Kentucky Blue Sky Laws for Syndication

Navigating the complexities of securities laws is a crucial task for anyone involved in raising capital through Regulation D offerings. For real estate developers, private equity fund managers, and other professionals engaged in syndication, understanding the interplay between federal regulations and state-specific Blue Sky Laws is essential. This article delves into Kentucky’s Blue Sky Laws, providing a comprehensive guide for those looking to leverage Regulation D rules, specifically Rule 506(b) and Rule 506(c), to streamline their capital-raising efforts.

From explaining the general principles of Blue Sky Laws and their relationship with the SEC’s Regulation D, to detailing the specific procedures and exemptions under Kentucky law, this guide aims to equip you with the knowledge needed to ensure compliance and optimize your fundraising strategies. Whether you’re determining the necessity of hiring a Kentucky-licensed attorney or understanding the nuances of state notification requirements, this article covers all critical aspects, offering practical insights and expert advice to help you navigate the legal landscape effectively.

By the end of this guide, you will have a clear understanding of why choosing Regulation D can often be more advantageous than relying solely on state Blue Sky Laws, and how to ensure your offerings are compliant with both federal and state regulations. This knowledge is vital for making informed decisions, minimizing legal risks, and successfully raising capital for your ventures.

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 critical elements in the landscape of securities regulation, each serving unique but interconnected roles. Understanding their relationship is essential for issuers, particularly those involved in syndication, real estate syndication, and private placements.

Federal Preemption Under Regulation D

Regulation D, promulgated by the SEC, provides exemptions from registration for certain securities offerings, facilitating capital raising while ensuring investor protection. Notably, Rule 506(b) and Rule 506(c) of Regulation D are widely used due to their broad preemption of state Blue Sky Laws. This preemption is codified under 15 U.S. Code § 77r(b)(4)(F), which means that offerings made under these rules are not subject to state registration or review requirements, significantly simplifying the compliance process for issuers.

Key Features of Rule 506(b) and Rule 506(c)

• Rule 506(b): Allows issuers to raise an unlimited amount of capital from an unlimited number of accredited investors and up to 35 non-accredited investors, provided they meet certain sophistication requirements. Importantly, general solicitation and advertising are not permitted under this rule.
• Rule 506(c): Permits general solicitation and advertising, but all investors must be accredited, and the issuer must take reasonable steps to verify their accredited status.

These rules streamline the fundraising process by providing a federal exemption that overrides state regulations, allowing for a more uniform approach across different jurisdictions.

Intrastate Offerings Under State Blue Sky Laws

Despite the federal preemption offered by Regulation D, there are scenarios where a sponsor might opt to use a state’s Blue Sky Laws, particularly for intrastate offerings. An intrastate offering is one where the sponsor, all investors, and the assets are located within a single state. In these cases, the sponsor may find it advantageous to comply with the state’s specific securities laws to leverage local exemptions and benefits.

For example, a real estate syndication project confined entirely within Kentucky could potentially qualify as an intrastate offering. By adhering to Kentucky’s Blue Sky Laws, the sponsor may benefit from tailored state provisions that might be more favorable or straightforward than federal regulations for localized offerings.

Balancing Compliance and Strategy

Choosing between Regulation D and state Blue Sky Laws involves strategic considerations. The broad preemption provided by Rule 506(b) and Rule 506(c) simplifies multi-state offerings by eliminating the need for state-by-state compliance. However, for purely intrastate projects, leveraging state Blue Sky Laws can be a viable and sometimes preferable option.

Issuers should work closely with a syndication attorney to navigate these regulatory landscapes effectively. A knowledgeable attorney can help determine the most beneficial route, whether it’s taking advantage of the federal preemption under Regulation D or optimizing an offering under state-specific regulations.

In summary, while Regulation D offers a streamlined, federally preempted path for most securities offerings, understanding and strategically utilizing state Blue Sky Laws remains crucial for certain intrastate offerings. By balancing these regulatory frameworks, issuers can effectively raise capital while ensuring compliance and maximizing their strategic advantages.

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

Choosing between Regulation D and a state’s Blue Sky Laws is a critical decision for issuers, particularly in the realm of syndication, real estate syndication, and private placements. Here are several compelling reasons why Regulation D, specifically Rule 506(b) and Rule 506(c), often emerges as the preferred choice.

