Delaware Blue Sky Laws for Syndication

Navigating the complex landscape of securities laws is crucial for anyone looking to raise capital through real estate syndication or private offerings. Understanding both federal regulations, like those under Regulation D, and state-specific laws, such as Delaware’s Blue Sky Laws, is essential for compliance and successful capital raising. This article aims to provide a comprehensive guide on Delaware’s Blue Sky Laws, their interaction with the SEC’s Regulation D, and the procedural nuances involved in obtaining necessary exemptions. Whether you’re a real estate developer, a private equity fund manager, or a business professional, this guide will help you understand the critical aspects of these regulations and ensure your offerings are both legally sound and strategically effective. From the intricacies of state notification requirements to the role of specialized legal counsel, we will explore all facets necessary for navigating Delaware’s securities laws with confidence.

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

Understanding the relationship between a state’s Blue Sky Laws and the SEC’s Regulation D is crucial for any sponsor looking to raise capital through real estate syndication or other private offerings. While both sets of regulations aim to protect investors and ensure the integrity of securities markets, their interaction can significantly impact the compliance strategy for issuers.

Federal Preemption under Regulation D Rule 506(b) and Rule 506(c)

One of the primary advantages of utilizing Regulation D, particularly Rule 506(b) and Rule 506(c), is the federal preemption of state securities laws. Under 15 U.S. Code § 77r(b)(4)(F), offerings made pursuant to Rule 506 of Regulation D are exempt from state Blue Sky Laws. This federal preemption simplifies the process for issuers by allowing them to bypass the often complex and varied registration requirements of individual states.

• Rule 506(b): This rule permits issuers to raise an unlimited amount of capital from an unlimited number of accredited investors and up to 35 non-accredited investors, provided that there is no general solicitation or advertising. This exemption from state laws means that issuers only need to comply with federal filing requirements, significantly reducing the regulatory burden.
• Rule 506(c): Under this rule, issuers can engage in general solicitation and advertising, but all investors must be accredited, and the issuer must take reasonable steps to verify this status. Like Rule 506(b), offerings under Rule 506(c) benefit from federal preemption, streamlining the compliance process.

State Notification Requirements

Despite the preemption, states are not entirely out of the picture. Issuers must still comply with state notification requirements. This typically involves filing a Form D with the SEC and submitting copies, along with the appropriate fees, to each state where the securities are sold. This process, known as “blue sky notice filing,” ensures that state regulators are aware of the offerings and can exercise oversight without imposing their own registration requirements.

Intrastate Offerings and Blue Sky Laws

In certain situations, an issuer might opt to utilize a state’s Blue Sky Laws rather than the federal exemptions provided by Regulation D. This is particularly relevant for intrastate offerings, where the sponsor, all investors, and the assets are located within a single state. Intrastate offerings can be more straightforward if the issuer is only dealing with one state’s regulations and if that state offers favorable conditions or exemptions.

For instance, a real estate syndication focused solely on a specific state may benefit from being classified as an intrastate offering. In such cases, the issuer would adhere strictly to that state’s Blue Sky Laws rather than relying on federal Regulation D exemptions. This approach might be advantageous if the state provides specific benefits or streamlined processes for intrastate offerings.

In summary, while Regulation D provides a streamlined federal framework that preempts state Blue Sky Laws for Rule 506(b) and Rule 506(c) offerings, state notification requirements still apply. Issuers must navigate these federal and state interactions carefully to ensure compliance and optimize their capital-raising efforts. Understanding when to leverage federal exemptions versus state-specific regulations, such as in intrastate offerings, can significantly impact the success and regulatory ease of a syndication project.

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

When raising capital through real estate syndication or other private offerings, sponsors have a critical decision to make: whether to rely on federal exemptions under Regulation D, specifically Rule 506(b) or Rule 506(c), or to adhere to the state’s Blue Sky Laws. Here are several compelling reasons why choosing Regulation D exemptions is often the more advantageous route.

1. Federal Preemption and Simplified Compliance

One of the most significant benefits of opting for Regulation D Rule 506(b) or Rule 506(c) is the federal preemption of state securities laws. Under 15 U.S. Code § 77r(b)(4)(F), offerings under these rules are exempt from the state Blue Sky Laws’ registration requirements. This means that sponsors do not need to navigate the complex and often disparate regulations across multiple states, greatly simplifying the compliance process.

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

By complying with these federal regulations, issuers benefit from a more straightforward and unified regulatory framework, avoiding the administrative burden of state-by-state compliance.

2. Broader Investor Base

Choosing Regulation D exemptions also allows for a broader investor base. If any investor or the sponsor is located outside of the state, the offering cannot fall solely under the state’s Blue Sky Laws. This limitation can severely restrict the pool of potential investors.

