Key Takeaways
- Regulators are designed to protect investors and markets, not to punish compliant syndicators. Understanding their role helps syndicators work with the system instead of fearing it.
- Regulation D Rule 506 creates federal preemption that simplifies multi-state capital raising. It replaces the need to comply with multiple state Blue Sky laws for the offer and sale of securities.
- State regulators still retain authority through notice filings and related activities. Failure to provide required notice can trigger scrutiny even under Rule 506.
- Regulation D protects the offer and sale of securities—but not improper sales activity or structure. Broker-dealer behavior, finders, and improper fund structures can still create state-level exposure.
- Staying within the “umbrella” of Regulation D is critical to avoiding enforcement actions. Once activity drifts outside that umbrella, regulators become active and enforcement risk increases.
Transcript
Introduction to the Regulation D Compliance Video Series
This is the first of seven videos as part of a series on how you as a syndicator, or a fund manager can stay out of trouble and be in compliance with both the states and the SEC. So that you can do what you do best: run your syndication or run your fund. My name is Tilden Moschetti. I’m a syndication attorney with the Moschetti Syndication Law Group.
This first video is going to go through regulators – those big scary things, or are they scary? What’s their purpose? How is it all set up? So that way you can understand who you’re up against, or not up against as the case may be.
Why Regulators Are Not the Enemy
Now, why am I being cagey? And toying with “who you’re up against” and things like that? Because regulators themselves are not the bad guy. Regulators are actually the good guy here.
Regulators’ job is to protect people like your family members who may not know better and fall prey to unscrupulous fraudsters. We don’t want that happening. That’s not a good thing. And there are a lot of them out there. There’s a lot of fraudsters, and so the SEC’s job, the state regulators’ job is to keep those people away.
These rules, the rules that we operate under when we’re doing Regulation D syndication are to protect the public from those fraudsters.
The Purpose of Securities Regulation in Capital Raising
So it’s allowing you to be able to do what you need to do to raise money so that you can deploy that capital, make money for your investors and make an income for yourself as well. But it’s to keep those people who are committing fraud away. And that’s what the whole point of it is.
So who are regulators? Well, regulators either come from or are part of the SEC, or another regulatory body within the federal government, or state regulators.
Who are the people exactly? Well, the people are actually very, very intelligent, quality people who care, they are mission-driven to protect the investing public.
Federal Regulators, State Regulators, and Investor Protection
Think of it like police officers, a lot of police officers do their job, probably the vast, vast, vast majority, because they want to protect the public, they want to help people, right. And same with security regulators.
Their whole mission is just to protect the investing public, and protect the markets as a system as a whole. We need that as a capitalist society.
So regulators, we love you, great job, keep doing what you’re doing. These videos are how to stay out of trouble with them.
Florida-Only Offerings and State Blue Sky Laws
So how does this system actually work and in its nuances? Let’s break it down by looking at a whiteboard.
So you are looking at offering a security and you are in the state of Florida. For example, forgive my drawings because I’m not the best artist in the world.
You’ve identified three investors all in Florida who all want to invest with you and they want to contribute, they want to grow this property. Everything is great.
Now you have a choice. As a resident of Florida yourself, you can file this under what we call the State Blue Sky laws.
The State Blue Sky laws are the laws about securities that each state has. The State Blue Sky laws are to protect the investors in the state of Florida.
Interstate Investors and the Limits of State Law
So you just you have a possible investor who is in Texas. And he’s heard about your deal, because he’s a good friend of yours.
Well, he can, but not under the State Blue Sky laws. What would happen? Why is that a problem? Because Texas is interested in protecting its people.
So this has now become a federal issue. It’s now a federal matter, because we’ve got two states.
You could decide to lodge this all under 4(a)(2) of the securities regulation.
Why Section 4(a)(2) Creates Complexity
So what 4(a)(2) lets you do is it lets you enter, it lets you put together offerings for interstate transactions. But it needs to comply exactly with both Texas and Florida law.
So now you need a lawyer from both Florida and you need a lawyer from Texas to help you figure out how to stay compliant with both of those.
And then you add California. And New York. And now you’ve got four states that are all vying for supremacy.
Regulation D Rule 506 and Federal Preemption
What if instead of 4(a)(2) we say now I want to use Regulation D. And specifically, I want to use Regulation D rule 506(b), or it could be 506(c).
Because Regulation D Rule 506 says, okay, states, listen up. We’re a federal country.
Rule 506 says, no matter what, where your people are from under Rule 506, the offering and sale of a security becomes part of the federal system.
States can require notice, but the rest of it is Regulation D rule 506. It’s under the nice auspices of the SEC.
State Notice Requirements and Ongoing State Interest
But what about this guy here? What about him? New York is very, very interested in protecting him still.
They require notice of the Regulation D. If they don’t get that notice, they want to know why.
States are continually trying to make sure that they’re upping their regulation.
Where State Regulators Step Back In
Regulation D kind of keeps things down, but the states keep trying to push it back up.
The times when it doesn’t is when the state regulators see something funny going on.
If you go outside of this boundary of Regulation D, that’s when the state regulators get hungry.
The Regulation D Umbrella and Compliance Boundaries
So we’ve got the Regulation D as this giant umbrella term.
You’re covered as long as it’s dripping right here.
The problem is what happens when it drips into state jurisdictional issues. That’s when states start regulating.
Final Thoughts on Regulators, Compliance, and the Video Series
So hope that was interesting. Hope that puts the whole kind of regulatory context in place for you.
We’ve got regulators from both systems. Their job is exactly the same. They want to protect the investing public.
This video series is going to go through the biggest problems that I see as a syndication attorney of where people go awry.
So I hope you’re looking forward to these videos as much as I am.
My name is Tilden Moschetti. I am a syndication attorney with the Moschetti Syndication Law Group. We specialize in Regulation D.
How amazing is it that you can put your own security together, you don’t have to be a giant company in order to raise money from investors, put it into the world, do good things, do big projects, make the world a better place and make lots of money for you, yourself and your investors at the same time.
I love Regulation D. So that’s what we’re working on. Those are what the videos are. Thanks a lot.