Alabama Blue Sky Laws for Syndication

Navigating the complex landscape of securities regulations is a critical task for real estate developers, business owners, private equity fund managers, and syndicators seeking to raise capital. Understanding both federal laws and state-specific regulations is essential to ensure compliance and avoid legal pitfalls. One key area of focus is the interplay between federal Regulation D offerings and state Blue Sky Laws. This article provides a comprehensive guide to Alabama’s Blue Sky Laws, detailing how they relate to the SEC’s Regulation D, the benefits of choosing Regulation D exemptions, and the specific requirements for notifying the state about such offerings.

Whether you are considering a multifamily syndication in Huntsville or a development project in Birmingham, understanding the nuances of Alabama’s securities laws is crucial. We will explore the various exemptions available under Alabama law, the procedures for claiming these exemptions, and the role of legal counsel in ensuring compliance. Additionally, we address common concerns about the involvement of out-of-state attorneys in the process, providing clarity on when and how their expertise can be utilized effectively.

By the end of this article, you will have a solid understanding of how to navigate Alabama’s Blue Sky Laws in conjunction with federal Regulation D offerings, helping you to make informed decisions and successfully raise capital for your ventures.

How do a State’s Blue Sky Laws Relate to the SEC’s Regulation D?

Federal Preemption of State Laws

When it comes to Regulation D offerings, particularly Rule 506(b) and Rule 506(c), federal law takes precedence over state Blue Sky Laws. This preemption is established under 15 U.S. Code § 77r(b)(4)(F), which essentially exempts securities offered under these rules from state registration requirements. This means that while states can still impose notice filing requirements and fees, they cannot mandate additional registration or disclosure requirements for these offerings.

Regulation D Overview

Regulation D is a set of rules enacted by the SEC to facilitate capital raising for small businesses and private enterprises while providing certain investor protections. Within Regulation D, Rule 506(b) and Rule 506(c) are the most commonly used exemptions:

• Rule 506(b): This rule allows issuers to raise an unlimited amount of capital from accredited investors and up to 35 non-accredited investors, provided there is no general solicitation or advertising.
• Rule 506(c): This rule permits issuers to engage in general solicitation and advertising, but all investors must be accredited, and issuers must take reasonable steps to verify their accredited status.

State Notice Filing Requirements

Despite federal preemption, states can require issuers to file a notice of their Regulation D offerings. This typically involves submitting a copy of Form D, which is filed with the SEC, along with any state-specific forms and fees. In Alabama, for example, issuers must file this notice with the Alabama Securities Commission within 15 days of the first sale of securities in the state.

Intrastate Offerings Under State Blue Sky Laws

While Regulation D offers a streamlined path for many offerings, there are situations where a sponsor might choose to rely on state Blue Sky Laws instead. This is particularly relevant for intrastate offerings, where the sponsor, all investors, and the assets are located within the same state. In such cases, the offering can be structured to comply solely with the state’s Blue Sky Laws.

• Intrastate Exemption: For an offering to qualify as an intrastate offering under Alabama law, it must be conducted entirely within the state. This means that the issuer must be based in Alabama, the investors must be Alabama residents, and the assets or business operations must be located within Alabama.
• Advantages: Utilizing the intrastate exemption can be beneficial for local businesses looking to raise capital from their community without the need for federal filings. It simplifies the regulatory requirements but limits the offering to in-state investors.

Strategic Considerations

Choosing between Regulation D exemptions and state Blue Sky Laws depends on the nature and scope of the offering. For broader offerings seeking a wider pool of investors, Regulation D’s Rule 506(b) or 506(c) is typically more advantageous due to federal preemption and the ability to bypass state registration. However, for localized offerings, leveraging state Blue Sky Laws through an intrastate exemption can be a viable strategy, providing a more straightforward compliance pathway for in-state activities.

In summary, while Regulation D provides powerful tools for bypassing state registration through federal preemption, understanding the nuances of both federal and state regulations ensures that issuers can strategically choose the best path for their specific capital-raising needs.

Why Would I Choose Regulation D Rule 506(b) or Rule 506(c) Over the State’s Blue Sky Laws?

