Securities Act Release No. 33-5450

January 7, 1974

The Securities and Exchange Commission today adopted Rule 147 which defines certain terms in, and clarified certain conditions of, Section 3(a) (11) of the Securities Act of 1933 ("the Act"). Section 3(a) (11) (the "intrastate offering exemption") exempts from the registration requirements of Section 5 of the Act, securities that are part of an issue offered and sold only to persons resident within a single state or territory, if the issuer is a person resident and doing business within that state or territory. Rule 147 was proposed for comment in Securities Act of 1933 Release No. 5349 (January 8, 1973).

In developing the definitions in, and conditions of, Rule 147 the Commission has considered the legislative history and judicial interpretations of Section 3(a) (11) as well as its own administrative interpretations. The Commission believes that adoption of the rule, which codifies certain of these interpretations, is in the public interest, since it will be consistent with the protection of investors and provide, to the extent feasible, more certainty in determining when the exemption provided by that Section of the Act is available. Moreover, the Commission believes that local businesses seeking financing solely from local sources should have objective standards to facilitate compliance with Section 3(a) (11) and the registration provisions of the Act, and that the rule will enable such businesses to determine with more certainty whether they may use the exemption in offering their securities. The rule also will give more assurance that the intrastate offering exemption is used only for the purpose that Congress intended, i.e., local financing of companies primarily intrastate in character. ¹ Neither Section 3(a) (11) nor Rule 147 provides an exemption from the civil liability provisions of Section 12(2) of the Act, the anti-fraud provisions of the Act of the Securities Exchange Act of 1934 ("Exchange Act"), the registration and periodic reporting provisions of Section 12(g) and 13 of the Exchange Act, or any applicable state laws.

Rule 147 is another step in the Commissions continuing efforts to provide protection to investors and, where consistent with that objective, to add certainty, to the extent feasible, to the determination of when the registration provisions of the Act apply. Other recent Commission actions in this regard were:

1. The adoption of Rule 144 (Securities Act Release No. 5223);

2. The adoption of Rule 145 (Securities Act Release No. 5316);

3. The announcement of revised proposed Rule 146 (Securities Act Release No. 5430).

This notice contains a general discussion of the background, purpose and general effect of the rule. A brief analysis of each section of the rule is also included. However, attention is directed to the attached text of the rule for a more complete understanding of its provisions.

Background and Purpose

Congress, in enacting the federal securities laws, created a continuous disclosure system designed to protect investors and to assure the maintenance of fair and honest securities markets. The Commission, in administering and implementing these laws, has sought to coordinate and integrate the disclosure system with the exemptive provisions provided by the laws. Rule 147 is a further effort in this direction.

Section 3(a) (11) was intended to allow issuers with localized operations to sell securities as part of a plan of local financing. Congress apparently believed that a company whose operations are restricted to one area should be able to raise money from investors in the immediate vicinity without having to register the securities with a federal agency. In theory, the investors would be protected both by their proximity to the issuer and by state regulation. Rule 147 reflects this Congressional intent and is limited in its application to transactions where state regulation will be most effective. The Commission has consistently taken the position that the exemption applies only to local financing provided by local investors for local companies. ² To satisfy the exemption, the entire issue must be offered and sold exclusively to residents of the state in which the issuer is resident and doing business. An offer or sale of part of the issue to a single non-resident will destroy the exemption for the entire issue.

Certain basic questions have arisen in connection with interpreting Section 3(a) (11). They are:

1. what transactions does the Section cover;

2. what is "part of an issue" for purposes of the Section;

3. when is a person "resident within" a state or territory for purposes of the Section; and 

4. what does "doing business within" mean in the context of the Section?

The courts and the Commission have addressed themselves to these questions in the context of different fact situations, and some general guidelines have been developed. Certain guidelines were set forth by the Commission in Securities Act Release No. 4434 and, in part, are reflected in Rule 147. However, in certain respects, as pointed out below, the rule differs from past interpretations.

