Connecticut Blue Sky Laws for Syndication

Navigating the complexities of securities regulations is essential for real estate developers, private equity fund managers, and businesses looking to raise capital through syndication. Connecticut’s Blue Sky Laws, designed to protect investors from fraudulent securities offerings, play a critical role in this landscape. However, federal regulations, such as Regulation D, provide exemptions that can simplify the process significantly. This comprehensive guide explores Connecticut’s Blue Sky Laws, how they interact with Regulation D, and the various considerations for choosing the appropriate legal framework for your capital-raising efforts. Whether you’re a seasoned syndicator or new to the field, understanding these laws is crucial for compliance and success. Here, we will delve into the specifics of Connecticut’s securities law exemptions, the procedural requirements for claiming these exemptions, and the roles of legal counsel in ensuring your offerings meet all necessary regulatory standards.

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

When raising capital through syndication, it’s essential to understand the interplay between state Blue Sky Laws and the SEC’s Regulation D. Blue Sky Laws are state-level securities regulations designed to protect investors from fraud by requiring issuers to register their offerings or qualify for an exemption. However, Regulation D, particularly Rule 506(b) and Rule 506(c), offers federal exemptions that can preempt these state laws under certain conditions, providing a streamlined path for issuers.

Preemption of State Laws by Regulation D

Under 15 U.S. Code § 77r(b)(4)(F), securities offered under Regulation D Rule 506(b) or Rule 506(c) are considered “covered securities.” This designation means that these offerings are exempt from state Blue Sky Laws’ registration and qualification requirements. However, while the substantive requirements of state laws are preempted, issuers must still comply with state notice filings, often referred to as “blue sky filings,” and pay associated fees.

Rule 506(b) allows issuers to raise an unlimited amount of capital from accredited investors and up to 35 non-accredited investors, provided they meet specific disclosure requirements. On the other hand, Rule 506(c) permits issuers to publicly solicit their offering but restricts sales to accredited investors who must be verified by the issuer. Both rules offer significant advantages in terms of ease of compliance and the ability to attract a broad investor base without navigating the complexities of individual state regulations.

Intrastate Offerings under State Blue Sky Laws

While Regulation D provides a federal exemption, there are scenarios where an issuer might opt to conduct an offering under state Blue Sky Laws. This option is particularly relevant for intrastate offerings, where the sponsor, all investors, and the assets are located within a single state.

In such cases, the issuer may choose to take advantage of the state’s specific regulations designed for intrastate offerings. These offerings can benefit from state-specific exemptions and simplified procedures tailored to local issuers and investors. For example, Connecticut’s Blue Sky Laws might offer particular advantages or lower compliance costs for a wholly in-state syndication compared to federal regulations.

Choosing between federal and state-level compliance will depend on the specific circumstances of the offering, including the location of the sponsor and investors, the nature of the assets, and strategic considerations regarding investor reach and regulatory burden.

Practical Implications for Issuers

For most real estate syndications and other private placements seeking to raise capital efficiently, leveraging the federal preemption under Rule 506(b) or Rule 506(c) will be advantageous. It simplifies compliance, broadens the potential investor pool, and avoids the patchwork of state-specific regulations. However, it’s crucial for issuers to conduct thorough due diligence and, where necessary, consult with a syndication attorney to navigate both federal and state requirements effectively.

Issuers should also be mindful of the ongoing compliance obligations, including timely state notice filings and adherence to the anti-fraud provisions of both federal and state securities laws. By understanding the relationship between state Blue Sky Laws and the SEC’s Regulation D, sponsors can make informed decisions that align with their fundraising goals and regulatory landscape.

In summary, while Regulation D provides a robust federal framework for securities offerings that preempts state Blue Sky Laws, there are instances where state compliance may be preferable or necessary. Careful consideration and expert legal guidance are essential to navigate this complex interplay and ensure successful and compliant capital raising.

