Monday, November 9, 2015
Once the SEC has created a safe harbor for a statutory exemption, can it ever really get rid of it? That’s one of the issues raised by the SEC’s proposed changes to Rule 147, which I considered in detail last week.
Rule 147 is currently a safe harbor for the intrastate offering exemption in section 3(a)(11) of the Securities Act. Section 3(a)(11) exempts from the Securities Act registration requirement
“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 or, if a corporation, incorporated by and doing business within, such State or Territory.”
Rule 147 currently provides that an offering
“made in accordance with all of the terms and conditions of this rule shall be deemed to be part of an issue offered and sold only to persons resident within a single state or territory where the issuer is a person resident and doing business within such state or territory, within the meaning of section 3(a)(11) of the Act.”
In other words, if you meet the requirements of Rule 147, you are within the section 3(a)(11) exemption.
However, as I wrote in my post last week, the SEC is proposing to decouple Rule 147 from section 3(a)(11) and make Rule 147 an independent exemption. As a result, section 3(a)(11) would no longer have a safe harbor. Issuers could still use the section 3(a)(11) exemption, but they would be relegated to the uncertain case law that prevailed under section 3(a)(11) before Rule 147 was adopted.
Or would they?
Consider the nature of a safe harbor. The SEC is saying that, if you comply with the current requirements of Rule 147, you have met the requirements of section 3(a)(11). The SEC is not creating a new exemption or redefining the requirements of section 3(a)(11), merely saying that a particular class of offerings (those that meet all of Rule 147’s requirements) falls within the exemption defined by Congress in section 3(a)(11).
But, if that’s the case, the elimination of the safe harbor should have no effect on offerings that meet the old requirements. If those offerings fell within the exemption created by Congress the day before the safe harbor was eliminated, they should still fall within the congressional requirements the day after the safe harbor is eliminated.
After Rule 147’s amendment, an issuer who meets the old requirements should still fall within the section 3(a)(11) exemption. Why? Because the SEC said an offering like that falls within section 3(a)(11) and, unless the Commission was wrong in the first place, that conclusion should still hold even after the formal rule is eliminated.