if the issuer could implement technological measures to limit offer communications on its website or social media account. The SEC described two specific ways in which an issuer could limit its communications.
First, issuers could include disclaimers and restrictive legends on offer communications to make it clear that an offering is limited to residents of the relevant state under applicable law.
The second option – which is much more difficult to implement – requires an issuer to limit communications that are offers to only those persons whose Internet Protocol (IP) address originates from a particular state or territory. This technological measure would allow an issuer’s offer to satisfy Rule 147’s single state requirement, as restricting the IP addresses would simultaneously prevent any offers from being made to persons whose IP addresses originate in another state or territory.
However, the state in which a reader of a website resides or is located is rarely shown in such reader’s IP address, making it very difficult to develop a reliable system for vetting specific readers from specific states. These challenges in the implementation of this IP address limitation method, and the method’s unreliability, may make it less than ideal for ensuring compliance with the intrastate offering exemption.
Nonetheless, even if issuers are unable or unwilling to implement these restrictions on IP addresses, issuers could still employ the method previously described in the C&DI’s posted by the SEC this past April. The method described in those articles was the limitation of accessible information about certain offerings to persons who confirm they are residents of a relevant state (through, for example, obtaining a representation of residency, such as a zip code or residence address).
Finally, aside from ensuring that communications on its own website and social media platforms satisfy Rule 147’s requirements, issuers must also remember that the entire offering must also comply with all other conditions of Rule 147.