Arkansas Blue Sky Laws for Syndication

Navigating the complexities of securities laws is crucial for anyone involved in raising capital through syndication, especially within the realm of real estate. Whether you are a real estate developer, private equity fund manager, or an entrepreneur looking to leverage Regulation D exemptions, understanding both federal and state regulations is essential. This comprehensive guide aims to demystify the interplay between Arkansas’s Blue Sky Laws and the SEC’s Regulation D, providing you with the knowledge needed to ensure compliance and streamline your capital-raising efforts.

In this article, we will explore the general concept of Blue Sky Laws and their relationship with the SEC’s Regulation D. We will delve into the specific benefits of choosing Regulation D Rule 506(b) or Rule 506(c) over state Blue Sky Laws, and outline the notification rules and procedures for making such offerings in Arkansas. Additionally, we will examine the exemptions available under Arkansas securities laws and the steps required to claim these exemptions. Finally, we will address practical considerations, such as the necessity of engaging an Arkansas-licensed attorney for certain aspects of your offering and the role of out-of-state syndication attorneys.

By the end of this guide, you will have a clear understanding of the regulatory landscape in Arkansas and how to navigate it effectively, ensuring your syndication efforts are both legally compliant and optimally structured for success.

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

When raising capital through securities offerings, understanding the relationship between state Blue Sky Laws and the SEC’s Regulation D is essential. Regulation D provides exemptions from federal securities registration requirements, specifically through Rule 506(b) and Rule 506(c). These exemptions streamline the process for syndicators and other entities to raise capital, but they also interact with state regulations in specific ways.

Preemption by Regulation D

Under 15 U.S. Code § 77r(b)(4)(F), offerings made under Regulation D Rule 506(b) or Rule 506(c) are preempted by state Blue Sky Laws. This preemption means that if you are conducting a securities offering under these rules, you are not required to comply with the registration and qualification requirements of the individual state Blue Sky Laws where your investors reside. This federal preemption simplifies the process for syndicators, allowing them to focus on compliance with federal regulations rather than navigating the potentially complex and varying requirements of each state.

Rule 506(b) and Rule 506(c)

• Rule 506(b): This rule allows issuers to raise an unlimited amount of money from accredited investors and up to 35 non-accredited investors, provided they meet certain sophistication requirements. General solicitation and advertising are prohibited under Rule 506(b).
• Rule 506(c): This rule also permits issuers to raise an unlimited amount of capital, but it allows for general solicitation and advertising. However, all investors must be accredited, and the issuer must take reasonable steps to verify their accredited status.

By utilizing Rule 506(b) or Rule 506(c), sponsors can bypass state-specific registration requirements, reducing the regulatory burden and expediting the capital-raising process. This makes these rules particularly attractive for real estate syndications and other private placements.

Intrastate Offerings

While Regulation D provides significant advantages, there are scenarios where a sponsor might opt to use state Blue Sky Laws instead. If an offering is conducted entirely within one state—meaning the sponsor, all investors, and the assets are all located within that state—it may qualify as an intrastate offering. In this case, the sponsor can choose to comply with the state’s Blue Sky Laws rather than federal Regulation D.

Intrastate offerings can be beneficial in certain contexts, especially for smaller, localized projects where the investor base is confined to a single state. However, these offerings require thorough knowledge of the specific state’s Blue Sky Laws and compliance with all relevant state regulations.

Practical Considerations

For most syndications, especially those involving investors from multiple states, using Regulation D Rule 506(b) or Rule 506(c) will be more efficient and less cumbersome. However, understanding the interplay between federal and state regulations ensures that sponsors can choose the most appropriate and advantageous route for their specific situation.

Whether opting for a Regulation D exemption or a state-specific intrastate offering, consulting with a knowledgeable syndication attorney is crucial. Legal expertise can help navigate these regulatory landscapes, ensuring compliance and protecting both the sponsor and the investors.

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

When raising capital through syndication, choosing the right regulatory framework is crucial for ensuring compliance and minimizing legal risks. Regulation D Rule 506(b) and Rule 506(c) offer significant advantages over state Blue Sky Laws, especially for offerings involving investors from multiple states or sponsors who are not domiciled in the same state as the assets or investors. Here’s why you might opt for these federal exemptions:

Flexibility and Scope

Interstate Offerings: If any investor or the sponsor is located outside the state, the offering cannot qualify as an intrastate offering under the state’s Blue Sky Laws. Regulation D provides a federal framework that allows for interstate offerings without having to navigate the differing requirements of each state’s Blue Sky Laws. This flexibility is particularly beneficial for syndicators and real estate professionals who often have investors from multiple states.

