Kansas Blue Sky Laws for Syndication

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Navigating the complexities of securities regulations is a critical aspect of raising capital through real estate syndications and other ventures. Whether you’re a real estate developer, private equity fund manager, or business owner, understanding both federal and state securities laws is essential to ensure compliance and avoid legal pitfalls. One key area to be aware of is the interplay between state Blue Sky Laws and the SEC’s Regulation D.

Kansas, like every other state, has its own set of Blue Sky Laws designed to protect investors from fraud and ensure transparency in securities offerings. For those looking to raise capital through Regulation D offerings, it’s important to know how Kansas’ specific regulations might impact your strategy. This comprehensive guide will explore the nuances of Kansas’ Blue Sky Laws, how they relate to Regulation D, and the procedures for leveraging exemptions under Kansas law.

In this article, we will cover the general principles of Blue Sky Laws, their relationship with Regulation D, and the benefits of choosing Regulation D’s Rule 506(b) or Rule 506(c) over state-specific laws. We will also outline the notification requirements for Kansas, detail the state’s securities law exemptions, and discuss whether you need a Kansas-licensed attorney for your offering. Additionally, we’ll address whether an out-of-state syndication attorney can review your purchase contracts and provide relevant business advice.

By the end of this article, you will have a clearer understanding of how to navigate the legal landscape of securities offerings in Kansas, ensuring that your capital-raising efforts are both compliant and efficient.

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

State Blue Sky Laws and the SEC’s Regulation D are both designed to regulate securities offerings, but they operate at different levels of government and can sometimes intersect in complex ways. Here’s what you need to know about how these two regulatory frameworks relate to each other:

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

Regulation D Rule 506(b) and Rule 506(c) offerings are federally exempt from state securities registration requirements due to federal preemption. This preemption is established under 15 U.S. Code § 77r(b)(4)(F), which means that states cannot require issuers to register these securities offerings at the state level. This preemption significantly reduces the regulatory burden on issuers, making it easier to raise capital.

Despite this federal preemption, issuers still need to comply with certain state requirements, specifically related to notice filings. Even though the offerings themselves do not need to be registered at the state level, issuers must still submit notice filings and pay any applicable fees in each state where securities are sold. These filings typically include submitting a copy of the SEC’s Form D and other state-specific documentation.

Intrastate Offerings Under State Blue Sky Laws

In some cases, an issuer might choose to conduct an offering solely within one state, leveraging that state’s Blue Sky Laws as an intrastate offering. This can be beneficial if the sponsor, all investors, and the assets involved are located within the same state. Intrastate offerings are subject to state securities laws and must comply with all relevant state registration or exemption requirements.

In Kansas, for example, an intrastate offering would need to adhere to the Kansas Securities Act and any exemptions or procedures specific to Kansas. While this approach can streamline the regulatory process within a single state, it limits the pool of potential investors to those residing within the state.

Practical Implications for Issuers

For most issuers, especially those involved in real estate syndications and other capital-raising ventures, leveraging Regulation D Rule 506(b) or Rule 506(c) is often the most practical approach. These rules allow for broader investor participation and facilitate raising larger amounts of capital without the need for state-level registration. However, it is crucial to remember that while federal law preempts state registration requirements, state notice filing obligations still apply and must be diligently followed.

In summary, while Regulation D provides significant federal exemptions from state Blue Sky Laws, understanding and complying with both federal and state requirements is essential for a successful securities offering. Working with a knowledgeable syndication attorney can help navigate these regulations and ensure full compliance, whether you choose a federally exempt offering under Regulation D or an intrastate offering under state Blue Sky Laws.

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

Choosing Regulation D Rule 506(b) or Rule 506(c) for your securities offering provides several significant advantages over relying solely on state Blue Sky Laws, particularly when it comes to broader investor participation and avoiding complex legal pitfalls.

Broader Investor Base

One of the primary reasons to choose Regulation D Rule 506(b) or Rule 506(c) is the ability to attract a wider range of investors from multiple states. If any investor or the sponsor is located outside the state, the offering cannot qualify as an intrastate offering under Blue Sky Laws. By leveraging Rule 506(b) or Rule 506(c), issuers can raise capital from accredited investors across the entire United States, significantly expanding the potential pool of investors.

Avoiding Legal Complications

Relying on state Blue Sky Laws for an intrastate offering carries the risk of inadvertently including investors domiciled outside the state. If it is discovered that an investor is actually domiciled outside the state, the offering may no longer qualify as an intrastate offering. This situation creates a securities law problem, potentially invalidating the exemption and exposing the issuer to significant legal liabilities.

Regulation D offerings under Rule 506(b) and Rule 506(c) preempt state securities registration requirements, thereby minimizing the risk of non-compliance due to investor domicile issues. This federal preemption provides a more secure and predictable framework for issuers, ensuring that they remain compliant with securities laws.