Federal Preemption and Simplified Compliance

One of the primary advantages of choosing Regulation D is the federal preemption of state Blue Sky Laws for offerings under Rule 506(b) and Rule 506(c). This preemption, outlined under 15 U.S. Code § 77r(b)(4)(F), significantly reduces the regulatory burden by eliminating the need for state-by-state registration and compliance. For issuers, this means:

• Uniform Compliance Standards: Regulation D provides a consistent regulatory framework across all states, simplifying the process of managing multi-state offerings.
• Reduced Costs and Complexity: Avoiding the intricacies of state Blue Sky Laws can result in lower legal and administrative costs, as well as reduced complexity in preparing and filing the necessary documentation.

Flexibility and Broader Investor Base

Regulation D, particularly Rule 506(b) and Rule 506(c), offers greater flexibility in terms of the investor base and solicitation practices:

• Rule 506(b): Allows up to 35 non-accredited but sophisticated investors, in addition to an unlimited number of accredited investors. This can broaden the pool of potential investors, making it easier to raise capital.
• Rule 506(c): Permits general solicitation and advertising, provided all investors are accredited and the issuer takes reasonable steps to verify their accredited status. This opens up new channels for attracting investors and marketing the offering.

Mitigating Risks of Intrastate Offering Issues

While state Blue Sky Laws can be advantageous for purely intrastate offerings, they come with significant risks if any element of the offering crosses state lines. If an investor or the sponsor is discovered to be outside of the state, the offering no longer qualifies as intrastate, leading to potential securities law violations. This risk is mitigated under Regulation D:

• Avoiding Intrastate Complications: By opting for Rule 506(b) or Rule 506(c), issuers can avoid the pitfalls associated with misidentifying the domicile of investors. If an investor is later found to be domiciled outside the state, it doesn’t jeopardize the entire offering as it would under intrastate exemptions.
• Greater Assurance of Compliance: Regulation D provides a clearer and more reliable path to compliance, reducing the risk of inadvertently violating securities laws due to interstate issues.

Strategic Considerations and Legal Guidance

Choosing Regulation D can be a strategic decision to streamline the offering process, minimize regulatory risks, and maximize investor reach. However, it’s crucial to work with a knowledgeable syndication attorney to navigate these regulations effectively. An attorney can:

• Assess Compliance Needs: Evaluate the specific needs and circumstances of the offering to determine whether Regulation D or state Blue Sky Laws are more appropriate.
• Ensure Proper Documentation: Assist in preparing and filing all necessary documents to ensure full compliance with federal and, if applicable, state laws.
• Provide Ongoing Support: Offer ongoing legal support to address any issues that arise during the offering process, particularly those related to investor domicile and regulatory compliance.

In conclusion, while state Blue Sky Laws have their place, Regulation D, specifically Rule 506(b) and Rule 506(c), offers significant advantages in terms of simplified compliance, broader investor access, and reduced regulatory risks. For most issuers, especially those operating across state lines, Regulation D provides a more flexible and secure framework for raising capital.

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 essential to understand and comply with the state-specific notification requirements. These requirements ensure that the state is aware of the securities offerings being conducted within its jurisdiction, even though these offerings are federally preempted from state registration. Here’s a detailed overview of the notification rules and terms for notifying the state about a Regulation D Rule 506(b) or Rule 506(c) offering.

Notification Rules for Regulation D Offerings

Form D Filing

• For both Rule 506(b) and Rule 506(c) offerings, issuers must file Form D with the SEC. This form provides basic information about the offering and the issuer.
• The Form D filing must be made within 15 days after the first sale of securities in the offering.

State Notice Filings

• Despite the federal preemption, states require notice filings to inform them of the Regulation D offerings being conducted within their borders.
• In Kentucky, issuers must submit a notice filing to the Kentucky Department of Financial Institutions via the NASAA Electronic Filing Depository (EFD).

Kentucky Specific Requirements

Filing Fee

• A fixed filing fee of $250 is required when submitting the notice filing to the Kentucky Department of Financial Institutions.
• This fee is non-refundable and must be paid at the time of filing through the EFD.

New Notice Filing

• Issuers must submit the notice filing within 15 days after the first sale of securities in Kentucky.
• The notice filing typically includes a copy of the Form D filed with the SEC, along with the state-specific cover sheet and any additional required documentation.

