District of Columbia Blue Sky Laws for Syndication

Navigating the complex landscape of securities regulations can be challenging for real estate developers, private equity fund managers, and other professionals involved in capital raising. Understanding the nuances of both federal and state laws is crucial to ensure compliance and successful syndication. This article delves into the specifics of the District of Columbia’s Blue Sky Laws, providing a comprehensive guide for those utilizing Regulation D exemptions, particularly Rule 506(b) and Rule 506(c). By exploring the relationship between federal Regulation D and state securities laws, the procedures for claiming exemptions, and the need for legal counsel, this article aims to equip sponsors and syndicators with the knowledge necessary to navigate the regulatory environment effectively. Whether you are considering a multi-state offering or a localized intrastate offering, this guide will clarify the essential steps and considerations to help you achieve your capital raising goals within the legal framework of the District of Columbia.

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 anyone involved in raising capital through syndication, particularly real estate syndication. The primary connection lies in the preemption of state Blue Sky Laws by Regulation D Rule 506(b) and Rule 506(c) offerings, as stipulated under 15 U.S. Code § 77r(b)(4)(F).

Federal Preemption

Regulation D, specifically Rule 506(b) and Rule 506(c), provides a framework for securities offerings that allows companies to raise capital without registering the securities with the SEC. One of the significant advantages of using Regulation D is the federal preemption of state Blue Sky Laws for these offerings. This means that when a company conducts an offering under Rule 506(b) or Rule 506(c), it is generally exempt from state securities registration requirements. This preemption simplifies the process of raising capital by reducing the regulatory burden on the issuer.

Conditions for Preemption

To qualify for the federal preemption:

• The offering must comply with the requirements of Rule 506(b) or Rule 506(c).
• Rule 506(b) allows issuers to raise an unlimited amount of money from accredited investors and up to 35 non-accredited investors who meet certain sophistication requirements. However, general solicitation and advertising are prohibited.
• Rule 506(c) allows issuers to use general solicitation and advertising to reach potential investors, but all purchasers must be accredited investors, and the issuer must take reasonable steps to verify their accredited status.

By meeting these conditions, the offering is exempt from the state-level registration, making the process more streamlined and efficient.

Intrastate Offerings and State Blue Sky Laws

Despite the benefits of federal preemption, there are scenarios where a sponsor might choose to utilize a state’s Blue Sky Laws instead of Regulation D. This typically occurs when the offering is confined within a single state, known as an Intrastate offering. In this situation:

• The sponsor, all investors, and the assets are all located within the same state.
• The offering may be registered or exempted under the state’s Blue Sky Laws, providing a potentially simpler and more localized regulatory process.

While this approach can be beneficial in specific circumstances, it does require a thorough understanding of the particular state’s Blue Sky Laws and exemptions.

Importance of Compliance and Legal Guidance

Navigating the interplay between federal and state securities laws can be complex. For those involved in real estate syndication or any other form of capital raising, it is crucial to ensure compliance with all applicable regulations. Engaging a syndication attorney, particularly one knowledgeable in both federal securities laws and the specific Blue Sky Laws of the state in question, is advisable. A qualified syndication attorney can provide invaluable guidance on whether to utilize Regulation D exemptions or to proceed under state Blue Sky Laws for an Intrastate offering.

By leveraging the preemption provisions of Regulation D Rule 506(b) and Rule 506(c), and understanding when state Blue Sky Laws may still apply, sponsors can effectively navigate the regulatory landscape to achieve their capital-raising goals.

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

Choosing between Regulation D Rule 506(b) or Rule 506(c) and a state’s Blue Sky Laws is a critical decision for sponsors and syndicators looking to raise capital. While state Blue Sky Laws can provide certain benefits for intrastate offerings, the flexibility and security offered by Regulation D often make it the preferable choice. Here’s why:

Federal Preemption and Broader Reach

One of the main reasons to choose Regulation D Rule 506(b) or Rule 506(c) over state Blue Sky Laws is the issue of preemption and the ability to include investors from multiple states. Under Regulation D:

• 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 but sophisticated investors without general solicitation.
• Rule 506(c): Permits general solicitation and advertising to raise an unlimited amount of capital, provided that all investors are accredited and the issuer takes reasonable steps to verify their accredited status.

By utilizing these rules, sponsors are not limited by state boundaries and can solicit investments nationwide, avoiding the complexities and limitations of state Blue Sky Laws.