Flexibility in Marketing and Solicitation

Rule 506(c) specifically allows for general solicitation and advertising, provided all investors are accredited and the issuer takes reasonable steps to verify their accreditation status. This flexibility can be particularly advantageous for issuers looking to reach a larger audience and raise significant capital.

Rule 506(b), while prohibiting general solicitation, allows for a mix of accredited and up to 35 non-accredited investors, provided they have sufficient knowledge and experience in financial matters. This can be beneficial for issuers with a diverse investor base that includes sophisticated non-accredited investors.

Simplified Compliance

Regulation D Rule 506(b) and Rule 506(c) offerings require filing Form D with the SEC, which is a relatively straightforward process compared to the more extensive registration requirements under many state Blue Sky Laws. While issuers must still file notice filings in each state where securities are sold, these filings are typically less burdensome than full state registration processes.

Choosing Regulation D Rule 506(b) or Rule 506(c) over state Blue Sky Laws provides issuers with the ability to reach a broader investor base, avoid potential legal complications, benefit from flexible marketing options, and simplify compliance. These advantages make Regulation D offerings an attractive option for real estate syndicators, private equity fund managers, and other businesses seeking to raise capital efficiently and effectively. Working with a knowledgeable syndication attorney can help navigate the intricacies of these regulations and ensure a successful securities offering.

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 is crucial to comply with state notification requirements to avoid penalties and ensure your offering remains in good standing. In Kansas, issuers must follow specific rules and terms for notifying the state about their securities offerings.

Filing Requirements

Issuers must submit a notice filing to the Kansas Office of the Securities Commissioner through the NASAA Electronic Filing Depository (EFD). This system streamlines the process, making it more efficient and straightforward. The filing includes the following components:

  • Form D: A copy of the Form D filed with the SEC, which provides details about the offering.
  • Filing Fee: A non-refundable fee of $125 must accompany the notice filing.

Timing of the Filing

The notice filing must be submitted within 15 days of the first sale of securities in Kansas. Adhering to this timeline is essential to avoid late fees and potential legal complications.

Late Filing Fees

If the notice filing is submitted more than 15 days after the first sale of securities in Kansas, the issuer will incur a late fee. The late fee is calculated as follows:

  • Base Late Fee: $250
  • Additional Late Fee: Ranges from $250 to $2,500, depending on the extent of the delay.
  • Calculation Based on Sales Amount: An additional fee of .0005 of the total amount sold in the offering.

For example, if the total amount sold in the offering is $1,000,000 and the filing is late, the additional fee would be $500 (.0005 of $1,000,000).

How to Submit the Filing

To submit the notice filing:

  1. Register on the NASAA EFD website here.
  2. Complete the Filing by uploading the necessary documents, including Form D.
  3. Pay the Filing Fee of $125 through the electronic system.

Importance of Compliance

Timely filing is critical to ensure compliance with Kansas Blue Sky Laws. Failure to file the notice within the specified timeframe not only incurs financial penalties but also increases the risk of regulatory scrutiny and potential legal issues.

When conducting a Regulation D Rule 506(b) or Rule 506(c) offering in Kansas, issuers must submit a notice filing through the NASAA Electronic Filing Depository, including Form D and a $125 filing fee, within 15 days of the first sale of securities in the state. Late filings are subject to additional fees ranging from $250 to $2,500, plus .0005 of the total amount sold. Adhering to these notification rules and terms helps ensure compliance and mitigates the risk of penalties and legal complications.

By following these guidelines and working with an experienced syndication attorney, issuers can navigate the regulatory landscape more effectively and maintain the integrity of their securities offerings.

What are Kansas’ Blue Sky Laws?

Blue sky laws are state regulations designed to protect investors from securities fraud. Kansas has several key provisions under its Uniform Securities Act. Section 17-12a201 identifies specific exempt securities, such as those issued by governments and certain organizations. Section 17-12a203 allows for additional exemptions and waivers, providing flexibility for regulatory authorities. Section 17-12a204 addresses the denial, suspension, or revocation of these exemptions, ensuring that even exempt securities comply with anti-fraud provisions. Understanding these rules is crucial for navigating the securities landscape in Kansas.

KS ST 17-12a201 Exempt securities

Kansas Statutes Section 17-12a201 details securities that are exempt from certain regulatory requirements. These include securities issued or guaranteed by governmental entities, foreign governments, banks, insurance companies, and certain public utilities. It also covers securities from non-profit organizations, cooperatives, and equipment trust certificates. Specific conditions and potential administrative requirements for these exemptions are also outlined, ensuring that while some securities are exempt from registration, they still maintain a level of oversight and compliance.