Ensuring Compliance Across State Lines

One of the primary reasons to choose Regulation D Rule 506(b) or Rule 506(c) over state Blue Sky Laws is the assurance of compliance when dealing with investors from multiple states. State Blue Sky Laws are designed for intrastate offerings, where all parties involved—including the sponsor, investors, and the assets—are located within the same state. However, if any investor or the sponsor is based outside the state, the offering no longer qualifies as an intrastate offering under state Blue Sky Laws. This can lead to significant compliance issues.

Avoiding Legal Complications

Regulation D exemptions offer a clear advantage by providing a federally preempted framework that simplifies the regulatory landscape. This federal preemption ensures that an offering compliant with Rule 506(b) or Rule 506(c) does not need to be registered under individual state securities laws, thus avoiding the complexity and potential legal pitfalls associated with multi-state offerings.

For example, if during an intrastate offering it is discovered that an investor is actually domiciled outside the state, the offering would then fail to meet the intrastate exemption criteria, creating a securities law problem. This could lead to significant penalties, including rescission rights for the out-of-state investor and potential state enforcement actions.

Advantages of Regulation D

Broad Investor Base:

• Rule 506(b): Allows for raising an unlimited amount of capital from an unlimited number of accredited investors and up to 35 non-accredited investors, provided no general solicitation is used.
• Rule 506(c): Permits general solicitation and advertising, expanding the reach to potential accredited investors nationwide, with the requirement that all purchasers are accredited and their status is verified.

Streamlined Compliance:

• Regulation D offerings preempt state Blue Sky Laws, meaning that while states can require notice filings and fees, they cannot impose additional registration requirements. This streamlines the compliance process and reduces the regulatory burden on issuers.

Reduced Legal Risk:

• Utilizing Regulation D exemptions minimizes the risk of inadvertently violating state securities laws. Given the complexity and variability of state regulations, federal preemption under Regulation D provides a safer and more predictable pathway for raising capital.

Strategic Flexibility

Choosing Rule 506(b) or Rule 506(c) provides issuers with greater strategic flexibility:

• Rule 506(b): Ideal for issuers who prefer to avoid general solicitation and who might include a limited number of non-accredited investors. This option provides a balance between raising capital and maintaining a private offering.
• Rule 506(c): Best suited for issuers who want to leverage advertising and general solicitation to reach a larger pool of accredited investors. This rule requires rigorous verification of accredited investor status but allows for broader outreach.

Mitigating Risks

By opting for Regulation D exemptions, issuers can mitigate the risk of their offering being invalidated due to investor domicile issues. Regulation D provides a robust framework that ensures compliance regardless of the geographic location of the investors, thereby preventing the complications that arise from state-to-state regulatory discrepancies.

In conclusion, choosing Regulation D Rule 506(b) or Rule 506(c) over state Blue Sky Laws is a prudent strategy for issuers looking to raise capital while ensuring compliance across multiple states. The federal preemption provided by these rules simplifies the regulatory process, reduces legal risks, and offers strategic flexibility, making them an attractive option for a wide range of offerings.

What Are The Notification Rules and Terms for Notifying the State about a Regulation D Rule 506(b) or Rule 506(c) Offering?

Regulation D Notification Requirements

While Regulation D offerings under Rule 506(b) and Rule 506(c) are exempt from state registration due to federal preemption, issuers must still comply with state notification requirements. These requirements ensure that the state is aware of the securities being offered and can monitor compliance with applicable laws.

Filing Requirements

In Alabama, issuers relying on Regulation D exemptions must file a notice with the Alabama Securities Commission (ASC). This involves submitting specific documentation and paying a filing fee. The process is streamlined through the NASAA Electronic Filing Depository (EFD) system. Here are the key steps and requirements:

1. Form D Submission: Issuers must file Form D with the SEC within 15 days of the first sale of securities. This form contains essential information about the offering, including the names and addresses of the issuers, the size of the offering, and the type of securities being sold.
2. State Notice Filing via EFD: A copy of Form D, along with any required state-specific forms, must be submitted to the Alabama Securities Commission through the NASAA Electronic Filing Depository (EFD) system. This platform simplifies the submission process and ensures that the ASC receives the necessary documentation promptly.
3. Filing Fee: Alabama requires a fixed filing fee of $300 for the submission of the notice. This fee must be paid through the EFD system at the time of filing.

