Hawaii Blue Sky Laws for Syndication

Raising capital for real estate projects and other ventures often involves navigating complex securities regulations. For those utilizing Regulation D exemptions, understanding both federal and state-specific requirements is crucial to ensuring compliance and avoiding legal pitfalls. Hawaii’s Blue Sky Laws present unique challenges and opportunities for issuers, particularly those engaged in syndication. This comprehensive guide aims to demystify Hawaii’s Blue Sky Laws, explain how they intersect with the SEC’s Regulation D, and provide practical advice on compliance. Whether you’re a real estate developer in Urban Honolulu or a private equity fund manager looking to tap into Hawaii’s market, this article will equip you with the knowledge needed to navigate the regulatory landscape effectively.

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

Preemption of State Blue Sky Laws by Regulation D:
Regulation D, specifically Rule 506(b) and Rule 506(c), plays a pivotal role in the relationship between state Blue Sky Laws and federal securities regulations. Under 15 U.S. Code § 77r(b)(4)(F), offerings made pursuant to these rules are exempt from state securities registration requirements. This federal preemption means that while states can still enforce anti-fraud provisions and require notice filings, they cannot impose additional registration burdens on these offerings. This preemption is crucial for sponsors seeking a more streamlined and efficient process for raising capital.

Understanding Regulation D Rule 506(b) and Rule 506(c):

• Rule 506(b): This rule allows issuers to raise an unlimited amount of capital from accredited investors and up to 35 non-accredited investors, provided there is no general solicitation or advertising. It is a popular choice for real estate syndication and other private placements due to its flexibility and broad applicability.
• Rule 506(c): This rule permits general solicitation and advertising, provided all investors are accredited, and the issuer takes reasonable steps to verify their accredited status. This provision offers greater reach and visibility for offerings, making it ideal for larger capital raises and public promotions.

State Compliance Requirements:
Even with federal preemption, issuers must still comply with certain state requirements. States often mandate the filing of a notice (typically Form D) and the payment of a filing fee. These steps ensure the state regulators are informed about securities activities within their jurisdiction and can monitor compliance with anti-fraud laws.

Intrastate Offerings as an Alternative:
In certain situations, sponsors may opt to conduct an offering under a state’s Blue Sky Laws instead of using Regulation D. This scenario typically arises when the sponsor, all investors, and the assets involved in the offering are located within a single state. Known as an intrastate offering, this approach leverages state-specific exemptions and can simplify compliance for purely local transactions.

Choosing Between Regulation D and Intrastate Offerings:
The decision to use Regulation D exemptions or state Blue Sky Laws depends on the specifics of the offering:

• Regulation D Advantages: Federal preemption reduces the regulatory burden, making it easier and faster to raise capital from a broad investor base. This option is particularly beneficial for real estate syndications and other ventures involving multiple states.
• Intrastate Offering Benefits: For offerings confined to a single state, utilizing state Blue Sky Laws may provide a more straightforward compliance path. This approach can be advantageous when all parties involved are local, and the state offers favorable exemptions.

Understanding the interplay between state Blue Sky Laws and the SEC’s Regulation D is essential for anyone involved in raising capital. While Regulation D offers significant advantages through federal preemption, there are scenarios where state-specific compliance might be more appropriate. Sponsors should carefully consider their options and consult with a syndication attorney to navigate the regulatory landscape effectively and ensure compliance with all relevant laws.

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

Regulation D Exemptions vs. State Blue Sky Laws:
Choosing between Regulation D exemptions and state Blue Sky Laws involves assessing the scope and geographic reach of your offering. Regulation D, particularly Rule 506(b) and Rule 506(c), offers significant advantages that often make it the preferred choice for issuers, especially in scenarios where investors or sponsors are located outside a single state.

