What it means
Normally, selling shares or similar securities to the public in the United States means registering them with the Securities and Exchange Commission (SEC), which is slow and costly. Congress created an exemption in Section 3(a)(11) of the Securities Act for offerings that are truly local, and Rule 147 explains exactly how to qualify.
If the company meets the conditions, it is treated as having met the exemption. The key conditions are that the company is incorporated in the state and has its principal place of business there, that it does real business in that state, and that every buyer is a resident of that state.
To show it does business locally, the company must meet at least one of four tests: 80% of revenue from the state, 80% of assets in the state, 80% of the money raised used in the state, or a majority of its employees based there. There is a sibling rule, Rule 147A, which loosens the rule for companies incorporated elsewhere and allows offers to be made over the internet to people outside the state, although sales still go only to residents.
Rule 147 itself is the stricter version and keeps the company-must-be-local requirement. The two are often discussed together, so it helps to know which one a lawyer is referring to.
Resale is restricted. For a period after a sale, buyers can generally resell the securities only to other residents of the same state, which keeps the offering from leaking into other states.
This matters to investors because it limits how easily they can sell. The federal rule does not set a maximum amount that can be raised, but state securities regulators, often called blue sky regulators, have their own rules and sometimes their own limits.
Anyone planning to use this route should take advice from a securities lawyer in the relevant state before approaching investors. In practice, the paperwork is lighter than a full registration but still real.
The company usually provides investors with a written disclosure document, keeps records proving each buyer's residency, and places a legend (a printed warning) on the securities explaining the resale limits. Skipping these steps is a common way for small issuers to lose the protection of the rule.
In practice
Real-world examples.
Example
A craft brewery based in one state wants to raise $400,000 from its own customers to buy new tanks. It sells shares only to residents of that state and uses 90% of the proceeds on its local brewery. It relies on Rule 147 and files with the state regulator rather than registering federally.
Example
A community-owned grocery cooperative sells memberships for $500 each to neighbours living in its town. Its stores, staff and suppliers are all within the state, so it meets the doing-business tests. It avoids a federal registration while giving locals a stake.
Example
A start-up incorporated in one state, with its main office there, accepts a $50,000 investment from a buyer who turns out to live in a neighbouring state. The sale breaks the residents-only condition, so the lawyers must review whether the exemption is lost for the whole offering.
Case study
Seen in the real world.
Riverbend Bakery Collective is a fictional business planning to open two more shops and raise $600,000 from local supporters. Its founder, Marcus, learns that a federal registration would cost more than the amount he hopes to raise.
His lawyer explains that if all buyers live in the state, the company is incorporated there and most of its assets and staff are local, the offering can use Rule 147. The company collects proof of residence from each investor, keeps records of where the money is spent, and files the required state paperwork. This is an illustrative story, but it shows the trade-off: the exemption saves cost, while the residency checks demand careful discipline.
Two years later, one investor moved to another state and asked to sell her shares. Because of the resale restriction, Marcus had to find a buyer who lived in the original state, and the sale took several months. The episode taught the company to explain the resale limits clearly to every new investor.
Watch out
Common mistakes.
- Believing the exemption removes all regulation. State securities laws still apply, and the company must satisfy the state regulator as well.
- Selling to one out-of-state investor and assuming it does not matter. A sale to a non-resident can put the whole exemption at risk.
- Confusing Rule 147 with Rule 147A. The newer rule allows out-of-state incorporation and internet offers beyond the state, while Rule 147 is stricter.
Questions
People also ask.
What is the legal basis for Rule 147?
It provides a safe harbour for the intrastate offering exemption in Section 3(a)(11) of the Securities Act of 1933.
Is there a federal cap on how much can be raised?
The federal rule does not set a dollar cap, but state rules may impose limits, so the state regulator should always be checked.
Can investors resell their securities freely?
Generally no, because for a set period after the sale resales are limited to residents of the same state.
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