The Transaction Concept

Although the intrastate offering exemption is contained in Section 3 of the Act, which Section is phrased in terms of exempt "securities" rather than "transactions", the legislative history and Commission and judicial interpretations indicate that the exemption covers only specific transactions and not the securities themselves. ³ Rule 147 reflects this interpretation.

The "Part of an Issue" Concept

The determination of what constitutes "part of an issue" for purposes of the exemption, i.e. what should be "integrated", has traditionally been dependent on the facts involved in each case. The Commission notes in Securities Act Release 4434 that "any one or more of the following factors may be determinative of the question of integration:

1. are the offerings part of a single plan of financing;
2. do the offerings involve issuance of the same class of security;

3. are the offerings made at or about the same time;
4. is the same type of consideration to be received; and
5. are the offerings made for the same general purpose.

In this connection, the Commission generally has deemed intrastate offerings to be "integrated" with those registered or private offerings of the same class of securities made by the issuer at or about the same time.

The rule as initially proposed would have done away with the necessity for such case-by-case determination of what offerings should be integrated by providing that all securities offered or sold by the issuer, its predecessor, and its affiliates, within any consecutive six month period, would be integrated. As adopted, the rule provides in Subparagraph (b) (2) that, for purposes of the rule only, certain offers and sales of securities, discussed below, will be deemed not to be part of an issue and therefore not be integrated, but the rule does not otherwise define "part of an issue." Accordingly, as to offers and sales not within (b)(2), issuers who want to rely on Rule 147 will have to determine whether their offers and sales are part of an issue by applying the five factors cited above.

The "Person Resident Within" Concept

The object of the Section 3(a)(11) exemption, i.e., to restrict the offering to persons within the same locality as the issuer who are, by reason of their proximity, likely to be familiar with the issuer and protected by the state law governing the issuer, is best served by interpreting the residence requirement narrowly. In addition, the determination of whether all parts of the issue have been sold only to residents can be made only after the securities have "come to rest" within the state or territory. Rule 147 retains these concepts, but provides more objective standards for determining when a person is considered a resident within a state for purposes of the rule and when securities have come to rest within a state.

The "Doing Business Within" Requirement

Because the primary purpose of the intrastate exemption was to allow an essentially local business to raise money within the state where the investors would be likely to be familiar with the business and with the management, the doing business requirement has traditionally been viewed strictly. First, not only should the business be located within the state, but the principal or predominant business must be carried on there. ⁴ Second, substantially all of the proceeds of the offering must be put to use within the local area. ⁵

Rule 147 reinforces these requirements by providing specific percentage amounts of business that must be conducted within the state, and of proceeds from the offering that must be spent in connection with such business. In addition, the rule requires that the principal office of the issuer be within the state.

Synopsis of Rule 147

1. Preliminary Notes

The first preliminary note to the rule indicates that the rule does not raise any presumption that the Section 3(a)(11) exemption would not be available for transactions which do not satisfy all of the provisions of the rule. The second note reminds issuers that the rule does not affect compliance with state law. The third preliminary note to the rule briefly explains that rules purpose and provisions.

As initially proposed, the rule was intended not to be available for secondary transactions. In order to make this clear, the fourth preliminary note indicates that the rule is available only for transactions by an issuer and that the rule is not available for secondary transactions. However, in accordance with long standing administrative interpretations of Section 3(a)(11), the intrastate offering exemption may be available for secondary offers and sales by controlling persons of the issuer, if the exemption would have been available to the issuer. ⁶

2. Transactions Covered -- Rule 147(a)

Paragraph (a) of the rule provides that offers, offers to sell, offers for sale and sales of securities that meet all the conditions of the rule will be deemed to come within the exemption provided by Section 3(a)(11). Those conditions are: (1) the issuer must be resident and doing business within the state or territory in which the securities are offered and sold (Rule 147(c)); (2) the offerees and purchasers must be resident within such state or territory (Rule 147(d)); (3) resales for a period of 9 months after the last sale which is part of an issue must be limited as provided (Rule 147(e) and (f)). In addition, the revised rule provides that certain offers and sales of securities by or for the issuers will be deemed not "part of an issue" for purposes of the rule only (Rule 147(b)).

