California Blue Sky Laws for Syndication

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California Blue Sky Laws are an essential factor that syndicators looking to raise capital from investors in California must consider. These laws are at the core of securities regulation within the state, and understanding their fundamental principles is crucial. By comprehending how these laws function, you can make informed and strategic business decisions regarding your capital-raising efforts. Moreover, a thorough grasp of these laws can serve as a protective shield, helping you avoid potential legal complications and ensuring your compliance with the state’s financial regulations.

What are Blue Sky Laws in General? 

Securities laws serve a critical function – safeguarding investors. The architecture of these protective measures has two major layers, marked by the federal Securities and Exchange Commission (SEC) and each state’s individual securities regulation agency.

At the federal level, the SEC serves as the primary watchdog, maintaining vigilance over market integrity, corporate transparency, and investor protection. Its mandate extends to the broad securities landscape, including stocks, bonds, mutual funds, and other investment vehicles.

On the other hand, states have their own regulatory bodies to ensure local investor protection. Although federal laws, such as the syndication of a Reg D offering, have substantially limited the states’ oversight capabilities over the sales of most securities, these state agencies still play a pivotal role. For instance, they often mandate that a notice, paired with an appropriate fee, be filed with them when securities are offered. Moreover, these agencies retain the power to conduct investigations and instigate legal actions against fraudulent activities, providing an additional layer of protection for investors domiciled within their jurisdictions.

Taking the case of California, when all securities transactions occur within its borders, the state’s Blue Sky Rules come into play. These laws are a part of California’s effort to regulate securities within its jurisdiction, aiming to prevent fraud in the sale of securities and ensure investor protection. Essentially, these rules ensure that any securities sold in the state adhere to standards of transparency, fairness, and honesty, reflecting the broader intent of securities laws to protect investors and maintain the integrity of the financial marketplace. Therefore, understanding and complying with these rules becomes crucial for any entity looking to raise capital within California.

What if I Need to Notify California about my Regulation D Syndication?

Here are the basic facts you need to know about giving notice to California about your Reg D Rule 506b or 506c offer:

Filing fee – Fixed

New notice – $300

Late fee for late filings – None  

What are California’s Blue Sky Laws?

CA CIVIL § 1917.068 Exemption from qualification requirements for corporate securities

CA CIVIL § 1917.168 Exemption from qualification requirements for corporate securities

CA CORP § 25100 Securities exempt from provisions of sections 25110, 25120, 25130

CA CORP § 25101 Securities exempt from provisions of S 25130

CA CORP § 25110 Necessity of qualification of security or exemption of security or transaction

CA CORP § 25120 Necessity of qualification of security or exemption of security or transaction

CA CORP § 25130 Necessity of qualification of security or exemption of security or transaction

CA CORP § 25163 Burden of proving exemption or exception

CA CORP § 25164 Facts not constituting finding that document filed is true, complete or not misleading; unlawful representation; required statement on permit

CA CORP § 25532 Orders to desist and refrain from certain activities; claims for ancillary relief; hearing; procedure

CA CORP § 25608 Fees; charge and collection; disposition

CA CORP § 25611 List of qualified or exempt securities  

What are the securities laws exemptions under the California Blue Sky Laws?

When it comes to raising capital in California, the role of the state’s Blue Sky Laws, specifically the securities exemptions within these laws, can not be overstated. These exemptions cover a wide variety of securities and issuers, providing a path for organizations to raise capital without going through the standard, often arduous, securities registration process.

One group of exemptions apply to governmental entities, which encompass not only domestic bodies but also certain foreign governments, including Canada. By virtue of their nature and the regulatory oversight they undergo, securities issued by these entities are exempted from the usual requirements of California’s Blue Sky Laws.

Similarly, financial institutions enjoy considerable exemptions under these laws. This category covers an extensive range of institutions from banks, trust companies, savings associations, savings banks, land banks, farm loan associations, credit unions, to industrial loan companies. These organizations are often governed by separate regulatory frameworks, negating the necessity for additional oversight under the Blue Sky Laws.

Securities regulated by insurance or public utilities commissions, as well as the Real Estate Commissioner, are also exempt. These securities, alongside those related to real estate and mortgages, benefit from their own sector-specific regulatory frameworks.

Another exemption applies to unincorporated inter-indemnity, reciprocal, and interinsurance contracts. Furthermore, entities like railroads, common carriers, public utilities, and holding companies have been extended exemptions under these laws.

Notably, securities listed on recognized stock exchanges are exempt, given the stringent requirements already needed to secure such listings. Similarly, non-profit organizations, cooperative associations, and consumer cooperative corporations can also issue exempt securities, reflecting their unique operational and organizational structures.

Life income contracts and current transaction commercial paper fall under the category of exempt securities, along with securities pertaining to employee benefit plans, in recognition of their particular characteristics and the significant role they play in financial planning and stability.

Just as important as understanding these exemptions, however, is knowing the procedures to claim these exemptions under California law. The process varies based on the type of security or issuer, but typically involves the payment of an application fee.

For instance, life income contracts require the payment of a $50 application fee to qualify for the exemption. On the other hand, industrial loan companies must pay a $200 fee and an additional amount based on the value of the security, capped at $2500. This fee is submitted along with a notice of intent to sell.

For issuers of commercial paper, a $250 application fee applies. Despite the cost, these procedures can often be more cost and time effective than the full securities registration process, making understanding these exemptions and their procedures a crucial part of capital raising efforts in California.

Frequently Asked Questions

What are the common types of California intrastate offerings?

Common California Intrastate Offerings:

  • 25102(f) Exemption – limited offering with investors with pre-existing relationships with the seller and no more than 35 unaccredited investors
  • 25102(n) Exemption – in California and 30 other states that adopted the Model Accredited Investor Act, this exemption can be taken if your offering is $5 million or under and all investors are accredited
  • Qualification by permit
  • Regulation D Rule 506 – public advertisement allowance
  • Regulation D Rule 504 – Small Corporate Offerings Registration (SCOR) for raising capital or succession planning allows brokers to trade securities directly

All of these intrastate offerings involve thorough and careful disclosures to the investors in a Form D or Private Placement Memorandum. This is an important step in the success of your company’s offering and the relationship with investors as well as safeguarding yourself through compliance with state securities laws.

Each exemption has specific allowances for advertising or communicating the investment opportunity to potential investors.

Do I need an attorney from California then to put together an offering?

That depends. If the offering you are putting together is under Regulation D and not one of the California-specific Blue Sky Laws (as discussed above), then probably not.  For example, if you needed a real estate syndication attorney to put together a private placement memorandum for a multifamily deal in Los Angeles, California, that was going to be offered in different states, and you didn’t need counsel on questions related to California laws, then chances are a licensed syndication lawyer would be able to help. They could even put together the entity for you and write the operating agreement, they just couldn’t provide you counsel on the specific laws of California and how they may or may not pertain to your offer. However, if you were putting together a private placement memorandum for a development project in San Diego, California, all of the investors were from California, and you wanted to use one of California’s Blue Sky Laws above as an exception to registration, then you would need to work with someone licensed in California.  

Is it ok if the real estate syndication attorney, licensed outside of California, looks over my purchase contract?

They can look, but they can’t give you advice as it pertains to California. For example, Tilden Moschetti, Esq, syndication attorney for the Moschetti Syndication Law Group, will look, if asked, about the contract underlying your purchase contract in San Jose, California, he can both speak to specific California laws as well as provide business consulting advice, because he is licensed in California. A non-California attorney could speak really only through broad terms (such as a discussion on price and broad deal points like the length of time until closing).

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