Geographic Flexibility:
One of the primary reasons to opt for Regulation D is its flexibility to include investors from multiple states. State Blue Sky Laws are designed for intrastate offerings, where all aspects of the transaction—sponsors, investors, and assets—are located within one state. However, in today’s interconnected market, it’s common for investors and sponsors to be spread across different states. If even one investor or the sponsor is domiciled outside the state, the offering cannot qualify as intrastate and must comply with federal regulations.

Avoiding Compliance Pitfalls:
Relying solely on state Blue Sky Laws can pose significant risks. Discovering that an investor is actually domiciled outside of the state after the offering has commenced can create a serious securities law problem. This situation would invalidate the intrastate offering exemption, leading to potential non-compliance with both state and federal securities laws. Regulation D exemptions mitigate this risk by providing a federal framework that preempts state registration requirements, ensuring compliance across state lines.

Advantages of Rule 506(b):

• Unlimited Capital: Rule 506(b) allows issuers to raise an unlimited amount of capital, which is a substantial benefit for large-scale projects like real estate syndications.
• Investor Flexibility: Issuers can include up to 35 non-accredited investors, provided there is no general solicitation or advertising. This flexibility enables sponsors to reach a wider investor base.
• Reduced Regulatory Burden: Federal preemption under Rule 506(b) streamlines the regulatory process, reducing the time and cost associated with state-by-state compliance.

Advantages of Rule 506(c):

• General Solicitation: Rule 506(c) permits general solicitation and advertising, significantly expanding the reach of the offering. This is particularly advantageous for issuers looking to attract a large number of accredited investors.
• Verification of Accredited Status: While Rule 506(c) requires issuers to take reasonable steps to verify that all investors are accredited, this provision enhances investor protection and can build greater trust with potential investors.
• Federal Preemption: Like Rule 506(b), Rule 506(c) offerings are federally preempted from state registration requirements, simplifying the compliance process and focusing on a unified federal standard.

Scenarios Favoring Regulation D:
Regulation D is especially suitable for real estate syndications and other ventures involving multiple states. For example:

• National or Regional Projects: Projects that draw investors from various states or regions benefit from the federal framework of Regulation D, avoiding the complications of multiple state compliance requirements.
• Large Capital Raises: Ventures requiring substantial capital can leverage the unlimited fundraising potential of Rule 506(b) and the broad reach of Rule 506(c) through general solicitation.
• Complex Investor Base: When dealing with a diverse group of investors, Regulation D provides a more straightforward and secure path to compliance, ensuring that all legal bases are covered.

Choosing Regulation D exemptions, specifically Rule 506(b) or Rule 506(c), over state Blue Sky Laws offers significant advantages in terms of geographic flexibility, reduced regulatory burden, and enhanced investor reach. This approach minimizes the risk of compliance issues arising from interstate investments and streamlines the capital-raising process for issuers. By working with a knowledgeable syndication attorney, sponsors can navigate these regulations effectively, ensuring their offerings are compliant and successful.

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

Overview of Notification Requirements:
While Regulation D, specifically Rule 506(b) and Rule 506(c), preempts state securities registration requirements, issuers must still comply with state notification rules. These notifications keep state regulators informed about securities offerings within their jurisdiction and help monitor compliance with anti-fraud provisions.

Filing Fee:
Hawaii imposes a fixed filing fee for Regulation D offerings. Issuers are required to pay this fee as part of the notification process to the state.

Specific Fees:

• New Notice Filing Fee: When an issuer files a new notice for a Regulation D offering, a fee of $100 is required. This fee applies to each new notice submitted to the Hawaii Department of Commerce and Consumer Affairs (DCCA).

No Late Fee:
Hawaii does not impose a late fee for late filings of Form D notices. Although there is no penalty for delayed filings, it is essential to adhere to filing deadlines to maintain good standing and avoid potential complications.

Notification Process:
To comply with Hawaii’s notification requirements for Regulation D Rule 506(b) or Rule 506(c) offerings, issuers should follow these steps:

Prepare Form D:

• Complete Form D, which is the notice of an exempt offering of securities. This form includes critical information about the offering, such as the issuer’s identity, the amount of the offering, and details about the securities being offered.