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, sponsors must carefully consider the regulatory framework under which they will operate. One critical decision is whether to utilize state Blue Sky Laws or federal exemptions available under Regulation D, specifically Rule 506(b) or Rule 506(c). While state laws can offer certain advantages for intrastate offerings, Regulation D often provides broader and more flexible pathways for compliance, particularly for multi-state or larger-scale offerings. Here are several reasons why choosing Regulation D might be the preferable option:

Federal Preemption and Simplicity

One of the most significant advantages of Regulation D, specifically Rule 506(b) and Rule 506(c), is the federal preemption of state Blue Sky Laws. Under 15 U.S. Code § 77r(b)(4)(F), offerings made under these rules are considered “covered securities,” which exempts them from the requirement to register with state securities regulators. This preemption simplifies the compliance process, reducing the administrative burden and legal complexity associated with navigating the different requirements of multiple states.

Flexibility and Investor Reach

Regulation D Rule 506(b) and Rule 506(c) provide issuers with the flexibility to raise an unlimited amount of capital from a wide pool of investors. Rule 506(b) allows for investments from accredited investors and up to 35 sophisticated non-accredited investors, provided that specific disclosure requirements are met. This rule enables sponsors to include a broader range of investors, which can be crucial for raising sufficient capital.

Rule 506(c) permits general solicitation and advertising of the offering, provided that all purchasers are accredited investors whose status the issuer has verified. This provision allows for greater marketing reach and the ability to attract investors beyond the issuer’s immediate network, which can be particularly beneficial for larger or more ambitious projects.

Avoiding Intrastate Compliance Issues

If any investor or the sponsor is domiciled outside of the state, the offering cannot fall under the state’s Blue Sky Laws as an intrastate offering. This limitation can pose significant risks. For instance, if it is later discovered that an investor is actually domiciled outside of the state, what was initially considered an intrastate offering would then fall out of compliance, resulting in a potential securities law violation. This scenario can lead to severe legal consequences, including fines, rescission rights for investors, and reputational damage.

By choosing Regulation D, sponsors can avoid these risks. Since Regulation D offerings are federally regulated, the domicile of investors does not restrict the offering’s legality, provided the rules of Rule 506(b) or Rule 506(c) are followed. This federal framework offers greater certainty and security, ensuring that the offering remains compliant regardless of the geographic distribution of investors.

Streamlined Compliance and Reduced Costs

While state Blue Sky Laws may offer certain exemptions and simplified procedures for intrastate offerings, the process can still be cumbersome and costly when dealing with multiple states. Regulation D’s federal preemption means that issuers only need to comply with a single set of regulations, significantly reducing the complexity and cost of compliance. This streamlined approach allows sponsors to focus more on their fundraising and business operations rather than navigating a patchwork of state-specific requirements.

Practical Considerations for Issuers

For real estate syndication and other private placements, the choice between state Blue Sky Laws and Regulation D often hinges on the scope and scale of the offering. If the offering is purely intrastate and involves only local investors and assets, state laws might provide a viable pathway. However, for most sponsors seeking to tap into a broader investor base or ensure seamless compliance across state lines, Regulation D Rule 506(b) or Rule 506(c) offers significant advantages.

Sponsors should conduct thorough due diligence and consult with a syndication attorney to determine the most appropriate regulatory framework for their specific circumstances. This legal guidance is crucial to navigate the complexities of securities laws and to ensure that the offering remains compliant and attractive to potential investors.

In summary, while state Blue Sky Laws can be suitable for intrastate offerings, Regulation D Rule 506(b) and Rule 506(c) provide a more flexible, secure, and streamlined approach for raising capital. By leveraging these federal exemptions, sponsors can avoid the pitfalls of intrastate compliance issues, reach a wider pool of investors, and focus on successfully executing their syndication strategies.

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

When conducting a Regulation D Rule 506(b) or Rule 506(c) offering, it’s important to comply with federal regulations while also notifying state securities regulators. In Connecticut, this notification is essential for regulatory transparency and monitoring. Here’s what you need to know about the notification rules and terms for informing Connecticut about your Regulation D offering.

Filing Requirements for Connecticut

Issuers conducting a Regulation D offering under Rule 506(b) or Rule 506(c) must notify the Connecticut Department of Banking, Securities and Business Investments Division. This is done through the NASAA Electronic Filing Depository (EFD) system, which simplifies and centralizes the filing process.