3. "Part of an Issue" -- Rule 147(b)

Subparagraph (b)(1) of the rule provides that all securities of the issuer which are part of an issue must be offered, offered for sale or sold only in accordance with all of the terms of the rule. For the purposes of the rule only, subparagraph (b)(2) provides that all securities of the issuer offered, offered for sale or sold pursuant to the exemptions provided under Section 3 or 4(2) of the Act or registered pursuant to the Act, prior to or subsequent to the six month period immediately preceding or subsequent to any offer, offer to sell, offer for sale or sale pursuant to Rule 147 will be deemed not part of an issue provided that there are no offers, offers to sell or sales of securities of the same or similar class by or for the issuer during either of these six month periods. If there have been offers or sales during the six months, then in order to determine what constitutes part of an issue, reference should be made to the five traditional integration factors discussed above.

As initially proposed the rule would have deemed all securities of the issuer, its predecessors and affiliates offered or sold by the issuer, its predecessors and affiliates within any consecutive six month period to be part of the same issue. On reconsideration, the Commission believes this would be too restrictive and has revised the rule as discussed above. Since subparagraph (b)(2) does not define "part of an issue", a note has been added to paragraph (b) which refers to the discussion of the five factors to be considered in determining whether a transaction is part of an issue. These factors are discussed in the third preliminary note to the rule, and should be considered in determining whether any offers and sales falling outside the scope of subparagraph (b)(2) and offers and sales made in reliance on the rule must be integrated. Neither Section 3(a)(11) nor Rule 147 can be relied upon in combination with another exemption for different parts of a single issue where a part is offered or sold to non-residents.

As initially proposed for comment the rule provided that securities offered or sold by a person which was a business separate and distinct from the issuer and which was affiliated with the issuer solely by reason of the existence of a common general partner would be deemed not to be part of the same issue. Since paragraph (b) has been revised to no longer automatically integrate offerings of affiliates, this proviso is no longer necessary and has been deleted.

Paragraph (b), as revised, is intended to create greater certainty and to obviate in certain situations the need for a case-by-case determination of when certain intrastate offerings should be integrated with other offerings, such as those registered under the Act or made pursuant to the exemption provided by Section 3 or 4(2) of the Act.

4. Nature of the Issuer -- Rule 147(c) -- "Person Resident Within" -- Rule 147(c)(1).

Subparagraph (c)(1) of the rule defines the situations in which issuers would be deemed to be "resident within" a state or territory. A corporation, limited partnership or business trust must be incorporated or organized pursuant to the laws of such state or territory. Section 3(a)(11) provides specifically that a corporate issuer must be incorporated in the state. A general partnership or other form of business entity that is not formed under a specific state or territorial law must have its principal office within the state or territory. The rule also provides that an individual who is deemed an issuer, e.g., a promoter issuing preincorporation certificates, will be deemed a resident if his principal residence is in the state or territory. As initially proposed, the rule provided that in a partnership, all the general partners must be resident within such state or territory. The Commission has reconsidered this provision in light of the provisions applicable to corporations and determined to treat all business entities in a similar manner.

5. Nature of the Issuer -- Rule 147(c) -- Doing Business Within -- Rule 147(c)(2)

Subparagraph (c)(2) of the rule provides that the issuer will be deemed to be "doing business within" a state or territory in which the offers and sales are to be made if: (1) at least 80 percent of its gross revenues and those of its subsidiaries on a consolidated basis (a) for its most recent fiscal year (if the first offer of any part of the issue is made during the first six months of the issuers current fiscal year) or (b) for the subsequent six month period, or for the twelve months ended with that period (if the first offer of any part of the issue is made during the last six months of the issuers current fiscal year) were derived from the operation of a business or property located in or rendering of services within the state or territory; (2) at least 80 percent of the issuers assets and those of its subsidiaries on a consolidated basis at the end of the most recent fiscal semi-annual period prior to the first offer of any part of the issue are located within such state or territory; (3) at least 80 percent of the net proceeds to the issuer from the sales made pursuant to the rule are intended to be and are used in connection with the operation of a business or property or the rendering of services within such state or territory; and (4) the issuers principal office is located in the state or territory.

