Consider that you are a professional violinist who lives in Maryland. To build your career as a solo violinist you are planning your first tour to Pennsylvania and Ohio, and you need to attract local audiences in those states. How would you connect with potential concertgoers? Newspaper ads, Internet advertising, and mass mailings all could be effective in attracting individuals in Ohio and Pennsylvania who would be interested in hearing you perform.
It would be a lot more difficult if there were rules that required that your advertisements for the Ohio concerts only reached individuals in Ohio and the advertisements for the Pennsylvania concerts only reached individuals in Pennsylvania. If the rules were changed again so that only musicians who resided in Ohio could seek Ohio concertgoers, that would derail any opportunity for your Maryland orchestra to go on tour.
That is the exact dilemma real estate securities sponsors faced if they attempted to issue securities under the exemption in federal securities Rule 147 – at least until the Securities and Exchange Commission adopted Rule 147A, which became effective on April 20, 2017.
Under the previous rules, the intrastate exemption in Rule 147 was available to a securities sponsor only if the securities were issued by an entity formed in the state in which the real estate was located and that securities were only offered and sold to investors resident in the same state. Since advertisements might be considered offers to sell securities, from a practical matter, that prevented sponsors from using advertisements, such as the Internet or newspaper ads, which might reach individuals outside of that state.
Now, in recognition of changes in business practices and technology since Rule 147’s adoption in 1974, the SEC has adopted Rule 147A, which eliminates the requirement that the securities offeror be organized in the state in which the real estate is located. Rule 147A also eliminates restrictions on the offer of securities, as long as securities are only sold to individuals residing in the state.
Rule 147A offerings will not be exempt from state securities laws, so issuers will need to find a state securities exemption or qualify their securities in the state in which they are sold. Nevertheless, just as the Maryland violinist can perform for audiences in other states, a national real estate securities sponsor now can “go on tour” and develop custom real estate programs consisting of real estate in a single state for sale to residents of that state – and like the violinist, the real estate sponsor can use modern advertising to reach qualified prospective investors without running afoul of federal securities laws.
 Legal Geek Fact: Much of the SEC’s authority is derived from the Commerce Clause of the US Constitution, which gives Congress the power to regulate interstate commerce. Rule 147 was a safe harbor implementing Securities Act Section 3(a)(11), and is known as the “intrastate exemption.” Although the Supreme Court has significantly expanded the scope of the Commerce Clause of the US Constitution since its adoption, arguably, Section 3(a)(11) was not an exemption at all, but rather a tacit acknowledgement that an offering by a state’s resident entity that is offered and sold only to that state’s residents and is used entirely in that state might well not involve interstate commerce and therefore, be outside of the SEC’s jurisdiction. Rule 147A, on the other hand, was NOT adopted under Section 3(a)(11), but rather, was adopted under the SEC’s general exceptive authority in Section 28 of the Securities Act, thereby eliminating any statutory requirement that the offering be made entirely in a single state. Section 3(a)(11) and an amended Rule 147 remain in effect, so securities offered pursuant to the intrastate exemption remain a possibility if the issuer can comply with the more strict standards imposed by that section.
© 2017 by Elizabeth A. Whitman