Discovery of Out-of-State Investors: Even if an offering initially seems to qualify for intrastate status, discovering that an investor is actually domiciled outside of the state can create significant legal issues. Such a discovery can retroactively disqualify the offering from its intrastate exemption, leading to compliance problems and potential liabilities. Regulation D avoids this pitfall by providing a clear, uniform set of rules that apply regardless of the investors’ locations.

Advantages of Regulation D Rule 506(b) and Rule 506(c)

Rule 506(b):

• Unlimited Capital Raising: Allows issuers to raise an unlimited amount of capital from accredited investors and up to 35 sophisticated non-accredited investors.
• No General Solicitation: Prohibits general solicitation and advertising, which can be a simpler route for those who have established networks of potential investors.
• Federal Preemption: Offers federal preemption over state Blue Sky Laws, reducing the need to comply with multiple state regulations.

Rule 506(c):

• General Solicitation Allowed: Permits issuers to publicly advertise their offerings, potentially reaching a broader audience of accredited investors.
• Accredited Investors Only: Requires all investors to be accredited and mandates that issuers take reasonable steps to verify this status.
• Unlimited Capital Raising: Like Rule 506(b), there is no limit on the amount of capital that can be raised.

Both Rule 506(b) and Rule 506(c) provide a streamlined process that simplifies compliance, reduces regulatory burdens, and mitigates the risk of inadvertently violating securities laws due to investor domicile issues.

Simplified Compliance

Uniform Federal Standards: By choosing Regulation D, issuers benefit from a uniform set of federal standards, which are generally simpler and more predictable than navigating the mosaic of state regulations. This uniformity is particularly advantageous for syndication attorneys and real estate professionals who operate across state lines.

Reduced Legal Risk: Compliance with Regulation D reduces the risk of falling afoul of securities laws due to unforeseen issues with investor locations or domicile. This can prevent costly legal disputes and penalties that might arise from misclassified intrastate offerings.

Practical Considerations

For syndicators and real estate professionals, the practical advantages of Regulation D Rule 506(b) and Rule 506(c) often outweigh the potential benefits of relying solely on state Blue Sky Laws. The federal preemption, flexibility in raising capital, and reduced legal risk make these rules an attractive choice for most offerings.

Choosing Regulation D helps ensure that your offering remains compliant, regardless of where your investors are located, providing peace of mind and allowing you to focus on the success of your syndication project.

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

Even though Regulation D Rule 506(b) and Rule 506(c) offerings are preempted from state Blue Sky Laws’ registration requirements, issuers are still required to notify the state where the securities are being offered or sold. This notification is known as a “notice filing” and it helps states monitor securities activities within their jurisdiction. Here are the notification rules and terms for notifying the state of Arkansas about a Regulation D Rule 506(b) or Rule 506(c) offering:

Filing Fees

When notifying the state about a Regulation D offering, issuers must pay a filing fee, which varies based on the size of the offering:

• New Notice Fee: The fee ranges from $100 to $500, calculated as 0.1% of the total amount offered in the state, with a minimum fee of $100 and a maximum fee of $500. For example, if the total offering amount in Arkansas is $200,000, the filing fee would be $200 (0.1% of $200,000).

Notification Process

1. Prepare Form D: Issuers must complete and file Form D with the SEC, which includes information about the offering, the issuer, and the securities being offered. This form must be filed electronically through the SEC’s EDGAR system.
2. Submit Notice through NASAA Electronic Filing Depository (EFD): After filing Form D with the SEC, issuers must submit a copy of the Form D to the Arkansas Securities Department using the NASAA Electronic Filing Depository (EFD) system. This system streamlines the filing process and ensures that all required information is submitted accurately. The EFD can be accessed at NASAA EFD.
3. Pay the Filing Fee: Along with the Form D submission, issuers must pay the appropriate filing fee through the EFD system. This fee ranges from $100 to $500, depending on the total amount offered in Arkansas.

Late Filing Fees

It is crucial to file the notice in a timely manner to avoid penalties. The late filing fees for Arkansas are as follows:

• Late Fee (up to 15 days after the first sale): If the filing is made more than 15 days after the first sale of securities in Arkansas, a late fee of $500 is imposed.
• Late Fee (more than 365 days after the first sale): If the filing is made more than 365 days after the first sale of securities in Arkansas, the late fee increases to $1,000.