As proposed the issuer would have been required to meet the gross revenues and assets conditions at the end of the most recent fiscal year and its most recent fiscal quarter. That provision might have been difficult for many small businesses to satisfy and it has been revised as discussed above. Also a moving twelve month calculation is permitted in some instances for determining gross revenues in recognition of the seasonal character of some businesses. The revised rule also clarifies the Commissions previous intention to include gross revenues of subsidiaries consolidated with those of the issuer. Finally, the rule as initially proposed would have required that the issuer intended to use and used 90 percent of the proceeds of the offering in connection with the operation of a business, the purchase of real property or the rendering of services in the state. This percentage has been reduced to 80 percent in the revised rule since it appeared to be unduly restrictive. Further, this is consistent with the nature of the business reflected in the other percentage tests.

Finally, subparagraph (c)(2) of the rule provides that an issuer which has not had gross revenues from the operation of its business in excess of $5,000 during its most recent twelve month period need not satisfy the revenue test of subsection (c)(2)(i).

The provisions of paragraph (c) are intended to assure that the issuer is primarily a local business. Many comments were received requesting more elaboration with respect to the above standards. The following examples demonstrate the manner in which these standards would be interpreted:

Example 1. X corporation is incorporated in State A and has its only warehouse, only manufacturing plant and only office in that state. Xs only business is selling products throughout the United States and Canada through mail order catalogs. X annually mails catalogs and order forms from its office to residents of most states and several provinces of Canada. All orders are filled at and products shipped from Xs warehouse to customers throughout the United States and Canada. All the products shipped are manufactured by X at its plant in State A. These activities are Xs sole source of revenues.

Question. Is X deriving more than 80 percent of its gross revenues from the "operation of a business or... rendering of services" within State A?

Interpretive Response. Yes, this aspect of the "doing business within" standard is satisfied.

Example 2. Assume the same facts as Example 1, except that X has no manufacturing plant and purchases the products it sells from corporations located in other states.

Question. Is X deriving more than 80 percent of its gross revenues from the "operation of a business or... rendering of services" within State A?

Interpretive Response. Yes, this aspect of the "doing business within" standard is satisfied.

Example 3. Y Corporation is incorporated in State B and has its only office in that state. Ys only business is selling undeveloped land located in State C and State D by means of brochures mailed from its office throughout the United States.

Question. Is Y deriving more than 80 percent of its gross revenues from the "operation of a business or of property or rendering of services" within State B?

Interpretive Response. There are not sufficient facts to respond. If Y owns an interest in the developed land, it might not satisfy the "80 percent of assets" standard as well as the "80 percent of gross revenues" standard. Moreover, Y could not use more than 20 percent of the proceeds of any offerings made pursuant to the rule in connection with the acquisition of the undeveloped land.

Example 4. Z company is a firm of engineering consultants organized under the laws of State E with its only office in that state. During any year, Z will provide consulting services for projects in other states. 75 percent of Zs work in terms of man hours will be performed at Zs offices where it employs some 50 professional and clerical personnel. Z has no employees located outside of State E. However, professional personnel visit project sites and clients offices in other states. Approximately 50 percent of Zs revenue is derived from clients located in states other than State E.

Question. Is Z deriving more than 80 percent of its gross revenues from "rendering services" within State E?

Interpretive Response. Yes, this aspect of the "doing business within" standard is satisfied.

Example 5. The facts are the same as in Example 4. In addition, at the end of Zs most recent fiscal quarter 25 percent of its assets are represented by accounts receivable from clients in other states.