Deadlines and Penalties

The notice filing with the Alabama Securities Commission must be completed within 15 days after the first sale of securities in Alabama. Timely submission is crucial to ensure compliance and avoid any potential issues with the state regulators.

• New Notice Filing Fee: The filing fee for a new notice is $300, a fixed amount that must be paid at the time of submission through the EFD system.
• Late Fee: Unlike some states, Alabama does not impose a late fee for late filings of Regulation D notices. However, it is still essential to file within the specified timeframe to maintain compliance and avoid any potential scrutiny or complications.

Steps to Ensure Compliance

To ensure compliance with both federal and state requirements, issuers should follow these steps meticulously:

1. Prepare Form D: Accurately complete Form D with all necessary information about the offering and the issuer.
2. Submit to the SEC: File Form D electronically with the SEC within 15 days of the first sale of securities.
3. File with the ASC via EFD: Submit a copy of Form D, along with any additional required documentation and the $300 filing fee, through the NASAA EFD system within the same 15-day period.
4. Verify Receipt: Confirm that the ASC has received and processed the filing through the EFD system to avoid any potential issues or misunderstandings.

Compliance with state notification rules for Regulation D Rule 506(b) and Rule 506(c) offerings is a straightforward process, especially with the use of the NASAA Electronic Filing Depository system. By adhering to these requirements and ensuring all filings are complete and submitted on time, issuers can avoid regulatory complications and focus on successfully raising capital.

What are Alabama’s Blue Sky Laws?

Alabama’s Blue Sky Laws are designed to protect investors from fraud and ensure transparency in the securities market. These laws require the registration of securities, with specific exemptions and conditions detailed in various statutes. Alabama Code § 8-6-4 mandates that securities must be registered unless exempt, while § 8-6-10 lists types of securities that are exempt from registration. Additionally, § 8-6-14 clarifies that filing or registration does not guarantee the accuracy of the information provided, and § 8-6-30 places the burden of proving an exemption on the party claiming it. These regulations collectively aim to safeguard investors and maintain market integrity.

AL ST § 8-6-4 Registration of securities — Required; exceptions

Under Alabama Code § 8-6-4, it is illegal to offer or sell any security within the state unless it meets one of the following conditions: it is registered under the specified article, it is exempt from registration under Section 8-6-10, or the transaction is exempt under Section 8-6-11. This statute ensures that securities are properly regulated to protect investors.

AL ST § 8-6-10 Registration of securities — Exempt securities

Alabama Code § 8-6-10 outlines exemptions from securities registration requirements. Exempt securities include those issued or guaranteed by governments (U.S., states, foreign governments with diplomatic relations), banks, savings institutions, credit unions, common carriers, public utilities, and non-profit organizations. Additionally, commercial paper for current transactions and investment contracts related to employee benefit plans are exempt. Certain investment companies must file a notice and pay a fee for exemption. The Alabama Securities Commission may revoke or suspend exemptions if necessary for public interest and investor protection.

AL ST § 8-6-14 Filing or registration not finding of truth, completeness, etc., of documents; representations concerning effect of registration or exemption

Alabama Code § 8-6-14 states that the filing or registration of a security does not imply that the Alabama Securities Commission has verified the truth, completeness, or accuracy of the documents. Furthermore, it is unlawful to misrepresent the significance of such registration or exemption to prospective purchasers, customers, or clients. The Commission’s role does not include endorsing or approving the merits of any security, person, or transaction. This ensures transparency and prevents misleading representations in the securities market.

AL ST § 8-6-30 Burden of proving exemption or exception from definition

Alabama Code § 8-6-30 specifies that in any proceeding under this article, the responsibility for proving an exemption or exception from a definition falls on the person who claims it. This places the burden of proof on the party asserting the exemption, ensuring they provide adequate evidence to support their claim.

What are Alabama’s Securities Laws Exemptions?