These late fees are designed to encourage timely compliance with notification requirements and to deter issuers from delaying their filings.

Compliance Tips

To ensure compliance with Arkansas notification rules, issuers should:

• Monitor Deadlines: Keep track of the sale dates and ensure that notice filings are submitted within the required 15-day period.
• Calculate Fees Accurately: Calculate the offering amount in Arkansas accurately to determine the appropriate filing fee, ensuring it falls within the $100 to $500 range.
• Prepare for Penalties: Be aware of the potential penalties for late filings and budget for these costs if necessary to avoid unexpected expenses.

Importance of Legal Guidance

Navigating the notification rules and terms can be complex, especially when managing multiple state requirements. Engaging a syndication attorney can provide invaluable assistance in ensuring that all filings are completed accurately and on time. An experienced attorney can help issuers understand their obligations, avoid costly penalties, and maintain compliance with both federal and state regulations.

By following these guidelines and leveraging expert legal advice, issuers can effectively manage their Regulation D offerings and maintain good standing with state securities authorities, facilitating a smoother and more efficient capital-raising process.

What are Arkansas’ Blue Sky Laws?

Blue sky laws are state regulations established to protect investors from securities fraud. In Arkansas, these laws encompass several key provisions designed to maintain the integrity of securities transactions. Arkansas Code § 23-42-212 clarifies that the registration of securities does not equate to endorsement by the Securities Commissioner. § 23-42-501 makes it illegal to sell unregistered, non-exempt securities. § 23-42-503 lists specific securities exempt from registration, while § 23-42-505 details the commissioner’s power to revoke exemptions. Lastly, § 23-42-506 places the burden of proving exemption claims on the claimant. These rules collectively ensure a transparent and fair securities market in the state.

AR ST § 23-42-212 Registration not guarantee of truth

Arkansas Code § 23-42-212 (2020) clarifies that the filing of an application for registration, a notice filing, or a registration statement, and the availability of an exemption or exception, do not imply approval or endorsement by the Securities Commissioner. It states that such actions do not mean that the documents are true, complete, or not misleading. Additionally, it is unlawful to make representations to prospective purchasers, customers, or clients that are inconsistent with this clarification.

AR ST § 23-42-501 Sale of unregistered nonexempt securities

Arkansas Code § 23-42-501 (2020) stipulates that it is illegal for any individual to offer or sell any security within the state unless the security is registered under the relevant chapter, qualifies for an exemption under § 23-42-503 or § 23-42-504, or is considered a covered security. This ensures that securities offered or sold are properly regulated to protect investors from fraudulent or unregistered securities.

AR ST § 23-42-503 Exempted securities

Arkansas Code § 23-42-503 (2017) lists securities exempt from registration requirements. Exemptions include securities issued by governments, banks, savings institutions, public utilities, non-profit organizations, and cooperatives, among others. The law also allows the Securities Commissioner to add exemptions for small or limited public offerings. Cooperatives must meet specific criteria for exemptions, including filing financial statements. The law ensures certain securities are regulated for public interest and investor protection.

AR ST § 23-42-505 Denial or revocation of exemption

Arkansas Code § 23-42-505 (2020) empowers the Securities Commissioner to deny or revoke exemptions for specific securities or transactions. Before doing so, the commissioner must provide prior notice, an opportunity for a hearing, and written findings of fact and conclusions of law. Summary orders can be issued but must be promptly communicated, with a hearing scheduled upon request within 15 days. Orders remain effective until modified or vacated, and cannot be retroactive. Individuals are not considered in violation if unaware of the order despite reasonable care.

AR ST § 23-42-506 Burden of proof

Arkansas Code § 23-42-506 (2017) specifies that in any legal proceeding under the Arkansas Securities Act, the responsibility of proving that a security or transaction is exempt from registration requirements lies with the person claiming the exemption. This provision ensures that those seeking exemptions must provide sufficient evidence to support their claims, thereby maintaining the integrity and regulatory oversight of securities transactions.

What are Arkansas’ Securities Laws Exemptions?

Arkansas’s Blue Sky Laws provide various exemptions from the registration requirements for securities offerings. These exemptions are designed to facilitate certain types of issuers and offerings that are deemed to pose less risk to investors or serve important public or economic functions. Understanding these exemptions is crucial for issuers to determine whether their offerings might qualify, thereby simplifying the compliance process.