Question. Does Z satisfy the "assets" standard?

Interpretive Response. Yes, Z satisfies the "assets" standard. For purposes of the rule, accounts receivable arising from a business conducted in the state would generally be considered to be located at the principal office of the issuer.

6. Offerees and Purchasers: Persons Resident -- Rule 147(d)

Paragraph (d) of the rule provides that offers and sales may be made only to persons resident within the state or territory. An individual offeree or purchaser of any part of an issue would be deemed to be a person resident within the state or territory if such person has his principal residence in the state or territory. Temporary residence, such as that of many persons in the military service, would not satisfy the provisions of paragraph (d). In addition, if a person purchases securities on behalf of other persons, the residence of those persons must satisfy paragraph (d). If the offeree or purchaser is a business organization its residence will be deemed the state or territory in which it has its principal office, unless it is an entity organized for the specific purpose of acquiring securities in the offering, in which case it will be deemed to be a resident of a state only if all of the beneficial owners of interests in such entity are residents of the state.

As initially proposed, subparagraph (d)(2) provided that an individual, in order to be deemed a resident, must have his principal residence in the state and must not have any present intention of moving his principal residence to another state. The Commission believes that it would be difficult to determine a persons intentions, and accordingly, has deleted the latter requirement. In addition, as initially proposed, the rule would have deemed the residence of a business organization to be the state in which it was incorporated or otherwise organized. The Commission believes that the location of a companys principal office is more of an indication of its local character for purposes of the offeree residence provision of the rule than is its state of incorporation. Section 3(a)(11) requires that an issuer corporation be incorporated within the state, but there is no similar requirement in the statute for a corporation that is an offeree or purchaser.

7. Limitations on Resales -- Rule 147(e)

Paragraph (e) of the rule provides that during the period in which securities that are part of an issue are being offered and sold and for a period of nine months from the date of the last sale by the issuer of any part of the issue, resales of any part of the issue by any person shall be made only to persons resident within the same state or territory. This provides objective standards for determining when an issue "comes to rest." The rule as initially proposed limited both reoffers and resales during a twelve month period after the last sale by the issuer of any part of the issue. However, the Commission believes that it would be difficult for an issuer to prohibit or even learn of reoffers. Thus, the limitation on reoffers would be impractical because, if any purchaser made a reoffer outside of such state or territory, the issuer would lose the exemption provided by the rule. In addition, the Commission determined that a shorter period would satisfy the coming to rest test for purposes of the rule. Thus, the twelve month period has been reduced to nine months.

Persons who acquire securities from issuers in transactions complying with the rule would acquire unregistered securities that could only be reoffered and resold pursuant to an exemption from the registration provisions of the Act.

The Commission, as it indicated in Rel. 33-5349, considered alternatives to the twelve month period. The Commission has determined that it is in the public interest to adopt a specific time period, but such period has been reduced to nine months and applied to resales only, which provides the necessary protections to investors against interstate trading markets springing up before the securities have come to rest within the state. As an additional precaution, a note to paragraph (e) reminds dealers that they must satisfy the requirements of Rule 15c2-11 under the Securities Exchange Act of 1934 prior to publishing any quotation for a security, or submitting any quotation for publication in any quotation medium.

A note to the rule indicates that where convertible securities are sold pursuant to the rule, resales of either the convertible security, or if it is converted, of the underlying security, could be made during the period specified in paragraph (e) only to residents of the state. However, the conversion itself, if pursuant to Section 3(a)(9) of the Act, would not begin a new period. In the case of warrants and options, sales upon exercise, if done in reliance on the rule, would begin a new period.