Alabama’s securities laws provide several exemptions from registration requirements, which can be beneficial for certain types of issuers and transactions. These exemptions are designed to facilitate the efficient functioning of capital markets while maintaining investor protections. Here is an overview of the key exemptions under Alabama law:

1. Governmental Entities

Securities issued or guaranteed by governmental entities are exempt from registration. This includes:

• U.S. government and its agencies
• State governments and their political subdivisions
• Certain foreign governments, including Canada and its political subdivisions

2. Financial Institutions

Securities issued by financial institutions are generally exempt. This category includes:

• Banks
• Savings institutions
• Trust companies
• Savings and loan associations
• Building and loan associations
• Credit unions
• Industrial loan associations

3. Open-End Management Investment Companies and Unit Investment Trusts

These investment vehicles, commonly known as mutual funds and UITs, are exempt provided they are registered under the Investment Company Act of 1940.

4. Other Entities

Certain entities engaged in regulated industries have their securities exempt from registration. These include:

• Railroads
• Common carriers
• Public utilities
• Holding companies subject to regulation by a governmental authority

5. Listed Stock Exchange Securities

Securities listed on major stock exchanges, such as the New York Stock Exchange (NYSE) or NASDAQ, are exempt from registration in Alabama. This exemption also extends to securities of the same issuer that are of senior or substantially equal rank.

6. Non-Profit Organizations

Securities issued by non-profit organizations are exempt, provided these organizations are organized and operated exclusively for religious, educational, benevolent, fraternal, charitable, social, athletic, or reformatory purposes.

7. Current Transaction Commercial Paper

Short-term commercial paper, which arises out of a current transaction and evidences an obligation to pay cash within nine months, is exempt. This exemption typically applies to instruments like promissory notes and bills of exchange used in ordinary business transactions.

8. Employee Benefit Plans

Securities issued in connection with employee benefit plans are exempt. These plans include stock purchase, savings, pension, profit-sharing, or similar benefit plans.

Criteria and Limitations

Each of these exemptions has specific criteria that must be met for the exemption to apply. For instance, to qualify as an exempt financial institution, the issuer must be properly chartered and regulated by a recognized governmental authority. Non-profit organizations must ensure that their securities are not primarily offered for profit and that proceeds are used in accordance with their charitable purposes.

Strategic Considerations

Issuers should carefully assess whether their securities offerings qualify for any of these exemptions. Utilizing these exemptions can significantly reduce regulatory burdens and associated costs. However, issuers must ensure full compliance with the specific requirements of each exemption to avoid legal issues.

Alabama’s securities law exemptions provide valuable avenues for certain issuers to raise capital without undergoing the full registration process. Understanding and appropriately leveraging these exemptions can facilitate smoother and more efficient securities offerings, allowing issuers to focus on their business objectives while maintaining compliance with regulatory standards.

What are Alabama’s Procedures for Securities Law Exemptions?

Understanding and navigating the procedures for securities law exemptions in Alabama is crucial for issuers who wish to take advantage of these regulatory provisions. The Alabama Securities Commission (ASC) oversees these procedures to ensure that issuers comply with state laws while facilitating the efficient offering of securities. Here is a detailed guide to the steps and requirements for claiming securities law exemptions in Alabama:

1. Identify the Applicable Exemption

The first step for any issuer is to determine which exemption applies to their securities offering. This involves a thorough review of the Alabama Securities Act, particularly Section 8-6-10, which outlines the various exemptions available.

2. Prepare the Necessary Documentation

Once the appropriate exemption is identified, the issuer must prepare the necessary documentation to support their claim. This typically includes:

• Detailed information about the issuer and the securities being offered
• Evidence that the issuer meets the criteria for the chosen exemption
• Any specific forms or disclosures required by the ASC

3. Filing with the Alabama Securities Commission

For most exemptions, issuers are required to file a notice with the ASC, even if the securities themselves are exempt from registration. The process generally involves the following steps:

• Form Submission: Complete and submit the necessary forms to the ASC. This may include specific exemption forms or a copy of Form D if relying on federal exemptions.
• Supporting Documentation: Attach all required supporting documents that provide evidence of eligibility for the exemption.
• Filing Fee: Pay any applicable filing fees. While some exemptions may not require a fee, others might have a fixed filing fee. For example, the filing fee for a new notice under Regulation D exemptions is $300.