KS ST 17-12a203 Additional exemptions and waivers

Kansas Statutes Section 17-12a203 grants the authority to adopt rules or issue orders that can exempt certain securities, transactions, or offers from the regulatory requirements of K.S.A. 17-12a301 through 17-12a306 and 17-12a504. This section also allows for the waiver of conditions for exemptions outlined in K.S.A. 17-12a201 and 17-12a202. Essentially, it provides flexibility for regulatory authorities to tailor exemptions and waivers based on specific circumstances.

KS ST 17-12a204 Denial, suspension, revocation, condition or limitation of exemptions

Kansas Statutes Section 17-12a204 outlines the conditions under which exemptions from securities regulation can be denied, suspended, revoked, conditioned, or limited. This applies to specific securities, transactions, or offers, except those involving federal covered securities. Orders to enforce these changes must follow specific procedural requirements and are only applied prospectively. Individuals are protected from violations if unaware of such orders despite exercising reasonable care. The section also clarifies that no exemptions can bypass anti-fraud provisions.

What are Kansas’ Securities Laws Exemptions?

Kansas offers several exemptions from the registration requirements under its Blue Sky Laws, as detailed in the Kansas Uniform Securities Act (K.S.A. 17-12a201). These exemptions are designed to facilitate certain types of securities transactions that are considered lower risk or involve sophisticated investors or entities. Understanding these exemptions is crucial for issuers to determine whether their offerings might qualify and to streamline compliance processes.

Governmental Entities and Certain Foreign Governments

Securities issued or guaranteed by governmental entities, including the United States, any state, any political subdivision of a state, or any public agency or instrumentality, are exempt from registration. This also includes securities issued by certain foreign governments that have diplomatic relations with the United States.

Financial Institutions

Exemptions are available for securities issued by a range of financial institutions, which include:

  • Banks and international banking institutions
  • Savings institutions
  • Trust companies
  • Savings and loan associations
  • Credit unions
  • Bank or savings and loan holding companies

These entities are typically subject to stringent regulatory oversight, reducing the risk of fraud.

Other Entities

Several other types of entities benefit from exemptions, including:

  • Railroads
  • Public utilities
  • Insurance companies

These organizations often have substantial regulatory frameworks and established trust, reducing the necessity for additional state-level securities registration.

Federal Covered Securities

Securities that qualify as federal covered securities are exempt from state registration. These include securities listed or approved for listing on recognized securities markets, such as the New York Stock Exchange (NYSE) or the Nasdaq Stock Market.

Derivative Securities and Options

Exemptions extend to various derivative securities and options, including:

  • Put or call option contracts
  • Warrants
  • Subscription rights on or with respect to exempt securities
  • Options or similar derivatives on a security or an index of securities or foreign currencies issued by a registered clearing agency and listed on a national securities exchange

Cooperative Securities

Securities issued by cooperatives, which include stocks or other securities evidencing membership or ownership in a cooperative, are also exempt. This exemption, however, may come with conditions, especially for sales of securities to individuals who are not members of the cooperative.

Equipment Trust Certificates

An equipment trust certificate, which pertains to equipment leased or conditionally sold to a person, is exempt if any security issued by the person would be exempt under Kansas law or qualify as a federal covered security.

Non-Profit Organizations

Securities issued by non-profit organizations can be exempt from registration. This exemption recognizes the charitable or non-commercial nature of these entities.

Summary

Understanding the various exemptions under Kansas’s securities laws can help issuers determine whether their offerings might qualify for simplified regulatory processes. These exemptions cover a wide range of entities and securities, including governmental bodies, financial institutions, railroads, public utilities, insurance companies, federally covered securities, derivative securities, cooperatives, equipment trust certificates, and non-profit organizations. Leveraging these exemptions effectively can streamline compliance and facilitate the efficient raising of capital. Working with a knowledgeable syndication attorney can help navigate these exemptions and ensure that all necessary conditions and filings are met.

What are Kansas’ Procedures for Securities Law Exemptions?

Navigating the procedures for obtaining securities law exemptions in Kansas involves understanding the specific requirements and steps that need to be followed to ensure compliance with the Kansas Uniform Securities Act. Here’s a detailed look at the procedures for claiming securities law exemptions in Kansas:

Identifying the Applicable Exemption

The first step in the process is to determine which exemption under K.S.A. 17-12a201 applies to your securities offering. The exemptions cover various entities and securities, including governmental entities, financial institutions, public utilities, cooperatives, and non-profit organizations. Each exemption has specific criteria that must be met.