File Form D with the SEC:

• Submit the completed Form D electronically with the Securities and Exchange Commission (SEC) through the EDGAR system. This filing must be done within 15 days after the first sale of securities in the offering.

Submit a Copy to Hawaii DCCA via NASAA EFD:

• After filing with the SEC, submit a copy of Form D and the $100 filing fee to the Hawaii DCCA through the NASAA Electronic Filing Depository (EFD). The NASAA EFD is an online platform that facilitates the submission of Form D filings to state securities regulators.
• Access the NASAA EFD at NASAA Electronic Filing Depository to complete this step.

Timeliness:
Although Hawaii does not impose a late fee for delayed filings, it is best practice to submit the Form D copy and fee to the DCCA via the NASAA EFD promptly to ensure full compliance. Timely filing helps avoid misunderstandings or issues with state regulators.

Benefits of Timely Compliance:
Adhering to these notification rules and terms ensures that issuers remain in good standing with both federal and state regulators. Timely compliance demonstrates a commitment to transparency and legal adherence, mitigating the risk of regulatory scrutiny and potential penalties.

For issuers utilizing Regulation D Rule 506(b) or Rule 506(c) exemptions, understanding and following Hawaii’s notification rules is crucial. By promptly filing Form D with the SEC and submitting the necessary notice and fee to the Hawaii DCCA through the NASAA EFD, issuers can ensure they meet state requirements and maintain compliance. Engaging with a knowledgeable syndication attorney can further assist in navigating these regulations and ensuring all filings are correctly and timely submitted.

What are Hawaii’s Blue Sky Laws?

Understanding Hawaii’s Blue Sky Laws: Ensuring Transparent and Secure Investments

Hawaii’s blue sky laws are designed to protect investors from securities fraud and to ensure a transparent investment environment. These laws, found under the Hawaii Revised Statutes, encompass a variety of regulations and exemptions that govern the offering and sale of securities within the state. Here’s a comprehensive look at some key components of these laws:

1. Exemption of Voting Stock from Registration (§421C-36):
   This statute provides that membership stock or certificates, and share or membership capital of consumer cooperative associations, are exempt from registration requirements. This exemption helps streamline processes for cooperatives while maintaining investor protection by recognizing the unique nature of cooperative securities.
2. Exempt Securities (§485A-201):
   Under this section, several classes of securities are exempt from registration, including those issued by the U.S. government, states, and certain regulated entities like banks and insurance companies. The law also covers securities from nonprofits, cooperatives, and public utilities, acknowledging their inherent safeguards and regulatory oversight.
3. Additional Exemptions and Waivers (§485A-203):
   This provision allows the adoption of rules or issuance of orders to exempt specific securities, transactions, or offers from the requirements of sections 485A-301 to 485A-305 and 485A-504. It also permits waivers of conditions for exemptions under sections 485A-201 and 485A-202, providing flexibility to adapt to various securities transactions.
4. Securities Registration Requirement (§485A-301):
   It is unlawful to offer or sell a security in Hawaii unless it is a federal covered security, exempt from registration under sections 485A-201 to 485A-203, or registered under the relevant chapter. This rule ensures that all securities sold within the state are either properly vetted through registration or clearly defined as exempt, safeguarding investors from potential fraud.

Hawaii’s blue sky laws are crucial for maintaining the integrity of the securities market, providing a balanced approach that facilitates legitimate business activities while protecting investors. By understanding these statutes, both issuers and investors can navigate the investment landscape more effectively, ensuring compliance and security in their transactions.

HI ST § 421C-36 Exemption of voting stock from registration

The law under §421C-36 of the 2009 Hawaii Revised Statutes provides that membership stock or certificates and share or membership capital of any consumer cooperative association organized under or existing before the passage of this chapter are classified as exempt securities. This exemption falls under section 485A-201, which means these stocks do not require registration. This provision was initially enacted on May 15, 1982, and later amended in 2006.

