Recently, my eye caught the following statement in the SEC’s Intrastate Offering Exemptions: A Small Entity Compliance Guide for Issuers:
Issuers registered or required to be registered under the Investment Company Act of 1940 are not eligible to conduct offerings pursuant to Section 3(a)(11), Rule 147 or Rule 147A.
This seemed accurate enough with respect to the SEC’s newly adopted Rule 147A because paragraph (a) of the rule explicitly states: “This exemption is not available to an issuer that is an investment company registered or required to be registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.).” Strangely, I could find no similar express disqualification in either Rule 147 or Section 3(a)(11). To get to the bottom of this mystery, I checked the adopting release, which provided the following explanation (footnotes omitted):
Under Section 24(d) of the Investment Company Act, the Section 3(a)(11) exemption is not available for an investment company registered or required to be registered under the Investment Company Act. Since we are retaining Rule 147 as a safe harbor under Section 3(a)(11), Rule 147 will continue to be unavailable for an investment company registered or required to be registered under the Investment Company Act. To provide a consistent treatment between Rule 147 and new Rule 147A, we are specifically excluding an issuer that is an investment company registered or required to be registered under the Investment Company Act from relying on Rule 147A.
Had I stopped there, the matter would be settled. However, I decided to check Section 24(d) of the Investment Company Act, which provides in relevant part:
The exemption provided by paragraph (11) of said section 3(a) shall not apply to any security of which a registered investment company is the issuer.
Noticeably absent from the statute is any mention of excluding a security of an issuer that is required to be registered. Did the SEC simply not read the statute or did it simply read something into the statute that was plainly not there? In a footnote to the passage from the adopting release quoted above, the SEC cites the following footnote to a 1961 Interpretive Release:
SEC Rel. No. 33-4434, at n. 1 (Dec. 6, 1961) [26 FR 11896 (Dec. 13, 1961)]. The adopting release accurately reflects the footnote, but the footnote does not accurately reflect the statute.
Does any of this matter? Well, it could. It seems to me likely that some issuers may unwittingly and therefore inadvertently fall into the definition of an investment company. It is far more likely that these issuers will rely on Rule 147 than a registered investment company. Another reason that this matters is that, contrary to the SEC’s assertion in the adopting release, it did not make Rule 147A consistent with Rule 147. Finally, this matters is that it demonstrates how false statements can be come “true” simply because they are unchallenged.