Notification Process

Form D Filing with the SEC:

• Initially, issuers must file Form D with the Securities and Exchange Commission (SEC). This form includes key information about the offering, such as the issuer’s details, the type of securities being offered, and the total amount of the offering.

State Notice Filing via NASAA EFD:

• After filing Form D with the SEC, issuers must submit a notice filing to the Connecticut Department of Banking through the NASAA EFD system. The EFD system is accessible at EFD NASAA.

Filing Fee:

• The fixed filing fee for submitting the notice to Connecticut is $150. This fee is paid through the EFD system at the time of filing.

Submission Timeline:

• It is advisable to submit the state notice filing promptly after the SEC Form D filing. Although Connecticut does not impose a late fee for late filings, timely submissions are important to maintain compliance and avoid scrutiny.

No Late Fee for Late Filings

Connecticut does not impose a late fee for late filings of the state notice. However, it remains crucial to file on time to demonstrate adherence to compliance standards and avoid any potential issues that could arise from delays.

Practical Tips for Compliance

• Utilize the NASAA EFD System: The NASAA EFD system streamlines the filing process, ensuring that notices are sent efficiently and accurately to the state.
• Maintain Accurate Records: Keep detailed records of all filings, including submission dates and copies of Form D filed with both the SEC and the state.
• Consult a Syndication Attorney: To ensure full compliance with notification requirements, consult a syndication attorney familiar with both federal and Connecticut state securities laws.
• Monitor Deadlines: Even though there are no late fees, adhering to recommended submission timelines is crucial for smooth compliance and avoiding any inadvertent issues from delayed filings.

By following the notification rules and terms for informing the state about a Regulation D Rule 506(b) or Rule 506(c) offering, issuers can ensure they meet their compliance obligations effectively. Utilizing the NASAA EFD system simplifies the process, allowing issuers to focus on their capital-raising activities while maintaining transparency and regulatory compliance.

What are Connecticut’s Blue Sky Laws?

Connecticut’s “blue sky laws” are a crucial part of the state’s regulatory framework designed to protect investors from fraud and ensure transparency in securities transactions. These laws encompass a range of statutes that govern the registration, offer, sale, and solicitation of securities within the state. Below, we explore some key sections of these laws to provide a comprehensive understanding of how they function and their importance.

Registration and Exemptions

The foundation of Connecticut’s securities regulation can be found in statutes such as Connecticut General Statutes § 36b-16 (2012). This law mandates that no security can be offered or sold unless it is registered under state law, exempted, or qualifies as a covered security. The primary goal is to ensure that all securities offered to the public meet stringent requirements to protect investors from potential fraud.

Further refining this framework, Connecticut General Statutes § 36b-21 (2011) outlines specific exemptions. It exempts certain securities and transactions from the registration requirements, including those issued by government entities, banks, and certain non-profit organizations. This statute also details various transactions that are exempt, such as isolated nonissuer transactions and sales to institutional buyers, thus facilitating smoother financial operations while maintaining investor protection.

Special Provisions and Compliance

Connecticut General Statutes § 36b-22j (2019) addresses the participation and solicitation of trusts, exempting these activities from certain state regulations. It requires the Treasurer to obtain legal advice to ensure that the trust and its offerings are not subject to federal securities laws, thereby simplifying the regulatory landscape for these financial products.

Findings and Misrepresentation

To maintain the integrity of securities transactions, Connecticut General Statutes § 36b-24 (2019) stipulates that the filing of an application for registration or the existence of an effective registration does not imply verification or endorsement by the commissioner. This law aims to prevent misrepresentation of these facts to potential investors, ensuring that they do not misconstrue regulatory actions as guarantees of investment safety.

Philanthropy Protection and State Preemption

Lastly, Connecticut General Statutes § 36b-32a (2019) clarifies the relationship between state laws and the Philanthropy Protection Act of 1995. This statute ensures that state laws requiring the registration of securities and regulation of financial professionals are not preempted by federal law. It also states that the Philanthropy Protection Act cannot be used as a defense in state administrative or judicial actions, thus reinforcing the state’s authority in securities regulation.