HI ST § 485A-201 Exempt securities

Hawaii Revised Statutes §485A-201 outlines the types of securities that are exempt from registration requirements under the Uniform Securities Act. These exemptions include securities issued or guaranteed by the U.S. government, states, political subdivisions, and certain federal or state-regulated entities such as banks and insurance companies. Additionally, securities from nonprofit organizations, cooperatives, and public utilities are also exempt. Notably, federal covered securities specified under the Securities Act of 1933, and securities listed on registered exchanges, are included in these exemptions. The law aims to streamline the regulatory process for these securities, acknowledging their inherent safeguards and oversight by other regulatory bodies.

HI ST § 485A-203 Additional exemptions and waivers

Hawaii Revised Statutes §485A-203 outlines the provisions for additional exemptions and waivers concerning securities regulation. This statute allows the adoption of rules or issuance of orders to exempt specific securities, transactions, or offers from the requirements outlined in sections 485A-301 to 485A-305 and 485A-504. Moreover, it permits the exemption of entire classes of securities or transactions from these requirements. The law also provides that such orders can waive any or all conditions for an exemption or offer under sections 485A-201 and 485A-202, either in whole or in part. This flexibility is designed to streamline the regulatory process and adapt to varying circumstances in securities transactions and offers​.

HI ST § 485A-301 Securities registration requirement

Hawaii Revised Statutes §485A-301 outlines the requirements for securities registration in the state of Hawaii. According to this statute, it is illegal for an individual to offer or sell a security within Hawaii unless one of the following conditions is met:

1. The security qualifies as a federal covered security.
2. The security, transaction, or offer is exempt from registration under sections 485A-201 to 485A-203 of the Hawaii Revised Statutes.
3. The security is registered under the relevant chapter of Hawaii’s Uniform Securities Act.

This law ensures that securities sold or offered in Hawaii are properly registered unless they fall under specified exemptions, providing a regulatory framework aimed at protecting investors and maintaining market integrity.

What are Hawaii’s Securities Laws Exemptions?

Hawaii’s Blue Sky Laws provide a range of exemptions that allow certain securities offerings to bypass the full registration requirements typically mandated by the state. These exemptions are designed to facilitate various types of transactions while maintaining investor protection. Understanding these exemptions is crucial for issuers to determine whether their offerings qualify for simplified regulatory processes.

Key Exemptions Under Hawaii’s Securities Laws:
The exemptions outlined in Hawaii Revised Statutes (HRS) § 485A-201 cover a variety of entities and types of transactions. Here’s a detailed look at the main categories:

Governmental Entities and Certain Foreign Governments:

• Securities issued by the U.S. government, any state, political subdivision, or public agency, and certain foreign governments, including Canada, are exempt from registration. These entities are considered low-risk due to their governmental backing.

Financial Institutions:

• Securities issued by banks, savings institutions, trust companies, financial services loan companies, savings and loan associations, building and loan associations, and credit unions are exempt. These institutions are heavily regulated, ensuring a level of investor protection.

Other Regulated Entities:

• Exemptions extend to common carriers, public utilities, holding companies, and insurance companies. These entities operate under stringent regulatory frameworks that mitigate investor risks.

Variable Annuity Contracts:

• Variable annuities, which are insurance products that provide periodic payments, are exempt. These products are regulated by both insurance and securities laws, offering dual layers of protection.

Cooperative Associations:

• Securities issued by consumer cooperatives or agricultural cooperatives are exempt. These organizations operate for the benefit of their members, reducing the likelihood of fraud.

Listed and Over-the-Counter Securities:

• Securities listed on recognized national securities exchanges, over-the-counter (OTC) markets, and certain foreign securities markets are exempt. These securities are subject to rigorous listing and reporting requirements.