8. Precautions Against Interstate Offers and Sales -- Rule 147(f)

Paragraph (f) of the rule requires issuers to take steps to preserve the exemption provided by the rule, since any resale of any part of the issue before it comes to rest within the state to persons resident in another state or territory will, under the Act, be in violation of Section 5. The required steps are: (i) placing a legend on the certificate or other document evidencing the security stating that the securities have not been registered under the Act and setting forth the limitations on resale contained in paragraph (e); (ii) issuing stop transfer instructions to the issuers transfer agent, if any, with respect to the securities, or, if the issuer transfers its own securities, making a notation in the appropriate records of the issuer; and (iii) obtaining a written representation from each purchaser as to his residence. Where persons other than the issuer are reselling securities of the issuer during the time period specified in paragraph (e) of the rule, the issuer would, if the securities are presented for transfer, be required to take steps (i) and (ii). In addition, the rule requires that the issuer disclose in writing the limitations on resale imposed by paragraph (e) and the provisions of subsections (f)(1)(i) and (ii) subparagraph (f)(2).

Operation of Rule 147

Rule 147 will operate prospectively only. The staff will issue interpretative letters to assist persons in complying with the rule, but will consider requests for "no action" letters on transactions in reliance on Section 3(a)(11) outside the rule only on an infrequent basis and in the most compelling circumstances.

The rule is a nonexclusive rule. However, persons who choose to rely on Section 3(a)(11) without complying with all the conditions of the rule would have the burden of establishing that they have complied with the judicial and administrative interpretations of Section 3(a)(11) in effect at the time of the offering. The Commission also emphasizes that the exemption provided by Section 3(a)(11) is not an exemption from the civil liability provisions of Section 12(2) or the anti-fraud provisions of Section 17 of the Act or of Section 10(b) of the Securities Exchange Act of 1934. The Commission further emphasizes that Rule 147 is available only for transactions by issuers and is not available for secondary offerings.

In view of the objectives and policies underlying the Act, the rule would not be available to any person with respect to any offering which, although in technical compliance with the provisions of the rule, is part of a plan or scheme by such person to make interstate offers or sales of securities. In such cases, registration would be required. In addition, any plan or scheme that involves a series of offerings by affiliated organizations in various states, even if in technical compliance with the rule, may be outside the parameters of the rule and of Section 3(a)(11) if what is being financed is in effect a single business enterprise.

The Commission, acting pursuant to the Securities Act of 1933, particularly Sections 3(a)(11) and 19(a) thereof, hereby adopts Rule 147 effective for issues of securities commenced on or after March 1, 1974.

By the Commission.

George A. Fitzsimmons

Secretary

____________________

Rule 147. "Part of an Issue," "Person Resident," and "Doing Business Within" for Purposes of Section 3(a)(11).

Preliminary Notes

1. This rule shall not raise any presumption that the exemption provided by Section 3(a)(11) of the Act is not available for transactions by an issuer which do not satisfy all of the provisions of the rule.

2. Nothing in this rule obviates the need for compliance with any state law relating to the offer and sale of the securities.

3. Section 5 of the Act requires that all securities offered by the use of the mails or by any means or instruments of transportation or communication in interstate commerce be registered with the Commission. Congress, however, provided certain exemptions in the Act from such registration provisions where there was no practical need for registration or where the benefits of registration were too remote. Among those exemptions is that provided by Section 3(a)(11) of the Act for transactions in "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... such State or Territory." The legislative history of that Section suggests that the exemption was intended to apply only to issues genuinely local in character, which in reality represent local financing by local industries, carried out through local investment. Rule 147 is intended to provide more objective standards upon which responsible local businessmen intending to raise capital from local sources may rely in claiming the Section 3(a)(11) exemption.

All of the terms and conditions of the rule must be satisfied in order for the rule to be available. These are: (i) that the issuer be a resident of and doing business within the state or territory in which all offers and sales are made; and (ii) that no part of the issue be offered or sold to non-residents within the period of time specified in the rule. For purposes of the rule the definition of "issuer" in Section 2(4) of the Act shall apply.