Key Exemptions under Arkansas Securities Laws

Governmental Entities

• Securities issued by the United States, any state, or any political subdivision or agency thereof are exempt from registration. This includes municipalities, counties, and other governmental entities.
• Foreign governments with which the United States maintains diplomatic relations, including the government of Canada, are also covered under this exemption.

Financial Institutions

• Securities issued by financial institutions such as banks, savings banks, or institutions, trust companies, bank holding companies, savings and loan associations, building and loan associations, and savings and loan holding companies are exempt.
• These institutions are typically regulated by other federal and state laws, providing a layer of protection for investors.

Farm Cooperatives

• Securities issued by farm cooperatives are exempt. These cooperatives are organized for the purpose of collective farming activities and are usually supported by other agricultural regulations.

Public Utilities and Holding Companies

• Securities issued by public utilities and their holding companies are exempt. These entities are heavily regulated by state and federal agencies, which oversee their financial and operational practices.

“World Class” Foreign Issuers

• Securities issued by foreign issuers that meet certain high standards, often referred to as “world class” foreign issuers, can be exempt. These standards typically relate to the issuer’s size, market presence, and compliance with international regulatory standards.

Non-Profit Persons

• Non-profit organizations are exempt from registration requirements. This includes charities, educational institutions, and other non-profit entities that do not distribute profits to shareholders but rather reinvest them into their mission.

Employee Benefit Plans

• Securities offered to employees through employee benefit plans, such as stock options or retirement plans, are exempt. These plans are designed to provide financial benefits to employees as part of their compensation package.

Practical Considerations for Exemptions

• Eligibility Assessment: Issuers must carefully assess their eligibility for these exemptions. Even if an offering seems to fit one of the categories, detailed criteria must be met to qualify.
• Documentation: Maintain thorough documentation supporting the claim of exemption. This can include corporate charters, financial statements, regulatory filings, and other relevant documents.
• Consultation with Legal Experts: Given the complexities involved in determining eligibility for exemptions, consulting with a syndication attorney or a securities law expert is advisable. This ensures that issuers correctly interpret the exemptions and avoid unintentional non-compliance.

Importance of Compliance

While these exemptions can simplify the process of raising capital, it is essential for issuers to ensure full compliance with all applicable laws and regulations. Incorrectly claiming an exemption can lead to legal challenges, financial penalties, and reputational damage. Therefore, a thorough understanding of Arkansas’s securities laws exemptions and careful application is critical for any issuer considering these routes.

By leveraging these exemptions appropriately, issuers can streamline their securities offerings, reduce regulatory burdens, and focus on their core business activities while maintaining investor trust and regulatory compliance.

What are Arkansas’ Procedures for Securities Law Exemptions?

Navigating the procedures for claiming securities law exemptions in Arkansas is a crucial step for issuers looking to streamline their offerings and comply with regulatory requirements. Understanding and following these procedures can help ensure that the offering remains lawful and that the issuer avoids potential penalties or legal challenges.

Step-by-Step Guide to Claiming Exemptions

Identify Applicable Exemptions

• The first step is to determine which exemptions might apply to your securities offering. Review the categories such as governmental entities, financial institutions, farm cooperatives, public utilities, “world class” foreign issuers, non-profit persons, and employee benefit plans.
• Assess whether the offering meets the specific criteria for these exemptions under Arkansas law.

Prepare Supporting Documentation

• Collect all necessary documentation that supports the claim for exemption. This may include:
  • Organizational documents (e.g., articles of incorporation, bylaws)
  • Financial statements
  • Regulatory filings and approvals
  • Descriptions of the offering and how it fits within the exemption criteria
• Ensure that all documents are accurate, up-to-date, and comprehensive.

File Notice of Exemption

• Even if an offering is exempt from registration, Arkansas may still require a notice filing. This typically involves submitting specific forms to the Arkansas Securities Department.
• The notice filing might include:
  • A copy of the Form D (if applicable)
  • A brief description of the exemption being claimed
  • Supporting documents that demonstrate eligibility for the exemption
• The filing fee, if applicable, must be included with the submission.

Submit via NASAA Electronic Filing Depository (EFD)

• For most exemptions, the required documents and notices should be submitted through the NASAA Electronic Filing Depository (EFD) system. The EFD system streamlines the process and ensures that the filings are properly recorded and accessible.
• Access the EFD system at NASAA EFD to submit the necessary documentation.

Pay the Filing Fee

• If there is a filing fee associated with the notice of exemption, it should be paid through the EFD system at the time of submission. Fees can vary depending on the nature and amount of the offering.
• Ensure the correct fee is calculated and paid promptly to avoid any delays in processing.