Federally Registered Securities:

• Securities that are registered with the federal government under the Securities Act of 1933 are exempt. This federal registration ensures comprehensive disclosure and oversight.

Commodity Futures Options:

• Options on commodities futures contracts are exempt, as they are regulated by the Commodity Futures Trading Commission (CFTC), providing another layer of investor protection.

Non-Profit Organizations:

• Securities issued by non-profit organizations are exempt. These entities are typically focused on charitable, religious, or educational missions, reducing the risk of fraudulent activities.

1. Commercial Paper:
   • Short-term commercial paper used in current transactions is exempt. These instruments are generally considered low-risk due to their short duration and use in routine business operations.
2. Employee Benefit Plans:
   • Securities issued as part of employee benefit plans are exempt. These offerings are designed to provide employees with retirement and other benefits, aligning the interests of issuers and investors.
3. Local Development Companies:
   • Securities issued by local development companies are exempt. These entities focus on regional economic development, often receiving support from government programs.

Practical Implications:
For issuers, understanding these exemptions is crucial to determining the appropriate regulatory pathway for their offerings. By leveraging these exemptions, issuers can avoid the time-consuming and costly process of full state registration, provided they meet the specific criteria set forth by the Hawaii Revised Statutes.

Hawaii’s securities laws exemptions offer significant flexibility for a variety of entities and transaction types, from governmental and financial institutions to non-profit organizations and employee benefit plans. By taking advantage of these exemptions, issuers can streamline their capital-raising efforts while ensuring compliance with state regulations. Consulting with a syndication attorney can help issuers navigate these exemptions effectively, ensuring they meet all necessary legal requirements and optimize their offerings for success.

What are Hawaii’s Procedures for Securities Law Exemptions?

Navigating Hawaii’s securities law exemptions requires a thorough understanding of the procedures involved in claiming and maintaining these exemptions. Here is a step-by-step guide to the process, ensuring that issuers can comply effectively with state requirements while leveraging the benefits of available exemptions.

Step 1: Determine Eligibility for Exemption

Review Exemption Criteria:

• Begin by thoroughly reviewing the criteria for each exemption category as outlined in Hawaii Revised Statutes (HRS) § 485A-201. Determine which exemption your offering qualifies for based on the nature of your entity and the type of securities being offered.

Consult with Legal Counsel:

• Engage a syndication attorney or securities law expert to ensure that your understanding of the exemption criteria is accurate and that your offering meets all necessary conditions.

Step 2: Prepare Required Documentation

Gather Necessary Information:

• Collect all pertinent information related to your securities offering. This may include details about the issuer, the nature and amount of the securities, and the intended use of proceeds.

Create Disclosure Documents:

• Even though exemptions might relieve some regulatory burdens, issuers should still prepare comprehensive disclosure documents, such as a private placement memorandum (PPM), to provide transparency to potential investors.

Step 3: Complete Form D (if applicable)

Federal Filing:

• For offerings under Regulation D, complete Form D and file it with the Securities and Exchange Commission (SEC) through the EDGAR system. This form must be filed within 15 days after the first sale of securities.

State Filing:

• Submit a copy of the filed Form D to the Hawaii Department of Commerce and Consumer Affairs (DCCA) through the NASAA Electronic Filing Depository (EFD). Ensure that the submission includes the required $100 filing fee.

Step 4: Submit Notice of Exemption

Prepare Notice Filing:

• Prepare any additional notice filings required by the DCCA. This notice will inform the state regulators of your intention to utilize a specific exemption.

Include Necessary Fees:

• Include any applicable fees with your notice filing. While there is a fixed fee for Regulation D filings, check for any additional fees that may apply to your specific exemption category.

Step 5: Maintain Compliance

Ongoing Disclosure:

• Maintain accurate and up-to-date records of all transactions and communications with investors. Ensure that any material changes in the offering are promptly disclosed to the state regulators.