All offers, offers to sell, offers for sale, and sales which are part of the same issue must meet all of the conditions of Rule 147 for the rule to be available. The determination whether offers, offers to sell, offers for sale and sales of securities are part of the same issue (i.e., are deemed to be "integrated") will continue to be a question of fact and will depend on the particular circumstances. See Securities Act of 1933 Release No. 4434 (December 6, 1961). Release 33-4434 indicates that in determining whether offers and sales should be regarded as part of the same issue and thus should be integrated any one or more of the following factors may be determinative:

(i) are the offerings part of a single plan of financing;

(ii) do the offerings involve issuance of the same class of securities;

(iii) are the offerings made at or about the same time;

(iv) is the same type of consideration to be received; and

(v) are the offerings made for the same general purpose.

Subparagraph (b)(2) of the rule, however, is designed to provide certainty to the extent feasible by identifying certain types of offers and sales of securities which will be deemed not part of an issue, for purposes of the rule only.

Persons claiming the availability of the rule have the burden of proving that they have satisfied all of its provisions. However, the rule does not establish exclusive standards for complying with the Section 3(a)(11) exemption. The exemption would also be available if the issuer satisfied the standards set forth in relevant administrative and judicial interpretations at the time of the offering but the issuer would have the burden of proving the availability of the exemption. Rule 147 relates to transactions exempted from the registration requirements of Section 5 of the Act by Section 3(a)(11). Neither the rule nor Section 3(a)(11) provides an exemption from the registration requirements of Section 12(g) of the Securities Exchange Act of 1934, the anti-fraud provisions of the federal securities laws, the civil liability provisions of Section 12(2) of the Act or other provisions of the federal securities laws.

Finally, in view of the objectives of the rule and the purposes and policies underlying the Act, the rule shall not be available to any person with respect to any offering which, although in technical compliance with the rule, is part of a plan or scheme by such person to make interstate offers or sales of securities. In such cases registration pursuant to the Act is required.

4. The rule provides an exemption for offers and sales by the issuer only. It is not available for offers or sales of securities by other persons. Section 3(a)(11) of the Act has been interpreted to permit offers and sales by persons controlling the issuer, if the exemption provided by that Section would have been available to the issuer at the time of the offering. See Securities Act Release No. 4434 (December 6, 1961). Controlling persons who want to offer or sell securities pursuant to Section 3(a)(11) may continue to do so in accordance with applicable judicial and administrative interpretations.

The text of the rule follows:

(a) Transactions Covered.

Offers, offers to sell, offers for sale and sales by an issuer of its securities 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.

(b) Part of an Issue.

(1) For purposes of this rule, all securities of the issuer which are part of an issue shall be offered, offered for sale or sold in accordance with all of the terms and conditions of this rule.

(2) For purposes of this rule only, an issue shall be deemed not to include offers, offers to sell, offers for sale or sales of securities of the issuer pursuant to the exemptions provided by Section 3 or Section 4(2) of the Act or pursuant to a registration statement filed under the Act, that take place prior to the six month period immediately preceding or after the six month period immediately following any offers, offers for sale or sales pursuant to this rule, provided that, there are during either of said six month periods no offers, offers for sale or sales of securities by or for the issuer of the same or similar class as those offered, offered for sale or sold pursuant to the rule.

NOTE: In the event that securities of the same or similar class as those offered pursuant to the rule are offered, offered for sale or sold less than six months prior to or subsequent to any offer, offer for sale or sale pursuant to this rule, see Preliminary Note 3, hereof as to which offers, offers to sell, offers for sale, or sales are part of an issue.

(c) Nature of the Issuer.

The issuer of the securities shall at the time of any offers and the sales be a person resident and doing business within the state or territory in which all of the offers, offers to sell, offers for sale and sales are made.