Connecticut’s blue sky laws play a vital role in protecting investors and ensuring transparency in the securities market. By understanding these key statutes, investors and financial professionals can better navigate the regulatory landscape, ensuring compliance and fostering trust in the state’s financial system.

CT ST § 3-22j Participation in and the offering and solicitation of the trust exempt from sections 36b-16 and 36b-22 Evidence of exemption from federal securities laws

Connecticut General Statutes § 3-22j (2019) stipulates that participation in and the offering and solicitation of the trust are exempt from sections 36b-16 and 36b-22. The Treasurer must obtain written advice from legal counsel or the Securities Exchange Commission to ensure that the trust and its offerings are not subject to federal securities laws. This exemption aims to simplify the regulatory requirements for these financial activities.

CT ST § 36b-16 Registration of security prior to offer or sale required. Exceptions

Connecticut General Statutes § 36b-16 (2012) mandates that no security can be offered or sold in the state unless it meets one of three conditions: it is registered under sections 36b-2 to 36b-34, it is exempted under section 36b-21, or it is a covered security with compliance to applicable requirements in subsections (c), (d), and (e) of section 36b-21. This ensures that securities transactions are properly regulated to protect investors.

CT ST § 36b-21 Exemption of certain securities and transactions; Denial or revocation of exemption

Connecticut General Statutes § 36b-21 (2011) exempts certain securities and transactions from registration requirements under sections 36b-16 and 36b-22. The exemptions include government securities, securities issued by banks, savings institutions, and certain non-profit organizations, among others. The law also outlines specific transactions, such as isolated nonissuer transactions and sales to institutional buyers, that are exempt. The commissioner has the authority to deny or revoke exemptions under certain conditions to protect investors.

CT ST § 36b-24 Findings by commissioner

Connecticut General Statutes § 36b-24 (2019) states that the filing of an application for registration of securities or the existence of an effective registration does not imply that the commissioner has verified the truth, completeness, or accuracy of any related documents. It also clarifies that these facts do not constitute a recommendation or endorsement of any person, security, or transaction by the commissioner. Misrepresentation of these facts to prospective purchasers or clients is prohibited.

CT ST § 36b-32a Applicability of the Philanthropy Protection Act of 1995

Connecticut General Statutes § 36b-32a (2019) addresses the applicability of the Philanthropy Protection Act of 1995 within the state. It clarifies that Section 6 of the Philanthropy Protection Act, which is codified at 15 USC Section 80a-3a, does not override state laws requiring the registration or qualification of securities, or the registration of individuals as broker-dealers, agents, or investment advisers. Furthermore, the statute states that the Philanthropy Protection Act cannot be used as a defense in administrative or judicial actions to argue that certain persons, securities, or transactions are not subject to the relevant provisions of Connecticut’s securities laws (sections 36b-2 to 36b-34).

What are Connecticut’s Securities Laws Exemptions?

Connecticut’s securities laws, like those of many states, provide various exemptions to facilitate certain types of transactions and issuers from the standard registration requirements. These exemptions are designed to balance the need for investor protection with the practicalities of raising capital. Below is an overview of the key exemptions under Connecticut’s securities laws as detailed in the 2019 Connecticut General Statutes, Title 3, Chapter 32, Section 3-22j.

Governmental Entities and Certain Foreign Governments

• Governmental Entities: Securities issued by the federal government, any state or municipal government, and their respective agencies are exempt.
• Foreign Governments: Securities issued by certain foreign governments, including Canada, are also exempt.

Financial Institutions

Securities issued by a variety of financial institutions are exempt, including:

• International banking institutions
• Banks and trust companies
• Savings institutions and savings banks
• Savings and loan associations
• Credit unions
• Industrial loan associations

Cooperatives

Exemptions are available for securities issued by cooperative entities, which include:

• Cooperative associations
• Cooperative apartment corporations
• Cooperative marketing corporations for farmers
• Worker cooperative corporations

Real Estate Related Securities

Certain real estate related securities are exempt from registration requirements. This can include securities related to real estate syndication under specific conditions, offering flexibility for real estate developers and syndicators.

Historical Offerings and Industrial Development

• October 1, 1977 Period Offerings: Securities offered or disposed of under specific conditions that were established on or before October 1, 1977.
• Industrial or Commercial Development Securities: Securities related to industrial or commercial development projects.