Late Filing Fees

• Unlike some states, Kentucky does not impose a late fee for notice filings that are submitted after the 15-day deadline.
• However, timely compliance is strongly recommended to avoid potential complications or scrutiny from state regulators.

Steps for Submitting a Notice Filing in Kentucky

Prepare Documentation

• Ensure that you have completed Form D and any required state-specific forms.
• Gather all necessary supporting documentation, such as offering materials and cover sheets.

Submit the Filing Through NASAA EFD

• Go to the NASAA Electronic Filing Depository (EFD) website: https://www.efdnasaa.org
• Follow the instructions to submit the required documents and the $250 filing fee electronically.
• Ensure that all information is accurate and complete to facilitate smooth processing.

Confirm Receipt

• Monitor the EFD system for confirmation of your filing.
• Keep records of all submissions and confirmations for your compliance files.

Importance of Compliance

Adhering to the notification rules and terms for state filings is crucial for maintaining compliance and ensuring the smooth progress of your offering. While the federal preemption under Regulation D simplifies many aspects of the process, meeting state notice requirements helps to:

• Avoid Regulatory Issues: Timely and accurate filings prevent potential legal issues and fines.
• Maintain Good Standing: Ensuring compliance with state laws helps maintain the issuer’s good standing and reputation.
• Provide Transparency: Notice filings keep state regulators informed, fostering a transparent and cooperative relationship.

Understanding and complying with the notification rules and terms for notifying the state about a Regulation D Rule 506(b) or Rule 506(c) offering is a critical component of the securities offering process. By paying the fixed filing fee of $250 and submitting the required documentation within the specified timeframe through the NASAA EFD, issuers can ensure they meet Kentucky’s requirements, thus avoiding any potential regulatory complications. Working with a knowledgeable syndication attorney can further streamline this process, ensuring all legal obligations are met promptly and accurately.

What are Kentucky’s Blue Sky Laws?

Understanding Kentucky’s Blue Sky Laws is essential for anyone involved in the state’s securities market. These laws are designed to protect investors from fraud and to ensure transparency in the offering and sale of securities. Key provisions include:

1. Registration Requirements (KRS 292.340): All securities must be registered unless exempt.
2. Exempt Securities (KRS 292.400): Certain securities are exempt from registration, such as those issued by government entities and non-profits.
3. Claim of Exemption (KRS 292.415): Issuers must file a claim to qualify for an exemption, subject to the commissioner’s approval.
4. Proving Exemption (KRS 292.420): The burden of proof lies on the issuer to demonstrate eligibility for an exemption.
5. Unlawful Representations (KRS 292.450): It is illegal to falsely claim that a security is registered or exempt.

These regulations aim to create a fair and transparent securities market in Kentucky, protecting investors and maintaining market integrity.

KY ST § 286.5-111 Associations exempt from security sale regulations

Kentucky Revised Statutes Section 286.5-111 exempts savings and loan associations, including their officers, employees, agents, and the savings accounts they manage, from state laws that require supervision, registration, or regulation related to the sale, issuance, or offering of securities. This exemption allows these financial entities to conduct their operations without needing approval or oversight from state officials, other than the commissioner responsible for licensing and regulation of securities. This statute ensures that the activities of savings and loan associations are streamlined and not burdened by additional state-level regulatory requirements, thereby facilitating smoother financial operations within Kentucky​.

KY ST § 292.340 Registration of securities

Kentucky Revised Statutes Section 292.340 stipulates that it is illegal to offer or sell any security within the state unless the security is registered under the provisions of this chapter, qualifies for an exemption under this chapter, or is classified as a covered security. This law ensures that all securities sold or offered in Kentucky undergo proper registration or meet specified exemptions to protect investors and maintain market integrity. The statute, originally enacted in 1961 and amended several times, most recently in 1998, is a crucial component of Kentucky’s securities regulation framework, commonly referred to as the Blue Sky Law​.

KY ST § 292.400 Exempt securities

Kentucky Revised Statutes Section 292.400 outlines various categories of securities that are exempt from registration requirements. These include securities issued by government entities, certain foreign governments, banks, savings institutions, federal and state credit unions, and public utilities. Additionally, it covers securities listed on major stock exchanges, those issued by non-profit organizations, certain commercial papers, and securities involved in employee benefit plans. The statute also provides exemptions for securities issued by cooperatives and certain insurance companies, aiming to streamline the issuance process for these entities while ensuring investor protection.