Annual Filings:

• Depending on the nature of your offering, you may be required to submit annual filings to the DCCA to maintain your exempt status. Confirm these requirements with your legal counsel.

Step 6: Respond to Regulatory Inquiries

Cooperate with Regulators:

• If the DCCA requests additional information or documentation, respond promptly and thoroughly. Cooperation with state regulators is crucial to maintaining your exemption status.

Address Any Issues:

• If any compliance issues arise, work with your legal counsel to address them swiftly and effectively. This may involve amending filings or providing additional disclosures.

Common Pitfalls and How to Avoid Them

Timeliness:

• Missing filing deadlines can jeopardize your exemption status. Set reminders and ensure all filings are submitted on time.

Incomplete Documentation:

• Submitting incomplete or inaccurate documentation can lead to delays and potential non-compliance. Double-check all forms and disclosures for completeness and accuracy.

Assumption of Exemption:

• Do not assume that your offering is exempt without proper verification. Always confirm with legal counsel that you meet all necessary criteria.

Following Hawaii’s procedures for claiming securities law exemptions requires careful preparation and attention to detail. By systematically determining eligibility, preparing thorough documentation, and maintaining ongoing compliance, issuers can effectively leverage these exemptions to facilitate their capital-raising efforts. Engaging with a knowledgeable syndication attorney can provide invaluable assistance in navigating these procedures and ensuring that all legal requirements are met.

Frequently Asked Questions

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

The need for a Hawaii-based attorney largely depends on the specifics of your securities offering and whether it falls under federal Regulation D or Hawaii-specific Blue Sky Laws. If your offering is structured under Regulation D and does not require compliance with Hawaii’s state-specific securities regulations, then you likely do not need an attorney licensed in Hawaii.

For instance, if you are engaging a real estate syndication attorney to draft a private placement memorandum (PPM) for a multifamily deal in Urban Honolulu, Hawaii, and this offering will be marketed to investors in multiple states, a licensed syndication lawyer from outside Hawaii would generally suffice. This attorney could assist with the creation of the PPM, form the necessary entities, and draft the operating agreements. However, they would not be able to provide legal counsel on Hawaii-specific laws and their implications for your offering.

On the other hand, if your project involves a private placement memorandum for a development in East Honolulu, Hawaii, with all investors residing in Hawaii, and you intend to use one of Hawaii’s Blue Sky Laws exemptions, it becomes imperative to engage an attorney licensed in Hawaii. In such cases, understanding and navigating the state’s specific securities regulations are crucial. A Hawaii-based attorney would provide the necessary expertise to ensure that your offering complies with local laws and leverages applicable exemptions effectively.

In summary, for Regulation D offerings with a broader, multi-state investor base, a qualified syndication attorney from outside Hawaii can competently handle most aspects of your offering. However, for offerings relying on Hawaii-specific exemptions and involving local investors, working with an attorney licensed in Hawaii is essential to ensure compliance and legal soundness.

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

Engaging a real estate syndication attorney licensed outside of Hawaii to review your purchase contract can be beneficial, but there are limitations to consider. Such an attorney can examine the contract and offer business consulting advice on broad deal points, such as pricing and the overall structure of the deal, including the length of time until closing. However, they cannot provide legal advice on any specific terms that pertain to Hawaii law.

For example, Tilden Moschetti, Esq., a syndication attorney with the Moschetti Syndication Law Group, can review your purchase contract for a property in Hilo, Hawaii, and provide valuable insights on the general aspects of the deal. However, Moschetti would make it clear that he is not licensed in Hawaii and therefore cannot advise on specific legal terms or ensure compliance with Hawaii state laws.

While having an experienced attorney review the contract can help in understanding the broader business implications, it is crucial to seek additional legal counsel from a Hawaii-licensed attorney for advice on specific terms and local legal requirements. This dual approach ensures that you receive comprehensive guidance that covers both the overall business strategy and the specific legal nuances of Hawaii real estate transactions.