Regulation D, on the other hand, accommodates investors from across the United States and beyond, provided they meet the accredited investor criteria under Rule 506(c) or the more flexible criteria under Rule 506(b). This broader reach can significantly enhance capital-raising efforts and attract a more diverse group of investors.

3. Avoiding Legal Pitfalls of Intrastate Offerings

Intrastate offerings can seem appealing due to their reliance on state Blue Sky Laws, especially if the sponsor and all investors are within a single state. However, this approach carries significant risks. One major issue is the potential discovery that an investor is actually domiciled outside of the state, thereby violating the conditions for an intrastate offering.

When an offering intended to be intrastate inadvertently includes an out-of-state investor, it no longer qualifies for the intrastate exemption. This oversight creates a serious securities law problem, as the offering would then be subject to federal securities laws without having complied with the necessary federal exemptions. Such situations can lead to regulatory scrutiny, penalties, and even legal action, undermining the entire capital-raising effort.

4. Enhanced Flexibility and Security

Regulation D offers enhanced flexibility and security for issuers. By adhering to Rule 506(b) or Rule 506(c), sponsors ensure their offerings are compliant with federal securities laws, reducing the risk of legal complications. This compliance provides greater peace of mind and stability, allowing sponsors to focus on their investment projects rather than worrying about potential regulatory issues.

Opting for Regulation D Rule 506(b) or Rule 506(c) over state Blue Sky Laws is often the wiser choice for sponsors aiming to raise capital through real estate syndication or private offerings. The federal preemption simplifies compliance, allows access to a broader investor base, and minimizes the risk of legal pitfalls associated with intrastate offerings. By ensuring adherence to federal securities laws, sponsors can confidently pursue their capital-raising goals while safeguarding against regulatory complications.

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, specifically Rule 506(b) and Rule 506(c), provides federal preemption from state Blue Sky Laws, issuers are still required to comply with certain state notification requirements. These requirements ensure that state regulators are aware of the offerings and can exercise their oversight responsibilities without imposing their own registration demands. Here’s what you need to know about the notification rules and terms for notifying the state about a Regulation D offering.

1. Filing Fees

The filing fee for notifying the state about a Regulation D Rule 506(b) or Rule 506(c) offering is variable, typically based on the amount being offered within the state. The fee structure is as follows:

• New Notice Filing Fee: The fee ranges from $200 to $1000. It is calculated as 0.5% of the offering amount in the state, with a maximum fee of $1000. For example, if the offering amount in a state is $150,000, the filing fee would be $750 (0.5% of $150,000).

2. New Notice Filing Requirements

When a Regulation D offering is made, issuers must file a Form D with the SEC. In addition to the federal filing, issuers must also notify each state where the securities are sold. This involves:

• Submitting a copy of the Form D to the relevant state securities authority through the NASAA Electronic Filing Depository (EFD) system, available at NASAA EFD.
• Paying the applicable filing fee based on the offering amount in that state through the EFD system.
• Completing any additional state-specific forms or requirements as dictated by the state’s securities division.

3. Timing of the Filing

The timing of the state notification is critical to ensure compliance and avoid late fees. Issuers must submit the required notice and fees within 15 days after the first sale of securities in the state. Adhering to this timeline is essential to prevent any regulatory issues.

4. Late Filing Fees

If the notification to the state is not filed within the prescribed 15-day period after the first sale, a late fee will be imposed. The late fee is also calculated as 0.5% of the state offering amount, with a maximum of $1000. For instance:

• If the offering amount in the state is $300,000 and the notification is filed late, the late fee would be $1000 (0.5% of $300,000, capped at $1000).

5. Importance of Compliance

Properly notifying the state about a Regulation D offering is not just a matter of regulatory compliance; it is also crucial for maintaining good standing with state securities authorities. Failure to comply with notification requirements and pay the necessary fees can result in penalties, fines, and potential legal complications. Moreover, it can damage the issuer’s reputation and relationship with both investors and regulators.

Complying with state notification rules for Regulation D Rule 506(b) and Rule 506(c) offerings involves understanding and adhering to the variable filing fees, ensuring timely submission of notices through the NASAA Electronic Filing Depository (EFD) system, and avoiding late fees. By diligently following these rules and terms, issuers can maintain compliance, avoid unnecessary penalties, and ensure a smooth capital-raising process under federal exemptions.

What are Delaware’s Blue Sky Laws?

Delaware’s Blue Sky Laws aim to regulate securities transactions within the state, ensuring transparency and investor protection. Key provisions include the mandatory registration of securities unless exempted (§ 73-202), a range of exemptions for certain securities and transactions (§ 73-207), and prohibitions against misrepresenting the implications of a security’s registration or exemption status (§ 73-210). These laws are designed to prevent fraud and protect investors by mandating disclosure and regulating the conduct of securities offerings.

