Illinois Blue Sky Laws for Syndication

Navigating the complex landscape of securities laws is crucial for anyone involved in raising capital through real estate syndications or other investment opportunities. Among these regulations, understanding state-specific Blue Sky Laws is essential, particularly for those operating under the framework of Regulation D. These state laws are designed to protect investors from fraudulent schemes and ensure transparency in the securities market.

This article delves into Illinois’s Blue Sky Laws, providing a comprehensive guide for syndicators, real estate developers, private equity fund managers, and other professionals looking to raise capital. We will explore the relationship between Illinois’s Blue Sky Laws and the SEC’s Regulation D, specifically focusing on Rule 506(b) and Rule 506(c) offerings. By examining the notification rules, exemptions, and procedures for compliance, we aim to equip you with the knowledge needed to navigate these regulations effectively.

Additionally, we address common questions such as whether you need an Illinois-licensed attorney to put together an offering and the role of out-of-state syndication attorneys in reviewing purchase contracts. Our goal is to provide clear, actionable insights to help you comply with both federal and state securities laws, ensuring the success and legality of your investment ventures in Illinois.

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

Preemption of State Blue Sky Laws by Regulation D

Under 15 U.S. Code § 77r(b)(4)(F), Regulation D Rule 506(b) and Rule 506(c) offerings are exempt from state Blue Sky Laws. This means that states cannot impose their own registration or qualification requirements on securities offerings made under these rules. Instead, these offerings must comply with the federal regulations set forth by the SEC, which simplifies the process for issuers by providing a uniform set of standards across all states.

Benefits of Preemption

The preemption of state Blue Sky Laws for Rule 506(b) and Rule 506(c) offerings provides several benefits to syndicators and issuers:

• Simplified Compliance: Issuers only need to adhere to federal regulations, reducing the complexity and cost associated with navigating multiple state laws.
• Broader Reach: Sponsors can offer securities to investors across state lines without having to meet varying state requirements, facilitating easier capital raising.
• Uniform Standards: A consistent regulatory framework provided by the SEC enhances clarity and predictability for issuers and investors.

Intrastate Offerings

While Regulation D Rule 506(b) and Rule 506(c) offerings are exempt from state Blue Sky Laws, there are circumstances where a sponsor might choose to rely on a state’s Blue Sky Laws. This is particularly relevant for intrastate offerings, where the sponsor, all investors, and the assets are located within a single state.

Intrastate Offering Considerations

For an intrastate offering, a sponsor may opt to comply with the state’s Blue Sky Laws instead of using Regulation D. This can be advantageous if:

• Local Focus: The investment is highly localized, and the sponsor prefers to deal exclusively with state regulations.
• Investor Familiarity: Local investors might be more comfortable with state-regulated offerings.
• Potential State Incentives: Some states may offer incentives or simpler procedures for intrastate offerings, making them an attractive option for certain sponsors.

Key Points to Remember

• Rule 506(b) and Rule 506(c) Offerings: These are exempt from state Blue Sky Laws and must comply with SEC regulations.
• Intrastate Offerings: These fall under state Blue Sky Laws if the sponsor, investors, and assets are all within the same state, providing an alternative route for localized investments.

Understanding the relationship between state Blue Sky Laws and SEC’s Regulation D is crucial for syndicators and real estate professionals. It allows them to choose the best regulatory path for their specific situation, ensuring compliance and optimizing their capital-raising efforts.

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

Advantages of Regulation D Offerings

Choosing Regulation D Rule 506(b) or Rule 506(c) over state Blue Sky Laws offers several key advantages for syndicators and sponsors:

1. Broad Geographic Reach
   • National Scope: Regulation D offerings are designed to facilitate capital raising across state lines. This is crucial for sponsors who have investors or operations in multiple states.
   • Avoiding Intrastate Limitations: If any investor or the sponsor is outside the state, the offering cannot qualify as an intrastate offering under state Blue Sky Laws. Regulation D provides a seamless solution that accommodates out-of-state investors without additional state regulatory burdens.
2. Legal Certainty and Compliance
   • Preemption of State Laws: Under 15 U.S. Code § 77r(b)(4)(F), Rule 506(b) and Rule 506(c) offerings are preempted from state Blue Sky Laws. This preemption ensures that issuers need only comply with federal securities regulations, simplifying the legal landscape.
   • Avoiding Securities Law Problems: Utilizing Regulation D mitigates the risk of inadvertently violating securities laws. For example, if an investor is later discovered to be domiciled outside the state, an offering initially structured as an intrastate offering could suddenly face compliance issues. Regulation D eliminates this risk by providing a uniform regulatory framework.
3. Flexibility and Investor Outreach
   • Rule 506(b) Flexibility: Allows issuers to raise an unlimited amount of capital from an unlimited number of accredited investors and up to 35 non-accredited investors who meet certain sophistication requirements. However, general solicitation and advertising are prohibited.
   • Rule 506(c) Advertising: Allows for general solicitation and advertising, significantly broadening the potential investor base. However, all investors must be verified as accredited, providing a layer of investor protection.
4. Streamlined Processes
   • Uniform Filing Requirements: Federal regulations under Regulation D require issuers to file a single Form D with the SEC, rather than navigating the varying requirements of multiple state jurisdictions.
   • Cost Efficiency: Focusing on federal compliance can reduce legal and administrative costs associated with meeting different state-level requirements.