Connecticut Development Credit Corporation

Securities issued by the Connecticut Development Credit Corporation are exempt, recognizing their role in fostering economic development within the state.

Public Utilities and Transportation

• Railroads and Common Carriers: Securities issued by railroads and other common carriers.
• Public Utilities and Holding Companies: Securities issued by public utilities and public utility holding companies.

Insurance Companies and Equipment Trust Certificates

• Insurance Companies: Securities issued by insurance companies, provided they are regulated by the insurance commissioner.
• Equipment Trust Certificates: Securities representing an interest in or secured by equipment trust certificates.

Listed Stock Exchange Securities

Securities listed on recognized stock exchanges are exempt, providing a streamlined path for companies already vetted by major exchanges.

Non-Profit Organizations

Securities issued by non-profit entities are generally exempt, facilitating the capital-raising activities of organizations that serve public or charitable purposes.

Commercial Paper and Employee Benefit Plans

• Current Transaction Commercial Paper: Short-term promissory notes and commercial paper arising out of current transactions.
• Employee Benefit Plans: Securities issued in connection with employee benefit plans are exempt, recognizing their role in employee compensation and benefits.

Practical Implications for Issuers

Understanding and leveraging these exemptions can significantly reduce the regulatory burden on issuers and facilitate smoother capital-raising processes. However, determining eligibility for these exemptions often requires careful analysis of the specific circumstances of the offering and the entities involved.

Consulting a Syndication Attorney

Issuers, particularly those involved in real estate syndication or other complex securities offerings, should consult with a syndication attorney. Legal professionals can provide critical guidance on qualifying for exemptions and ensuring compliance with both state and federal securities laws.

By taking advantage of Connecticut’s securities law exemptions, issuers can navigate the capital-raising process more efficiently, ensuring that they meet all necessary legal requirements while optimizing their ability to attract investors.

What are Connecticut’s Procedures for Securities Law Exemptions?

Navigating Connecticut’s securities law exemptions requires a clear understanding of the procedures and documentation necessary to ensure compliance. Whether you are an issuer leveraging these exemptions for a real estate syndication, a private placement, or another type of securities offering, following the proper procedures is essential for a smooth and legally compliant process.

Initial Assessment and Eligibility

Determine Eligibility:

• Assess whether your offering qualifies for any of the specific exemptions under Connecticut law. This includes reviewing the type of security, the nature of the issuer, and the characteristics of the offering against the criteria set forth in the 2019 Connecticut General Statutes, Title 3, Chapter 32, Section 3-22j.

Consultation with Legal Counsel:

• It is advisable to consult with a syndication attorney or securities law attorney to confirm eligibility for the desired exemption. Legal counsel can provide insights into the nuances of the law and help avoid potential pitfalls.

Documentation and Preparation

Prepare Necessary Documentation:

• Collect and prepare all required documentation to support your claim for exemption. This might include:
  • Offering circulars or private placement memoranda (PPMs)
  • Financial statements
  • Contracts or agreements related to the offering
  • Proof of investor qualifications (e.g., accreditation status)

Disclosure Requirements:

• Ensure that all required disclosures are included in your documentation. Full and transparent disclosure is critical to maintain investor confidence and comply with legal requirements.

Filing with the Connecticut Department of Banking

Notice Filing:

• Even if your offering is exempt from registration, you may still need to file a notice with the Connecticut Department of Banking, Securities and Business Investments Division. This step is essential to inform the state of your exempt offering and maintain compliance.
• Submit a copy of Form D, which is also filed with the SEC, if applicable. This form provides basic information about the offering and the issuer.

Electronic Filing via NASAA EFD:

• Use the NASAA Electronic Filing Depository (EFD) system to submit your notice filing. The EFD system streamlines the process and ensures that your documentation reaches the state regulators efficiently.
• Access the EFD system at EFD NASAA to begin your filing process.

Filing Fee:

• Pay the required filing fee of $150 through the EFD system at the time of submission. This fee is mandatory for processing your notice filing.