DE ST TI. 6 § 73-202 Registration of and notice filing for securities

Under Delaware law, it is unlawful to offer or sell any security within the state unless it meets one of the following conditions: the security is registered under the chapter, is exempted under § 73-207, or is a federally covered security with a notice filing pursuant to § 73-208. This ensures regulatory compliance and investor protection by requiring proper registration or exemption of securities before they are offered or sold in Delaware.

DE ST TI. 6 § 73-207 Exemptions

Delaware Code § 73-207 outlines various exemptions from securities registration requirements. Exempt securities include those issued or guaranteed by government entities, banks, insurance companies, certain savings institutions, and specific federally regulated entities. Additionally, the law exempts transactions involving nonissuer securities, certain broker-dealer transactions, and offers directed to limited numbers of investors under specific conditions. The Director of the Division of Securities has the authority to deny or revoke exemptions with proper notice and a hearing.

DE ST TI. 6 § 73-210 Unlawful representations concerning registration, notice filing or exemption

Delaware Code § 73-210 makes it unlawful to falsely represent that a security’s registration, notice filing, or exemption implies endorsement or verification by the Director of the Division of Securities. The filing or registration of a security does not equate to a validation of its truthfulness, completeness, or merits. Any misrepresentation to prospective purchasers, customers, or clients suggesting such endorsements or validations is prohibited.

What are Delaware’s Securities Laws Exemptions?

Delaware’s Blue Sky Laws, like those of other states, aim to protect investors and maintain fair and transparent securities markets. However, Delaware provides several exemptions from its securities registration requirements, recognizing that certain types of issuers and transactions pose a lower risk to investors. These exemptions allow specific entities and transactions to bypass the standard registration process, streamlining capital-raising efforts for qualified issuers. Here’s an overview of Delaware’s securities laws exemptions as outlined in Delaware Code Title 6, Chapter 73, Subchapter II, Section 73-207.

1. Governmental Entities

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

• U.S. federal, state, and local government entities.
• Certain foreign governments, including Canada and its subdivisions.

2. Financial Institutions

A variety of financial institutions are also exempt from registration. These include:

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

These entities are typically subject to rigorous regulatory oversight, reducing the need for additional state-level securities regulation.

3. Agricultural Cooperatives

Securities issued by agricultural cooperatives are exempt, recognizing the unique nature and structure of these entities which often serve specific community and economic functions.

4. Other Entities

Several other types of entities and their securities are exempt due to their established regulatory frameworks and lower risk profiles:

• Railroads.
• Common carriers.
• Public utilities.
• Holding companies.
• Insurance companies.

These entities are often already subject to substantial regulation at both state and federal levels.

5. Listed Stock Exchange Securities

Securities listed on recognized stock exchanges are exempt from Delaware’s registration requirements. This includes:

• Securities listed on major exchanges such as the NYSE, NASDAQ, and others.

These securities are subject to rigorous disclosure and reporting requirements, ensuring that investors have access to comprehensive information.

6. Non-Profit Persons

Securities issued by non-profit entities are exempt. This category includes:

• Charitable organizations.
• Religious organizations.
• Educational institutions.

These entities operate for public or mutual benefit rather than profit, reducing the investment risk typically associated with for-profit issuers.

7. Current Transaction Commercial Paper

Commercial paper issued in the ordinary course of business is exempt. This includes:

• Short-term debt instruments used by businesses to finance current transactions.

Commercial paper typically has a short maturity period and is considered a low-risk investment.

8. Employee Benefit Plans

Securities issued in connection with employee benefit plans are exempt. This includes:

• Stock options.
• Retirement plans.
• Employee stock purchase plans.

These plans are designed to benefit employees and often include specific regulatory safeguards.

Delaware’s securities laws provide a range of exemptions designed to facilitate capital raising while ensuring investor protection. By recognizing the lower risk associated with certain issuers and transactions, these exemptions help streamline the regulatory process for qualified entities. Understanding and utilizing these exemptions can be a crucial strategy for issuers looking to efficiently navigate Delaware’s securities regulations.

What are Delaware’s Procedures for Securities Law Exemptions?

Delaware offers several exemptions from its securities registration requirements, simplifying the regulatory process for eligible issuers. However, obtaining these exemptions involves adhering to specific procedures to ensure compliance with state laws. Here’s an overview of the procedures for securing securities law exemptions in Delaware.

Understanding the Exemption Criteria

The first step in securing a securities law exemption in Delaware is to understand whether your offering qualifies under one of the specified exemptions. Delaware’s securities exemptions apply to various entities and transactions, including governmental entities, financial institutions, agricultural cooperatives, certain other regulated entities, listed securities, non-profit organizations, commercial paper for current transactions, and employee benefit plans.