Filing Requirements

While some exemptions do not require any filing, others may necessitate a notice filing with the Kansas Office of the Securities Commissioner. Here are the general steps involved:

  1. Prepare the Necessary Documentation: Gather all relevant documents that support your claim for exemption. This may include financial statements, proof of eligibility for the exemption, and other supporting materials.
  2. Complete the Required Forms: If a notice filing is required, complete the appropriate forms provided by the Kansas Office of the Securities Commissioner. This may include:
  • A notice of exemption form.
  • A consent to service of process form, which designates the Kansas Securities Commissioner as the agent for service of legal documents.
  1. Submit the Filing: Submit the completed forms along with any required documentation to the Kansas Office of the Securities Commissioner. Ensure that you comply with any specific submission instructions, such as electronic filing or physical delivery.
  2. Pay the Applicable Fees: Some exemptions require a filing fee. Ensure that the correct fee is paid at the time of submission. The fee structure can vary, so it is essential to check the latest requirements on the Kansas Office of the Securities Commissioner’s website.

Timing of the Filing

For certain exemptions, especially those involving notice filings, there may be specific timelines within which the filings must be made. It is crucial to adhere to these timelines to avoid penalties and ensure the validity of the exemption. Typically, filings should be made in advance of or concurrent with the securities offering.

Confirmation and Record-Keeping

Once the filing is submitted:

  • Confirmation: You may receive a confirmation from the Kansas Office of the Securities Commissioner acknowledging the receipt of your filing.
  • Record-Keeping: Maintain detailed records of all filings, communications, and confirmations related to the exemption. This documentation is vital in case of any inquiries or audits by regulatory authorities.

Compliance and Ongoing Obligations

Even after securing an exemption, issuers must continue to comply with all applicable securities laws and regulations. This includes:

  • Updating Information: If there are any material changes to the information provided in the exemption filing, issuers may need to update their filings with the Kansas Office of the Securities Commissioner.
  • Ongoing Reporting: Some exemptions may require periodic reporting to maintain their validity. Ensure that any such reporting requirements are met promptly.

Seeking Legal Assistance

Given the complexities involved in securities law exemptions, it is advisable to seek the assistance of an experienced syndication attorney. A knowledgeable attorney can help ensure that all procedures are correctly followed, filings are accurately completed, and compliance is maintained throughout the offering process.

Summary

Kansas’ procedures for securities law exemptions involve identifying the applicable exemption, preparing and submitting the necessary documentation, paying required fees, and adhering to specific timelines. Maintaining accurate records and ongoing compliance is crucial for the validity of the exemption. Consulting with a syndication attorney can provide valuable guidance and help navigate the regulatory landscape effectively.

Frequently Asked Questions

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

Whether you need an attorney specifically licensed in Kansas to put together your securities offering depends on the nature of your offering and the legal issues involved.

If your offering is conducted under Regulation D and does not rely on any Kansas-specific Blue Sky Laws, you likely do not need an attorney from Kansas. For instance, if you are working on a real estate syndication and need an attorney to prepare a private placement memorandum (PPM) for a multifamily deal in Wichita, Kansas, that will be offered in multiple states, a licensed syndication lawyer from outside Kansas can typically assist you. They can handle the creation of the entity, draft the operating agreement, and ensure compliance with federal securities regulations under Regulation D, such as Rule 506(b) or Rule 506(c). However, they would not be able to provide legal counsel on the specific nuances of Kansas state laws or how they might impact your offering.

On the other hand, if your offering is more localized and relies on Kansas-specific Blue Sky Laws, the situation changes. For example, if you are preparing a PPM for a development project in Overland Park, Kansas, and all your investors are from Kansas, you might want to use one of Kansas’s exemptions to registration. In this case, you would need to consult with an attorney licensed in Kansas. Such an attorney would be well-versed in the state’s securities laws, including the exemptions and filing requirements, ensuring your offering complies with local regulations.

In summary, for offerings under Regulation D intended for investors in multiple states, a syndication attorney licensed outside Kansas can generally provide the necessary services, excluding advice on Kansas-specific laws. However, for offerings relying on Kansas Blue Sky Laws, working with a Kansas-licensed attorney is essential to navigate the state’s specific legal requirements and ensure compliance.

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

It is permissible for a real estate syndication attorney licensed outside of Kansas to review your purchase contract, but there are limitations to the type of advice they can provide. For example, Tilden Moschetti, Esq., a syndication attorney with the Moschetti Syndication Law Group, can examine the underlying contract for your purchase in Kansas City, Kansas. However, it is important to note that while he can offer business consulting advice—such as discussing the price, general deal points, and the timeline until closing—he cannot provide legal advice on specific terms of the contract due to not being licensed in Kansas.

This distinction is crucial because providing legal advice on state-specific terms would require a thorough understanding of Kansas laws and regulations, which an attorney not licensed in the state would not possess. Therefore, while an out-of-state attorney can offer valuable insights and business guidance, you should seek legal counsel from a Kansas-licensed attorney for advice on the specific legal terms and conditions of your purchase contract to ensure full compliance and protection of your interests.

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