Review and Compliance

State Review:

• Once your filing is submitted, the Connecticut Department of Banking will review the documentation to ensure it meets the exemption criteria. This process may take some time, so it is important to file well in advance of your planned offering date.

Addressing Deficiencies:

• If the state finds any deficiencies or requires additional information, respond promptly to address these issues. Timely communication with regulators can expedite the approval process and ensure compliance.

Maintain Records:

• Keep detailed records of all filings, correspondence, and related documentation. Maintaining a comprehensive file ensures you can address any future inquiries or audits efficiently.

Ongoing Obligations

Compliance with Anti-Fraud Provisions:

• Even if your offering is exempt from registration, you must still comply with anti-fraud provisions under both federal and state securities laws. This includes avoiding any material misrepresentations or omissions in your offering materials.

Monitor Legal Changes:

• Securities laws and regulations can change. Stay informed about any updates to Connecticut’s securities laws that may affect your exemption status or compliance requirements.

Periodic Reporting:

• Depending on the specifics of your offering and the applicable exemptions, you may have ongoing reporting obligations. Ensure that you meet all periodic reporting requirements to maintain compliance.

Practical Tips for Issuers

• Work Closely with Legal Counsel: Engaging a knowledgeable syndication attorney can help navigate the complexities of securities law exemptions and ensure all procedural requirements are met.
• Timely Submissions: File all necessary documentation well before your offering date to allow sufficient time for state review and to address any potential issues.
• Clear and Transparent Disclosures: Providing clear, transparent, and complete disclosures can prevent compliance issues and build investor trust.

By following Connecticut’s procedures for securities law exemptions diligently, issuers can leverage these exemptions to facilitate their capital-raising activities while maintaining full legal compliance. This proactive approach ensures that the offering proceeds smoothly and protects both the issuer and investors from regulatory risks.

Frequently Asked Questions

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

Whether you need an attorney from Connecticut to put together an offering depends largely on the nature of your offering and the specific legal requirements involved. If your offering falls under Regulation D and does not rely on Connecticut-specific Blue Sky Laws, you likely do not need a Connecticut-licensed attorney.

For instance, if you are organizing a real estate syndication and need a syndication attorney to prepare a private placement memorandum (PPM) for a multifamily deal in Bridgeport, Connecticut, which will be offered to investors in various states, you can typically work with a licensed syndication lawyer from outside Connecticut. Such an attorney can assist in creating the PPM, forming the entity, and drafting the operating agreement. However, they cannot provide legal advice on Connecticut-specific securities laws and their implications for your offering.

On the other hand, if you are structuring a private placement memorandum for a development project in Stamford, Connecticut, where all investors are from Connecticut, and you intend to utilize one of Connecticut’s Blue Sky Laws as an exemption to registration, it is crucial to engage with a Connecticut-licensed attorney. A local attorney would have the necessary expertise in Connecticut’s securities regulations to ensure compliance and navigate the nuances of the state-specific legal landscape.

In summary, the need for a Connecticut-based attorney hinges on whether your offering involves state-specific exemptions and legal advice. For multi-state offerings under Regulation D, an out-of-state syndication attorney can typically suffice. However, for offerings solely within Connecticut that rely on local Blue Sky Laws, partnering with a Connecticut-licensed attorney is essential to ensure full legal compliance.

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

While a real estate syndication attorney licensed outside of Connecticut can review your purchase contract, they are limited in the advice they can provide regarding Connecticut-specific legal matters. For example, Tilden Moschetti, Esq., a syndication attorney for the Moschetti Syndication Law Group, can examine the contract underlying your purchase agreement in New Haven, Connecticut. He can offer business consulting advice on general aspects such as price and key deal points, like the length of time until closing. However, he cannot provide specific legal advice on the contract’s terms because he is not licensed to practice law in Connecticut.

This distinction is important to understand. An out-of-state attorney can offer valuable insights and guidance on general business considerations and overall structuring of the deal. Still, they must refrain from giving legal opinions or advice on how Connecticut law might affect specific terms of the purchase contract. For legal advice tailored to Connecticut laws, it is essential to consult with an attorney licensed in Connecticut. This ensures that you receive accurate and legally sound guidance that complies with local regulations and protects your interests in the transaction.