4. Review by the Alabama Securities Commission

After submission, the ASC will review the filing to ensure that all requirements are met. This review process involves:

• Verification of Information: The ASC will verify that the information provided is complete and accurate.
• Compliance Check: Ensuring that the issuer complies with all relevant statutes and regulations pertaining to the exemption.

5. Notification of Approval or Additional Requirements

Once the ASC completes its review, it will notify the issuer of the status of their filing:

• Approval: If the filing meets all requirements, the ASC will approve the exemption. The issuer can then proceed with the securities offering under the claimed exemption.
• Additional Requirements: If the ASC identifies any issues or requires additional information, they will notify the issuer, who must then provide the requested information or make necessary adjustments to comply.

6. Ongoing Compliance and Reporting

Even after receiving an exemption, issuers must adhere to ongoing compliance and reporting obligations. This includes:

• Annual Reports: Depending on the exemption, issuers may need to file annual reports or updates with the ASC.
• Material Changes: If there are any material changes to the information initially provided, issuers must promptly update the ASC.

7. Maintaining Records

Issuers should maintain thorough records of all filings, approvals, and communications with the ASC. This documentation is essential for ensuring ongoing compliance and for reference in the event of an audit or investigation.

Navigating Alabama’s procedures for securities law exemptions requires careful planning and attention to detail. By understanding the steps involved and ensuring all requirements are met, issuers can effectively leverage these exemptions to facilitate their securities offerings while remaining compliant with state laws. Engaging with a knowledgeable syndication attorney can further streamline this process and help avoid potential pitfalls.

Frequently Asked Questions

Do I Need an Attorney from Alabama to Put Together an Offering?

Whether you need an attorney licensed in Alabama to put together a securities offering depends on the nature of the offering and the specific legal requirements involved. If your offering is structured under Regulation D and does not rely on Alabama-specific Blue Sky Laws, then an attorney from outside Alabama may suffice.

For instance, if you need a real estate syndication attorney to prepare a private placement memorandum (PPM) for a multifamily deal in Huntsville, Alabama, that will be offered to investors in multiple states, a licensed syndication lawyer from another state could likely assist you. This attorney could handle the creation of the entity, draft the operating agreement, and ensure compliance with federal securities laws under Regulation D, specifically Rule 506(b) or Rule 506(c). However, this attorney would not be able to provide counsel on Alabama-specific laws or how they might affect your offering.

On the other hand, if you are preparing a PPM for a development project in Birmingham, Alabama, where all the investors are from Alabama, and you intend to use one of Alabama’s Blue Sky Law exemptions to registration, then you would need to work with an attorney licensed in Alabama. In such cases, understanding and navigating the specific requirements and procedures of Alabama’s securities laws is crucial, and a local attorney’s expertise would be necessary to ensure full compliance.

In summary, while a syndication attorney from outside Alabama can handle many aspects of structuring and managing your offering, working with an Alabama-licensed attorney becomes essential when dealing with state-specific legal issues or exemptions under Alabama’s Blue Sky Laws.

Is it Okay if the Real Estate Syndication Attorney, Licensed Outside of Alabama, Looks Over My Purchase Contract?

Yes, a real estate syndication attorney licensed outside of Alabama can review your purchase contract, but there are limitations on the advice they can provide. For example, Tilden Moschetti, Esq., a seasoned syndication attorney, can examine the underlying aspects of your purchase contract for a property in Montgomery, Alabama. While he can offer business consulting advice, such as discussing the price, overall deal points, and the timeline until closing, he cannot provide legal advice on specific terms of the contract because he is not licensed in Alabama.

This distinction is crucial because legal advice on state-specific matters requires a thorough understanding of local laws and regulations. An out-of-state attorney, like Tilden Moschetti, can provide valuable insights into the business aspects of the deal and help structure the transaction, but for detailed legal guidance on Alabama-specific terms and conditions, you would need to consult an attorney licensed to practice in Alabama.

In summary, while an out-of-state syndication attorney can offer general advice and business consulting related to your purchase contract, any legal advice on specific contract terms or compliance with Alabama law should be obtained from a local attorney licensed in Alabama.