Avoiding Intrastate Offering Pitfalls

When an offering is confined to one state, known as an intrastate offering, it must comply with that state’s Blue Sky Laws. While this might seem straightforward, there are significant risks:

• Investor Domicile Issues: If it is later discovered that an investor is actually domiciled outside of the state, the offering can no longer be considered intrastate. This discovery can retroactively create a securities law problem, as the offering would need to comply with federal laws and potentially multiple state laws.
• Regulatory Compliance: Navigating multiple state regulations can be complex and costly, with each state having its own set of requirements and filing procedures.

Simplified Compliance and Reduced Risk

Regulation D offers a streamlined regulatory framework that reduces compliance burdens:

• Uniform Standards: By following federal rules, sponsors adhere to a single set of regulations, reducing the risk of conflicting state laws.
• Lower Costs: Simplified compliance procedures can result in lower legal and administrative costs, making the offering process more efficient and cost-effective.
• Reduced Liability: The preemption of state Blue Sky Laws under Regulation D minimizes the risk of inadvertent non-compliance and the associated penalties.

Enhanced Flexibility

Regulation D, particularly Rule 506(c), provides greater flexibility in marketing and soliciting investments:

• General Solicitation: Rule 506(c) allows for general solicitation and advertising, enabling sponsors to reach a wider audience and attract more investors.
• Accredited Investor Verification: The requirement to verify accredited investor status under Rule 506(c) ensures that all participants meet specific financial criteria, adding an additional layer of protection for both the issuer and the investors.

For sponsors and syndicators, particularly those involved in real estate syndication, choosing Regulation D Rule 506(b) or Rule 506(c) over state Blue Sky Laws is often the more advantageous route. The federal preemption, simplified compliance, reduced risk, and enhanced marketing flexibility provide a robust framework for raising capital efficiently and effectively. Engaging a knowledgeable syndication attorney can further ensure that all regulatory requirements are met, facilitating a successful offering and safeguarding against potential legal issues.

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 essential to comply with both federal and state notification requirements. Even though Regulation D offerings are federally exempt from state registration, issuers must still file notices with the states where they are soliciting investors. Here’s a detailed look at the notification rules and terms for notifying the District of Columbia about a Regulation D offering.

Filing Requirements

Filing Fee

• A fixed filing fee of $250 is required for submitting a new notice to the District of Columbia. This fee must be paid at the time of filing to ensure compliance and avoid any processing delays.

New Notice

• When initiating a Regulation D Rule 506(b) or Rule 506(c) offering, issuers must file a Form D with the SEC. Subsequently, a notice of the offering must be filed with the state securities regulator in the District of Columbia.
• The notice must be filed no later than 15 days after the first sale of securities in the offering. This timely filing is crucial to maintain compliance and avoid late fees.
• Notices are sent to the state through the NASAA Electronic Filing Depository (EFD) system, which streamlines the process for both issuers and regulators.

Late Fee for Late Filings

• If the notice is filed late, the District of Columbia imposes significant penalties. The late fee can be as high as $10,000 per violation. It’s important to note that these late fees are not calculated within the EFD system, so issuers must ensure timely filing to avoid these hefty penalties.

Steps for Filing

Prepare Form D

• Complete Form D, which includes detailed information about the offering, the issuer, and the type of securities being offered. This form must be filed electronically with the SEC via the EDGAR system.

Submit Notice via NASAA EFD

• After filing Form D with the SEC, submit the notice to the District of Columbia’s Department of Insurance, Securities and Banking (DISB) through the NASAA EFD system. Include the $250 filing fee with the notice.
• Ensure all required information is accurate and complete to prevent delays or additional requests for information from the state regulator.

Monitor Filing Deadlines

• Keep track of the 15-day deadline from the first sale of securities to avoid incurring late fees. Establish a process for timely submission and verification of filings to maintain compliance.

Importance of Compliance

Adhering to these notification rules is essential for several reasons:

• Legal Compliance: Ensures the offering is conducted within the bounds of federal and state securities laws.
• Avoiding Penalties: Prevents the imposition of late fees that can significantly impact the financials of the offering.
• Investor Confidence: Demonstrates to potential investors that the issuer is diligent and compliant with regulatory requirements, fostering trust and credibility.