Key Considerations

• Interstate Investor Involvement: For offerings involving investors from multiple states, Regulation D is the practical choice to avoid intrastate offering complications.
• Discovery of Out-of-State Investors: The risk of an investor being discovered as domiciled outside the state can lead to significant legal issues if relying solely on state Blue Sky Laws. Regulation D provides a safeguard against such problems.
• Syndication Strategy: Real estate syndicators and private equity fund managers benefit from the broader reach and legal clarity offered by Regulation D, ensuring smoother transactions and compliance.

Choosing Regulation D Rule 506(b) or Rule 506(c) over state Blue Sky Laws is often the best strategy for sponsors and syndicators looking to raise capital across state lines. The federal preemption of state laws, combined with the flexibility and broad reach of Regulation D offerings, provides a robust framework that minimizes legal risks and maximizes investor outreach.

What are Illinois’ Blue Sky Laws?

Illinois’ Blue Sky Laws, encompassing various statutes under the Illinois Securities Law of 1953 and the Illinois Prepaid Tuition Act, aim to regulate securities and protect investors within the state. Key provisions include:

1. Securities Registration Exemption (110 ILCS 979/60): This exempts Illinois prepaid tuition contracts from registration, simplifying the process while maintaining oversight on contract transfers.
2. Exemptions from Registration Requirements (815 ILCS 5/3): Certain securities, including those issued by governments, banks, and public utilities, are exempt from registration, balancing regulatory oversight with transaction facilitation.
3. Registration of Securities (815 ILCS 5/5): This section details the procedures for registering securities, whether through coordination with federal registration or through a detailed qualification process.

These rules are designed to ensure a transparent and fair securities market, safeguarding the interests of both issuers and investors in Illinois.

IL ST CH 110 § 979/60 Securities Registration Exemption

The Illinois Prepaid Tuition Act, specifically Section 110 ILCS 979/60, exempts Illinois prepaid tuition contracts from registration under the Illinois Securities Law of 1953. However, these contracts cannot be sold or transferred by the purchaser or the qualified beneficiary without prior approval from the Commission, unless the contract explicitly allows it. This exemption simplifies the process for those participating in the prepaid tuition program by removing the need for securities registration, while maintaining regulatory oversight on the transfer of these contracts.

IL ST CH 815 § 5/3 Exempt securities

Section 815 ILCS 5/3 of the Illinois Securities Law of 1953 details the exemptions from registration requirements for certain securities. These include securities issued or guaranteed by the U.S. government, states, political subdivisions, and various financial institutions like banks and credit unions. Exemptions also apply to securities from certain foreign governments, public utilities, and specific types of corporate securities that meet criteria such as listing on recognized exchanges. The law outlines conditions under which these exemptions apply, ensuring regulatory oversight while facilitating securities transactions.

IL ST CH 815 § 5/5 Registration of Securities

Section 815 ILCS 5/5 of the Illinois Securities Law of 1953 outlines the procedures for the registration of securities before they can be offered or sold in Illinois. This section describes two primary methods of registration: by coordination and by qualification. Registration by coordination aligns with federal registration under the 1933 Securities Act, requiring certain documents to be filed with the Illinois Secretary of State. Registration by qualification involves a more detailed application process, including financial statements and other pertinent information about the issuer. The law ensures regulatory compliance while facilitating securities offerings in the state.

IL ST CH 815 § 5/11 Duties and powers of the Secretary of State

Section 815 ILCS 5/5 of the Illinois Securities Law of 1953 outlines the procedures for the registration of securities before they can be offered or sold in Illinois. This section describes two primary methods of registration: by coordination and by qualification. Registration by coordination aligns with federal registration under the 1933 Securities Act, requiring certain documents to be filed with the Illinois Secretary of State. Registration by qualification involves a more detailed application process, including financial statements and other pertinent information about the issuer. The law ensures regulatory compliance while facilitating securities offerings in the state.

What are Illinois’ Securities Laws Exemptions?