(1) The issuer shall be deemed to be a resident of the state or territory in which:

(i) it is incorporated or organized, if a corporation, limited partnership, trust or other form of business organization that is organized under state or territorial law;

(ii) its principal office is located, if a general partnership or other form of business organization that is not organized under any state or territorial law;

(iii) his principal residence is located, if an individual.

ost recent fiscal year, if the first offer of any part of the issue is made during the first six months of the issuers current fiscal year; or

(B) for the first six months of its current fiscal year or during the twelve month fiscal period ending with such six month period, if the first offer of any part of the issue is made during the last six months of the issuers current fiscal year

from the operation of a business or of real property located in or from the rendering of services within such state or territory; provided, however, that this provision does not apply to any issuer which has not had gross revenues in excess of $5,000 from the sale of products or services or other conduct of its business for its most recent twelve month fiscal period;

(ii) the issuer had at the end of its most recent semi-annual fiscal period prior to the first offer of any part of the issue, at least 80 percent of its assets and those of its subsidiaries on a consolidated basis located within such state or territory;

(iii) the issuer intends to use and uses at least 80% of the net proceeds to the issuer from sales made pursuant to this rule in connection with the operation of a business or of real property, the purchase of real property located in, or the rendering of services within such state or territory; and

(iv) the principal office of the issuer is located within such state or territory.

(d) Offerees and Purchasers: Person Resident

Offers, offers to sell, offers for sale and sales of securities that are part of an issue shall be made only to persons resident within the state or territory of which the issuer is a resident. For purposes of determining the residence of offerees and purchasers:

(1) A corporation, partnership, trust or other form of business organization shall be deemed to be a resident of a state or territory if, at the time of the offer and sale to it, it has its principal office within such state or territory.

(2) An individual shall be deemed to be a resident of a state or territory if such individual has, at the time of the offer and sale to him, his principal residence in the state or territory.

(3) A corporation, partnership, trust or other form of business organization which is organized for the specific purpose of acquiring part of an issue offered pursuant to this rule shall be deemed not to be a resident of a state or territory unless all of the beneficial owners of such organization are residents of such state or territory.

(e) Limitation of Resales

During the period in which securities that are part of an issue are being offered and sold by the issuer, and for a period of nine months from the date of the last sale by the issuer of such securities, all resales of any part of the issue, by any person, shall be made only to persons resident within such state or territory.

NOTES: 1. In the case of convertible securities resales of either the convertible security, or if it is converted, the underlying security, could be made during the period described in paragraph (e) only to persons resident within such state or territory. For purposes of this rule a conversion in reliance on Section 3(a)(9) of the Act does not begin a new period.

2. Dealers must satisfy the requirements of Rule 15c2-11 under the Securities Exchange Act of 1934 prior to publishing any quotation for a security, or submitting any quotation for publication, in any quotation medium.

(f) Precautions Against Interstate Offers and Sales

(1) The issuer shall, in connection with any securities sold by it pursuant to this rule:

(i) place a legend on the certificate or other document evidencing the security stating that the securities have not been registered under the Act and setting forth the limitations on resale contained in paragraph (e);

(ii) issue stop transfer instructions to the issuers transfer agent, if any, with respect to the securities, or, if the issuer transfers its own securities, make a notation in the appropriate records of the issuer; and

(iii) obtain a written representation from each purchaser as to his residence.

(2) The issuer shall, in connection with the issuance of new certificates for any of the securities that are part of the same issue that are presented for transfer during the time period specified in paragraph (e), take the steps required by subsections (f) (1) (i) and (ii).

(3) The issuer shall, in connection with any offers, offers to sell, offers for sale or sales by it pursuant to this rule, disclose, in writing, the limitations on resale contained in paragraph (e) and the provisions of subsections (f) (1) (i) and (ii) subparagraph (f) (2).

¹ H.R. Rep. No. 85, 73rd Cong. 1st Sess. 6 - 7 (1933).

² See, e.g., Securities Act of 1933 Release No. 4434 (December 6, 1961).

³ Ibid.

⁴ Chapman v. Dunn, 414 F. 2d 153 (C.A. 6, 1969).

⁵ SEC v. Truckee Showboat, Inc., 157 F. Supp. 824 (S.D. Cal., 1957).

⁶ Securities Act of 1933 Release No. 4434 (December 6, 1961).