Engaging a Syndication Attorney

Given the complexity and importance of these filings, it is highly recommended to engage a syndication attorney who can:

• Guide Through Filing Procedures: Assist in preparing and submitting all necessary forms and notices.
• Ensure Timely Compliance: Help track deadlines and manage filings to avoid late fees.
• Provide Legal Assurance: Offer expertise and assurance that all regulatory requirements are met, reducing the risk of legal issues.

By following these notification rules and terms, and with the support of a knowledgeable syndication attorney, issuers can confidently conduct their Regulation D Rule 506(b) or Rule 506(c) offerings while maintaining compliance with the District of Columbia’s requirements.

What are the District of Columbia’s Blue Sky Laws?

Understanding the securities regulations in the District of Columbia is crucial for both issuers and investors. These laws, often referred to as “Blue Sky Laws,” are designed to protect investors from fraud and ensure transparency in the securities market. Key provisions include registration requirements (§ 31-5603.01), exemptions for certain securities (§ 31-5604.01), additional discretionary exemptions (§ 31-5604.03), revocation of exemptions (§ 31-5604.04), coordination with federal regulations (§ 31-5604.06), and prohibitions against false representations concerning securities status (§ 31-5605.05). These rules collectively ensure a fair and regulated securities market in the District.

DC CODE § 31-5603.01 Registration requirement

The law outlined in § 31–5603.01 of the District of Columbia Code mandates that no person may offer or sell a security within the District unless the security is registered under the relevant chapter, qualifies for an exemption under § 31-5604.01 or § 31-5604.02, or is a federal covered security. This requirement ensures that securities are properly vetted and regulated to protect investors.

DC CODE § 31-5604.01 Exempt securities

Section § 31-5604.01 of the District of Columbia Code outlines specific securities exempt from registration requirements. These include securities issued or guaranteed by the U.S. government, states, or certain international entities, as well as those from banks, insurance companies, and recognized exchanges. Additional exemptions cover securities issued by non-profit organizations, short-term commercial paper, and employee benefit plans. The section ensures that securities falling under these categories are not subject to the usual registration process, provided they meet specified criteria.

DC CODE § 31-5604.03 Additional exemptions

Section § 31-5604.03 of the District of Columbia Code allows the Commissioner to exempt additional securities or transactions from certain registration requirements by rule or order. This provision enables the adoption of limited offering transactional exemptions to align with the Securities Act of 1933 and ensure uniformity among states. The Commissioner has the authority to create these exemptions to further regulatory compatibility and efficiency.

DC CODE § 31-5604.04 Revocation of exemptions

Section § 31-5604.04 of the District of Columbia Code grants the Commissioner the authority to deny or revoke exemptions for specific securities or transactions under sections § 31-5604.01(7), (8), (10), (12), or § 31-5604.02. This revocation is not retroactive, meaning actions taken prior to the revocation remain unaffected if the person involved did not know or could not reasonably have known about the order.

DC CODE § 31-5604.06 Coordination of exemptions

Section § 31-5604.06 of the District of Columbia Code aims to align local securities exemptions with those under the Securities Act of 1933. This coordination ensures that offerings registered under the federal act are subject to registration by filing locally unless exempt. The Commissioner has the authority to create, amend, or rescind rules regarding these exemptions to maintain consistency and regulatory alignment with federal standards.

DC CODE § 31-5605.05 Unlawful representations concerning licensing, registration, notice filing, or exemption

Section § 31-5605.05 of the District of Columbia Code prohibits making false representations about the licensing, registration, notice filing, or exemption status of a security or individual. The filing of any related documents does not imply the Commissioner’s endorsement or validation of their truthfulness or completeness. Misleading potential purchasers, customers, or clients regarding these aspects is unlawful.

What are the District of Columbia’s Securities Laws Exemptions?

Understanding the securities laws exemptions in the District of Columbia is crucial for sponsors and syndicators looking to navigate regulatory requirements effectively. The District of Columbia provides several exemptions under its securities laws, allowing certain entities and types of securities to be exempt from registration. Here’s a detailed overview of these exemptions as outlined in the District of Columbia Code § 31-5604.01.

Exempt Entities and Securities

Governmental Entities

• Securities issued by the U.S. government, any state, political subdivision, or agency.
• Securities issued by certain foreign governments, including Canada, are also exempt.