KY ST § 292.415 Claim of exemption; effect of failure to file

Kentucky Revised Statutes Section 292.415 addresses the claim of exemption for securities. Before issuing an exempt security, a claim must be filed with the commissioner, who has ten business days to deny it. Offers, but not sales, can be made during this period if prospective buyers are informed that the offer is preliminary. Failure to file does not create a private right of action unless intentional. The commissioner can issue stop orders if public interest or investor protection is at risk.

KY ST § 292.420 Burden of proving exemption

Kentucky Revised Statutes Section 292.420 places the responsibility of proving an exemption for a security or transaction on the party claiming the exemption. This statute ensures that the issuer must demonstrate compliance with the exemption criteria under the Blue Sky Law. If the exemption is challenged, the issuer must provide sufficient evidence to support the claim. This requirement helps maintain regulatory oversight and investor protection by ensuring that only eligible securities benefit from exemptions.

KY ST § 292.450 Unlawful representations concerning registration or exemption

Kentucky Revised Statutes Section 292.450 makes it illegal to falsely claim that a security has been registered or is exempt from registration. This law prevents individuals or entities from misleading investors by suggesting that their securities have regulatory approval or special status without actually meeting the necessary legal requirements. It ensures transparency and honesty in the marketing and sale of securities, protecting investors from fraudulent or deceptive practices.

What are Kentucky’s Securities Laws Exemptions?

Kentucky’s Blue Sky Laws provide a range of exemptions from the standard registration requirements for certain types of securities and transactions. Understanding these exemptions can significantly simplify compliance for issuers, particularly those involved in syndication, real estate syndication, and private placements. Here’s an overview of the key exemptions under Kentucky law, as outlined in Section 292.400 of the Kentucky Revised Statutes.

1. Governmental Entities

• Securities issued or guaranteed by the United States, any state, any political subdivision of a state, or any agency or instrumentality of these entities are exempt. This includes securities of foreign governments with which the United States maintains diplomatic relations, including Canada.

2. Financial Institutions

• Securities issued by banks, savings institutions, trust companies, savings and loan associations, building and loan associations, and credit unions are exempt. These institutions are typically subject to stringent regulatory oversight, reducing the need for additional state-level scrutiny.

3. Cooperatives

• Securities issued by cooperative corporations, rural electric and telephone cooperative corporations, and agricultural cooperative associations are exempt. These entities operate on a cooperative basis, often with regulatory structures that provide investor protection.

4. Other Entities

• Common carriers, public utilities, holding companies, and insurance companies benefit from exemptions due to their regulated nature and public service roles. Securities issued by these entities are often overseen by other regulatory bodies, ensuring compliance and investor protection.

5. Listed Stock Exchange Securities

• Securities listed on recognized stock exchanges, such as the New York Stock Exchange (NYSE) or NASDAQ, are exempt. These exchanges impose strict listing requirements and ongoing disclosure obligations, providing a level of investor protection that justifies the exemption.

6. Non-Profit Persons

• Securities issued by non-profit organizations are exempt. These organizations are typically focused on charitable, religious, educational, or similar missions, and their securities offerings are generally not aimed at profit-making, reducing the risk to investors.

7. Current Transaction Commercial Paper

• Commercial paper, drafts, bills of exchange, and banker’s acceptances that arise out of a current transaction or the proceeds of which have been or are to be used for current transactions, are exempt. This exemption is intended for short-term instruments typically used in commercial financing.

8. Employee Benefit Plans

• Securities issued in connection with employee benefit plans are exempt. These plans, which include stock purchase plans, savings plans, profit-sharing plans, and similar programs, are often structured to provide benefits to employees, with regulatory safeguards to protect participants.

Practical Implications for Issuers

For issuers involved in syndication, real estate syndication, and private placements, understanding these exemptions is crucial:

• Streamlined Compliance: Leveraging applicable exemptions can significantly reduce the regulatory burden and associated costs.
• Strategic Planning: Identifying which exemptions apply to your offering can help in structuring the deal to maximize efficiency and compliance.
• Risk Management: Ensuring that your offering falls within an exemption can mitigate the risk of regulatory issues and potential penalties.