Filing Form D with the SEC

For issuers seeking to use federal exemptions under Regulation D, particularly Rule 506(b) or Rule 506(c), the process begins with filing Form D with the Securities and Exchange Commission (SEC). This form provides essential details about the offering and must be filed within 15 days of the first sale of securities.

State Notification through NASAA Electronic Filing Depository (EFD)

Even though federal preemption simplifies the process, issuers must still notify Delaware of their offering. This is done through the NASAA Electronic Filing Depository (EFD) system. The EFD system streamlines the process by allowing issuers to submit the necessary documentation electronically. The required filings typically include a copy of the SEC Form D, along with any state-specific forms that may be required.

Paying the Filing Fees

Delaware requires issuers to pay a filing fee when submitting their exemption notice. The fee is variable, based on the amount of the offering within the state, and ranges from $200 to $1000, calculated as 0.5% of the offering amount. Ensuring timely payment of this fee is crucial, as failure to do so can result in penalties or delay the exemption process.

Adhering to Filing Deadlines

Timeliness is critical in the exemption process. Issuers must file the necessary documents and fees with Delaware within 15 days of the first sale of securities in the state. Meeting this deadline is essential to maintain compliance and avoid any late filing fees, which are also calculated as 0.5% of the offering amount, with a maximum of $1000.

Ensuring Accurate and Complete Submissions

To avoid complications, it is important to ensure that all submissions are accurate and complete. This includes providing all required information on the Form D and any additional state forms, accurately calculating and submitting the appropriate filing fee, and confirming that all information matches across federal and state filings.

Maintaining Compliance and Documentation

After securing an exemption, ongoing compliance is vital. Issuers should keep thorough records of all filings, fees, and correspondence with state authorities. Regular reviews of compliance practices and staying informed about any changes in state securities laws can help maintain the exemption status and avoid future legal issues.

Securing a securities law exemption in Delaware involves a series of well-defined steps, from understanding the eligibility criteria to timely filing and fee payment through the NASAA EFD system. By carefully following these procedures, issuers can take advantage of the streamlined regulatory process and focus on their capital-raising activities with confidence. Proper compliance not only ensures legal standing but also fosters trust with investors and regulators alike.

Frequently Asked Questions

Do I Need an Attorney from Delaware Then to Put Together an Offering?

The necessity of engaging an attorney from Delaware to put together a securities offering depends on the specifics of the offering and the applicable regulations. If your offering falls under the federal exemptions provided by Regulation D and not the Delaware-specific Blue Sky Laws, you likely do not need a Delaware-licensed attorney.

For instance, if you are working on a real estate syndication for a multifamily deal in Wilmington, Delaware, and the offering will be available in multiple states under Regulation D, you generally do not need counsel specifically licensed in Delaware. In this scenario, a knowledgeable real estate syndication attorney can assist with drafting the private placement memorandum (PPM), forming the entity, and preparing the operating agreement. However, this attorney would not provide legal advice on Delaware-specific securities laws and their implications for your offering.

Conversely, if your project is centered in Delaware and relies on Delaware’s Blue Sky Laws for an exemption from registration, the situation changes. For example, if you are developing a project in Dover, Delaware, and all investors are from Delaware, utilizing Delaware’s securities exemptions requires thorough knowledge of state laws. In such a case, you would need to work with an attorney licensed in Delaware who can provide detailed counsel on state-specific regulations and ensure compliance with Delaware’s securities laws.

In summary, while a competent syndication attorney can handle most aspects of a Regulation D offering regardless of their state of licensure, Delaware-specific offerings that leverage local Blue Sky Laws necessitate the expertise of a Delaware-licensed attorney. This distinction ensures that all legal nuances and compliance requirements are adequately addressed, safeguarding the legitimacy and success of your capital-raising efforts.

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

It is permissible for a real estate syndication attorney who is not licensed in Delaware to review your purchase contract, but their scope of advice will be limited. An out-of-state attorney, such as Tilden Moschetti, Esq. from the Moschetti Syndication Law Group, can provide business consulting advice regarding the contract. This includes discussing the price, deal structure, and broad terms such as the closing timeline. However, the attorney cannot offer legal advice on any specific terms of the contract as they pertain to Delaware law.

For instance, while Tilden Moschetti can examine the underlying purchase contract for a property in Newark, Delaware, he would make it clear that his advice would be restricted to general business considerations. He cannot provide guidance on legal nuances or specific contractual terms because he is not licensed to practice law in Delaware. Therefore, while you can benefit from the broad expertise and business acumen of an out-of-state syndication attorney, for detailed legal advice on Delaware-specific terms and conditions, it is essential to consult with a lawyer who is licensed in Delaware. This ensures that all legal aspects of the contract are thoroughly reviewed and compliant with local regulations.