Overview of Exemptions

The Illinois Securities Law of 1953 provides several exemptions from registration requirements for certain securities and transactions. These exemptions are designed to facilitate specific types of offerings and issuers, reducing the regulatory burden while ensuring investor protection. Below is a detailed overview of key exemptions under Illinois law:

1. Governmental Entities

• Securities issued by governmental entities, including the state of Illinois, its political subdivisions, and certain foreign governments (such as Canada), are exempt from registration requirements.

2. Financial Institutions

• Securities issued by various financial institutions, including banks, savings banks, savings institutions, trust companies, bank holding companies, savings and loan associations, building and loan associations, credit unions, and industrial loan associations, are exempt. These institutions are typically subject to stringent regulatory oversight, which mitigates the need for additional state securities regulation.

3. Other Entities

• Exemptions are available for securities issued by entities such as railroads, common carriers, public utilities, holding companies, and insurance companies. These entities often operate under specific regulatory frameworks that provide investor protection.

4. Listed Stock Exchange Securities

• Securities listed on recognized stock exchanges and over-the-counter (OTC) margin stocks are exempt from registration. These securities are subject to stringent listing requirements and continuous disclosure obligations, ensuring a high level of transparency for investors.

5. Agricultural Cooperatives

• Securities issued by agricultural cooperatives are exempt. These cooperatives often serve local farming communities and operate under regulations that safeguard members’ interests.

6. Instruments Relating to Property Acquisition

• Certain instruments directly related to the acquisition of real estate or tangible personal property, such as deeds of trust, mortgages, and other property-related securities, are exempt from registration requirements.

7. Mortgage-Related Securities

• Mortgage-related securities, which are often backed by pools of mortgage loans, are exempt. These securities provide investors with exposure to the real estate market without the need for direct property ownership.

8. Clearing Agency Options

• Options issued by registered clearing agencies are exempt. These options facilitate hedging and risk management activities in the financial markets.

9. Non-Profit Persons

• Securities issued by non-profit organizations are exempt. These organizations operate for charitable, educational, religious, or similar purposes and are not profit-driven.

10. Current Transaction Commercial Paper

• Commercial paper, which represents short-term, unsecured promissory notes issued by corporations to finance their operations, is exempt. This exemption applies to commercial paper that is part of a current transaction and has a maturity of no more than nine months.

11. Employee Benefit Plans

• Securities issued as part of employee benefit plans, including stock options, retirement plans, and other compensatory arrangements, are exempt. These plans are designed to align employees’ interests with those of the company.

12. Securities Meeting Certain Conditions

• Other securities may be exempt if they meet specific conditions outlined in the Illinois Securities Law of 1953. These conditions typically relate to the nature of the offering, the type of issuer, and the qualifications of the investors involved.

Key Considerations

• Understanding Exemptions: Issuers must thoroughly understand the exemptions available under Illinois law to ensure compliance and leverage these provisions effectively.
• Documentation and Compliance: Even if an offering qualifies for an exemption, proper documentation and adherence to other regulatory requirements are essential to maintain legal compliance and investor trust.

The Illinois Securities Law of 1953 offers a range of exemptions that simplify the process for issuing certain types of securities. By understanding and utilizing these exemptions, issuers can efficiently navigate the regulatory landscape while ensuring they meet all necessary legal obligations. For specific advice and to ensure compliance, consulting with a qualified syndication attorney is highly recommended.

What are Illinois’ Procedures for Securities Law Exemptions?

Overview of Exemption Procedures

While certain securities and transactions are exempt from registration under Illinois law, issuers must still follow specific procedures to ensure compliance with the Illinois Securities Law of 1953. These procedures help to verify that the offering qualifies for an exemption and maintain transparency with the Illinois Securities Department.

1. Determine Eligibility for Exemption

• Review Exemptions: Issuers should thoroughly review the list of exemptions under Illinois law to determine if their offering qualifies. Key exemptions include those for governmental entities, financial institutions, agricultural cooperatives, and employee benefit plans, among others.
• Consult Legal Counsel: Consulting with a syndication attorney experienced in Illinois securities law can provide valuable guidance on eligibility and ensure all legal criteria are met.

2. Prepare Documentation

• Exemption Statement: Prepare a statement that outlines the basis for claiming the exemption. This should include a detailed description of the offering, the type of security, the issuer, and the specific exemption being claimed.
• Supporting Documents: Gather all necessary supporting documents that demonstrate the offering’s eligibility for the exemption. This may include financial statements, organizational documents, and details about the investors involved.

3. File a Notice of Exemption (if required)

• Form D Filing: For offerings under Regulation D, issuers must file a Form D with the SEC and provide a copy to the Illinois Securities Department through the NASAA Electronic Filing Depository (EFD).
• State-Specific Forms: Depending on the exemption, additional state-specific forms may be required. These forms provide the Illinois Securities Department with necessary information about the offering and help ensure compliance.