Financial Institutions

• Securities issued by depository institutions such as banks and credit unions.
• Includes securities issued by federal savings and loan associations and federal credit unions.

Non-Profit Membership Cooperatives

• Securities issued by non-profit membership cooperatives, which are organized primarily for the mutual benefit of their members.

Other Specific Entities

• Railroads, Common Carriers, and Public Utilities: Securities issued by railroads and other common carriers regulated by the Interstate Commerce Commission.
• Holding Companies: Securities issued by holding companies of such entities.
• Insurance Companies: Securities issued by insurance companies regulated by state insurance commissions.

Equipment Trust Certificates

• Securities involving equipment trust certificates, which typically finance transportation equipment.

Listed Stock Exchange Securities

• Securities listed or approved for listing on major stock exchanges such as the NYSE, NASDAQ, or other recognized securities exchanges.

Clearing Agency Options

• Securities related to clearing agency options, which are part of the options market and subject to regulation by a clearing agency.

Non-Profit Persons

• Securities issued by non-profit entities organized for educational, religious, benevolent, charitable, fraternal, social, athletic, or reformatory purposes, or as a chamber of commerce or trade or professional association.

Commercial Paper Obligations

• Short-term commercial paper obligations with maturities not exceeding nine months issued in denominations of at least $50,000.
• These are typically high-quality debt instruments issued by corporations to meet short-term liabilities.

Employee Benefit Plans

Securities issued in connection with employee benefit plans, provided they meet certain criteria ensuring they are offered as part of a bona fide employee benefit plan.

Practical Implications for Syndicators and Sponsors

For those involved in real estate syndication or other forms of capital raising, understanding these exemptions can help in structuring offerings to potentially qualify for an exemption, thereby simplifying the regulatory process. However, it is important to:

• Verify Eligibility: Ensure that the specific circumstances of the offering or the issuing entity meet the exemption criteria.
• Consult Legal Counsel: Engaging a knowledgeable syndication attorney can provide invaluable guidance in navigating these exemptions and ensuring compliance with all applicable laws.

The District of Columbia offers a range of securities laws exemptions designed to facilitate capital raising while protecting investors. By leveraging these exemptions, sponsors and syndicators can reduce the regulatory burden and focus on their core business objectives. However, given the complexity and potential legal nuances, consulting with a syndication attorney is highly recommended to ensure proper compliance and to take full advantage of these exemptions.

What are District of Columbia’s Procedures for Securities Law Exemptions?

Navigating the procedures for securities law exemptions in the District of Columbia is crucial for issuers who seek to benefit from these exemptions while ensuring compliance. The District of Columbia’s Department of Insurance, Securities and Banking (DISB) oversees the administration of securities laws, including the process for claiming exemptions. Here’s a detailed overview of the procedures involved.

Steps to Claim an Exemption

Determine Eligibility

• Before proceeding, issuers must verify that they meet the criteria for one of the exemptions listed under the District of Columbia Code § 31-5604.01. This involves a careful review of the specific requirements for each exemption category.

Prepare Documentation

• Gather all necessary documentation that supports the claim for exemption. This may include:
  • Organizational Documents: Proof of the entity’s status (e.g., non-profit designation, financial institution charter).
  • Offering Documents: Details about the securities being offered and the terms of the offering.
  • Compliance Records: Records demonstrating compliance with other relevant regulations.

File Notice with DISB (If Required)

• While certain exemptions do not require a filing, others may necessitate submitting a notice to the DISB. This step ensures that the regulatory body is aware of the exempt offering and can monitor compliance.
• Notice of Exempt Offering: This notice typically includes information about the issuer, the type of exemption claimed, and details about the securities offering.

Pay Applicable Fees

• Depending on the exemption being claimed, there may be filing fees associated with submitting a notice to the DISB. Ensure that all applicable fees are paid in full to avoid delays in processing.
• It’s important to consult the DISB’s fee schedule or contact them directly to confirm the amount.

Await Confirmation

• After submitting the required documentation and fees, issuers may need to wait for confirmation from the DISB that their exemption claim has been accepted. This process may involve correspondence with DISB representatives to clarify any details or provide additional information.

Maintain Compliance Records

• Even after an exemption is granted, issuers must maintain thorough records of the offering and the exemption claim. This includes:
  • Transaction Records: Detailed records of all transactions conducted under the exemption.
  • Investor Information: Information on all investors participating in the offering to ensure they meet any required criteria.
  • Annual Reports: For some exemptions, annual reporting to the DISB may be required to maintain exempt status.

