Section 3(a)(11) of the Securities Act of 1933 exempts the sale of any security offered and sold only to persons who reside in the same state as the state in which the issuing company resides and does business. Nevertheless, if the company distributes the security on an intrastate basis by using the mail, the company must satisfy both the antifraud and the civil liability provisions of the 1933 Act. To clarify some problems that had arisen concerning intrastate offerings, the Securites and Exchange Commission (“SEC”) issued Rule 147 to provide a “safe harbor” for those companies wanting to make an intrastate offering.

     To satisfy Rule 147, the company must offer and sell the entire issue to residents of a single state. If the company offers and sells any part of the issue to a resident of another state, the company will lose the intrastate exemption not only for the securities sold to nonresidents but for all securities of the issue, including those sold to residents of the company's state. A single offer or sale to a nonresident can lose the exemption. A company can lose the exemption if the regulators find that a later, or earlier, sale made to out-of-state residents was part of the intrastate offering. Additionally, the regulators can “integrate” these sales into the intrastate sale. If Rule 147 prohibits these sales, the intrastate exemption would fail and registration would be required.

     Whether a sale is part of an issue depends primarily on the facts of each case, but the SEC may rely on one or more of the following factors in determining whether integration is required:

(i)     The offers were part of a single plan of financing;

(ii)     The offers involved the same class of securities;

(iii)     The offers were made at approximately the same time;

(iv)     The same type of payment was made in connection with both offerings; and

(v)     The offers were made for the same general purpose.

     The company, the offerees, and actual purchasers must all be residents of the same state.

     The company is a resident of the state in which (a) it is incorporated or organized; (b) its principal office is located if it is a general partnership or other form of business that they do not organize under any state or territorial law; or (c) if an individual, he has his principal residence there.

      For purposes of Rule 147, offerees and purchasers are residents of a state if they have their principal place of residence in the state where the company makes the offer. To prevent the purchasers of securities in an intrastate offering from making a rapid resale of securities to subsequent purchasers residing in other states, the rule prohibits out of state resales within nine months of the last sale of any part of the intrastate offer. This prevents companies from getting around Section 3(a)(11) by using an intrastate offering followed immediately by an interstate resale.

     Further, a company must be doing business within the state. This means a company:

(a)     Must derive at least 80% of its gross revenues from a business or property located in the state or from services rendered in the state;

(b)     Must have at least 80% of its assets in the state at the end of the semiannual period that ends before the first part of its offering;

(c)     Must plan to use at least 80% of the proceeds of the offering to operate a business, buy property, or render services in the state and actually so use the proceeds; and

(d)     Must have its principal office in the state.

Please see the following articles for additional information: Private Offering Exemption / Regulation D Exemption, Federal Securities Aspects of a Stock Option Grant, Texas Exemption for Employee Stock Option and Similar Plans, Texas Uniform Limited Offering Exemption, Texas Intrastate Exemption, Texas Limited Offering Exemptions.

THIS INFORMATIONAL MEMORANDA FROM THE LAW OFFICES OF THOMAS D. SOLOMON, P.C. is provided as a courtesy to our friends and clients to provide them with items of interest in the securities area. It is not and is not intended to be an exhaustive treatment of its subject matter, but rather an overview of some of the pertinent elements of such matter. It is not intended to be legal advice or a legal opinion and should not be relied on in making legal or business decisions. If you have any questions, please call us.