Monitor Compliance and Confirmation

• After submission, monitor the status of your filing to ensure it is accepted and processed by the Arkansas Securities Department.
• Keep records of all filings, confirmations, and correspondence with the department for future reference and compliance verification.

Ongoing Compliance and Record-Keeping

• Maintain Updated Records: Continuously update your records and documentation to reflect any changes in the offering or the issuer’s status. This helps in ensuring ongoing compliance with the exemption requirements.
• Periodic Reviews: Conduct periodic reviews of your exemption status and ensure that all conditions and criteria continue to be met throughout the offering period.

Consulting Legal Experts

Given the complexity and potential for variation in how exemptions are applied and processed, it is advisable to consult with a syndication attorney or a securities law expert. These professionals can provide tailored advice, help prepare and review documentation, and ensure that all filings are correctly made and compliant with Arkansas’s securities laws.

Importance of Accuracy and Timeliness

Ensuring the accuracy and timeliness of your filings is crucial. Late or incorrect filings can lead to penalties, legal challenges, and disruptions in your capital-raising efforts. By following these procedures diligently and seeking expert guidance, issuers can effectively navigate the exemption process, reduce regulatory burdens, and focus on achieving their business objectives.

By understanding and adhering to Arkansas’s procedures for securities law exemptions, issuers can take full advantage of the benefits offered by these exemptions, while maintaining compliance and protecting their investments and reputations.

Frequently Asked Questions

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

Whether you need an attorney licensed in Arkansas to put together your offering depends largely on the specifics of your situation. If your offering is under Regulation D and does not fall under Arkansas-specific Blue Sky Laws, then you likely do not need an attorney from Arkansas.

For instance, suppose you are working on a real estate syndication and need an attorney to prepare a private placement memorandum (PPM) for a multifamily deal in Little Rock, Arkansas. If this offering is going to be marketed in different states and you do not need legal counsel on Arkansas-specific laws, then a syndication attorney licensed in another state would probably be able to assist you. This attorney could help you draft the PPM, form the necessary entities, and write the operating agreements. However, they would not be able to provide legal advice on specific Arkansas laws and how they might impact your offering.

On the other hand, if your project is more localized, the situation changes. For example, if you are preparing a PPM for a development project in Fayetteville, Arkansas, with all investors based in Arkansas, and you wish to utilize an exemption under Arkansas’s Blue Sky Laws, you would need to engage with an attorney licensed in Arkansas. In this case, understanding and navigating the intricacies of Arkansas’s securities regulations is critical, and only a licensed Arkansas attorney would have the requisite authority and knowledge to provide such counsel.

Ultimately, the necessity of hiring an attorney from Arkansas hinges on the legal scope and geographical focus of your offering. If your offering spans multiple states under federal Regulation D exemptions, an out-of-state syndication attorney can provide comprehensive assistance. However, for offerings confined to Arkansas and relying on state-specific exemptions, working with a local attorney becomes essential to ensure full compliance with Arkansas laws and regulations.

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

Engaging a real estate syndication attorney who is licensed outside of Arkansas to review your purchase contract is possible, but there are limitations to what they can provide. An attorney not licensed in Arkansas, such as Tilden Moschetti, Esq., of the Moschetti Syndication Law Group, can look at your contract for a property in Fort Smith, Arkansas. However, they must be clear about the scope of their advice.

An out-of-state attorney can offer business consulting advice on general matters such as the price, overall deal structure, and timeline until closing. They can discuss broader deal points and provide valuable insights based on their expertise in real estate syndication. For instance, they might help you assess whether the purchase price is reasonable or if the deal’s timeline aligns with your strategic goals.

However, when it comes to specific legal terms and conditions within the contract, their ability to advise is limited. Because they are not licensed to practice law in Arkansas, they cannot provide legal advice on state-specific issues. This includes interpreting local laws, evaluating compliance with Arkansas regulations, or advising on legal nuances particular to Arkansas real estate transactions.

For any specific legal questions or concerns related to your purchase contract in Arkansas, it is essential to consult with a local attorney who is licensed in the state. This ensures that you receive accurate legal guidance tailored to Arkansas’s legal framework, helping you avoid potential legal pitfalls and ensuring that your transaction complies with all relevant state laws.

In summary, while an out-of-state syndication attorney can offer general business advice on your purchase contract, they cannot provide legal advice specific to Arkansas. For detailed legal counsel, it is necessary to engage an attorney licensed in Arkansas.