Common Documentation Requirements

Form D (If Applicable)

• For offerings that also fall under federal exemptions (e.g., Regulation D), the SEC’s Form D must be completed and filed. A copy of this form may need to be submitted to the DISB as part of the exemption notice.

Financial Statements

• Provide audited or unaudited financial statements, depending on the exemption criteria and the scale of the offering.

Disclosure Documents

• Include any private placement memorandum (PPM) or offering circulars that provide detailed information about the offering to prospective investors.

Tips for Successful Exemption Filing

• Engage Legal Counsel: A syndication attorney can provide expert guidance in preparing and submitting exemption notices, ensuring all criteria are met and documentation is complete.
• Stay Informed: Regularly check for updates to the District of Columbia’s securities regulations to ensure ongoing compliance.
• Follow Up: Maintain open communication with DISB representatives and promptly address any requests for additional information or clarification.

Understanding and following the District of Columbia’s procedures for securities law exemptions is essential for issuers looking to leverage these exemptions while remaining compliant. By meticulously preparing documentation, adhering to filing requirements, and maintaining thorough records, issuers can benefit from the streamlined regulatory process. Engaging a knowledgeable syndication attorney can further facilitate this process, providing peace of mind and ensuring that all legal obligations are met.

Frequently Asked Questions

Do I Need an Attorney from the District of Columbia to Put Together an Offering?

Whether you need an attorney licensed in the District of Columbia to put together an offering depends on the nature of the offering and the specific legal guidance required. If the offering is being conducted under Regulation D and not one of the District of Columbia’s specific Blue Sky Laws, you might not need an attorney from the District of Columbia.

For example, if you are working on a real estate syndication and need an attorney to put together a private placement memorandum (PPM) for a multifamily deal in Washington, D.C. that will be offered in multiple states, you generally would not require an attorney specifically licensed in the District of Columbia. In such a case, a syndication attorney licensed in another state could assist you with drafting the PPM, forming the entity, and writing the operating agreement. However, this attorney would not be able to provide legal counsel on specific District of Columbia laws and their applicability to your offering.

On the other hand, if your project is more localized—say, you are preparing a private placement memorandum for a development project in the Shaw neighborhood of Washington, D.C., and all the investors are from the District of Columbia—you might want to utilize one of the District’s Blue Sky Laws as an exemption from registration. In this scenario, you would need to work with an attorney licensed in the District of Columbia. Such an attorney would have the expertise to navigate the specific requirements and exemptions under the District’s securities laws, ensuring full compliance and reducing the risk of legal issues.

In summary, for multi-state offerings under Regulation D, an attorney licensed outside of the District of Columbia can typically handle the general aspects of the syndication. However, for offerings that specifically invoke District of Columbia’s Blue Sky Laws, involving local investors and projects, an attorney licensed in the District of Columbia is essential to provide the necessary legal counsel and ensure regulatory compliance.

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

When engaging a real estate syndication attorney who is not licensed in the District of Columbia to review your purchase contract, it is important to understand the limitations of the advice they can provide. While such an attorney can certainly look over your contract and offer general business consulting advice, they cannot provide specific legal advice pertaining to District of Columbia law.

For instance, Tilden Moschetti, Esq., a syndication attorney with the Moschetti Syndication Law Group, who is licensed in the District of Columbia, can review your purchase contract and provide comprehensive advice that covers both legal and business consulting aspects. This includes detailed guidance on legal terms, compliance with local laws, and specific contract provisions unique to the District of Columbia.

Conversely, a syndication attorney not licensed in the District of Columbia can still offer valuable business consulting advice. They can discuss broad deal points such as the purchase price, overall structure of the deal, and timelines until closing. However, they must refrain from providing any advice on specific legal terms of the contract as they do not have the authority to practice law in the District of Columbia. This limitation ensures that any legal advice you receive complies with local regulations and professional conduct standards.

In summary, while a non-DC licensed attorney can provide helpful business insights, for any legal advice specific to the District of Columbia, it is crucial to consult with an attorney who is licensed in that jurisdiction. This approach ensures that all legal aspects of your contract are thoroughly reviewed and compliant with local laws, safeguarding your interests in the transaction.