4. Pay Filing Fees

• Fixed Fees: Pay any required filing fees associated with the exemption. For most Regulation D filings, Illinois imposes a fixed fee of $100 for new notices. Ensure that all fees are paid promptly to avoid delays in processing.

5. Submit Filing via NASAA EFD

• Electronic Submission: Use the NASAA Electronic Filing Depository (EFD) to submit the required documents and fees. The EFD streamlines the submission process, ensuring that filings are received and processed efficiently by the Illinois Securities Department.

6. Confirm Receipt and Compliance

• Acknowledgment: After submitting the filing, obtain an acknowledgment from the Illinois Securities Department confirming receipt and processing of the exemption notice.
• Maintain Records: Keep detailed records of all filings, correspondence, and acknowledgments related to the exemption. These records are essential for demonstrating compliance in case of any future inquiries or audits.

7. Ongoing Compliance

• Monitor Changes: Continuously monitor any changes in Illinois securities laws and regulations that may affect the exemption status of the offering. Staying informed helps ensure ongoing compliance.
• Annual Reviews: Conduct annual reviews of the offering and related documentation to verify continued eligibility for the claimed exemption.

Key Points to Remember

• Thorough Preparation: Ensure all documentation is complete and accurately reflects the basis for the exemption.
• Timely Filing: Submit all required notices and fees promptly through the NASAA EFD to avoid any regulatory issues.
• Legal Guidance: Engaging a syndication attorney can provide invaluable support in navigating the exemption process and maintaining compliance with Illinois securities laws.

Adhering to Illinois’ procedures for securities law exemptions is essential for issuers seeking to benefit from these provisions. By following the outlined steps, issuers can ensure their offerings are compliant, thereby avoiding legal complications and fostering trust with investors. For tailored advice and assistance, consulting with a qualified syndication attorney is highly recommended.

Frequently Asked Questions

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

Whether you need an attorney from Illinois to put together a Regulation D offering depends largely on the specifics of your situation and the scope of legal advice you require.

If your offering is under Regulation D and not subject to Illinois-specific Blue Sky Laws, you may not need an attorney licensed in Illinois. For instance, if you are a real estate syndicator looking to prepare a private placement memorandum (PPM) for a multifamily deal in Chicago that will be offered in multiple states, a licensed syndication attorney from outside Illinois can likely assist you. This attorney can help you structure the entity, draft the operating agreement, and prepare the PPM, as long as you do not need legal counsel on matters specific to Illinois law. Their expertise in federal securities regulations and multi-state offerings would generally suffice.

However, if your project is localized within Illinois and you plan to rely on Illinois-specific Blue Sky Laws for exemptions, the situation changes. For example, if you are preparing a PPM for a development project in Aurora, Illinois, with all investors based in Illinois, and you intend to use one of Illinois’s Blue Sky Laws as an exemption to registration, then working with an attorney licensed in Illinois is essential. An Illinois-based attorney would be familiar with state-specific securities regulations, ensuring your offering complies with local laws and maximizes available exemptions.

In summary, while a syndication attorney from outside Illinois can assist with many aspects of a Regulation D offering, including multi-state syndications and federal compliance, engaging an Illinois-licensed attorney is crucial when dealing with Illinois-specific legal issues and exemptions. This ensures comprehensive legal support and adherence to all relevant regulations, safeguarding your offering from potential legal complications.

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

While a real estate syndication attorney licensed outside of Illinois can review your purchase contract, there are important limitations to be aware of. An out-of-state attorney can provide general business consulting advice, such as discussing the price, broad deal points, and the overall structure of the agreement. For example, Tilden Moschetti, Esq., a syndication attorney with the Moschetti Syndication Law Group, can review your purchase contract for a property in Joliet, Illinois, and offer insights on aspects like the length of time until closing and general contract strategy.

However, it is crucial to understand that an attorney not licensed in Illinois cannot provide specific legal advice related to Illinois law. This includes interpreting or advising on particular legal terms, conditions, or requirements specific to Illinois real estate transactions. The distinction is important because state laws can significantly impact the legal and financial aspects of a real estate deal. Without the appropriate licensing, the attorney’s advice is limited to general business and strategic considerations, leaving any Illinois-specific legal nuances unaddressed.

In summary, while an out-of-state syndication attorney can offer valuable general advice and insights on your purchase contract, they cannot provide legal counsel on issues specific to Illinois law. For detailed legal advice on the terms and conditions governed by Illinois statutes, it is advisable to consult with an attorney licensed in Illinois to ensure full compliance and protection in your transaction.