Kentucky’s securities laws exemptions offer a valuable tool for issuers seeking to navigate the regulatory landscape efficiently. By understanding and utilizing these exemptions, issuers can focus on their core activities—whether it’s raising capital, developing real estate projects, or managing investment funds—while maintaining compliance with state laws. Consulting with a knowledgeable syndication attorney is advisable to ensure that all applicable exemptions are correctly identified and applied, optimizing your offering’s legal and regulatory framework.

What are Kentucky’s Procedures for Securities Law Exemptions?

Understanding and following the correct procedures for claiming securities law exemptions in Kentucky is essential for issuers looking to streamline compliance and reduce regulatory burdens. The Kentucky Department of Financial Institutions oversees these procedures, ensuring that exempt offerings are conducted in accordance with state law. Here’s a detailed guide to the procedures for claiming securities law exemptions in Kentucky.

1. Identify Applicable Exemptions

Before initiating any filing process, it is crucial to determine which specific exemption your offering qualifies for under Kentucky law. The key exemptions are detailed in Section 292.400 of the Kentucky Revised Statutes and include exemptions for governmental entities, financial institutions, cooperatives, listed stock exchange securities, non-profit persons, current transaction commercial paper, and employee benefit plans.

2. Prepare Required Documentation

While certain exemptions may not require a detailed filing, it is good practice to maintain thorough documentation supporting the claim of exemption. This documentation should include:

• Description of the Offering: Detailed information about the securities being offered.
• Basis for Exemption: A clear explanation of why the offering qualifies for the claimed exemption.
• Supporting Evidence: Any necessary supporting documents, such as organizational documents for non-profits, listing confirmations for exchange-listed securities, or regulatory approvals for financial institutions.

3. File Notice with the Kentucky Department of Financial Institutions

For some exemptions, particularly those involving broader or more public offerings, issuers may need to file a notice with the Kentucky Department of Financial Institutions. This is often a procedural requirement to inform the state of the exempt offering, even if full registration is not required.

• Form D: For federal Regulation D exemptions under Rule 506(b) and Rule 506(c), issuers must file Form D with the SEC and provide a copy to the state through the NASAA Electronic Filing Depository (EFD).
• State-Specific Forms: Depending on the exemption, additional state-specific forms or cover sheets may be required. Check the Kentucky Department of Financial Institutions’ website or consult with a legal expert to determine the exact requirements.

4. Pay the Filing Fee

For exemptions that require notice filings, a filing fee is typically required. In Kentucky:

• Filing Fee: A fixed fee of $250 must be paid at the time of filing the notice. This fee is non-refundable and should be included with the submission through the NASAA EFD.

5. Submit the Filing Electronically

Kentucky utilizes the NASAA Electronic Filing Depository (EFD) for processing filings related to securities exemptions. This platform streamlines the submission process, ensuring that filings are processed efficiently and accurately.

• Access the EFD: Visit https://www.efdnasaa.org to begin the filing process.
• Follow Instructions: Complete the required forms and upload all necessary documentation. Ensure that the $250 filing fee is paid electronically through the EFD system.
• Verify Submission: After submitting, verify that all documents have been received and that the filing is complete. Retain copies of all submissions and confirmations for your records.

6. Monitor Compliance and Recordkeeping

Even after claiming an exemption, it is crucial to maintain ongoing compliance and proper recordkeeping. This includes:

• Ongoing Documentation: Keep detailed records of all transactions and communications related to the offering.
• Annual Filings: For certain exemptions, periodic filings or updates may be required. Ensure that any such obligations are met timely.
• Consult Legal Counsel: Regularly consult with a syndication attorney to review compliance status and address any legal or regulatory changes that may impact your offering.

Kentucky’s procedures for securities law exemptions provide a streamlined pathway for issuers to raise capital while maintaining compliance with state regulations. By identifying applicable exemptions, preparing thorough documentation, filing necessary notices, and paying required fees through the NASAA EFD, issuers can effectively navigate the regulatory landscape. Continuous compliance and diligent recordkeeping further ensure that the offering remains within the bounds of the law, protecting both the issuer and investors. Working with a knowledgeable syndication attorney can provide valuable guidance and support throughout this process, ensuring that all procedural requirements are met and that the offering proceeds smoothly.

Frequently Asked Questions

Do I Need an Attorney From Kentucky Then to Put Together an Offering?

Whether you need an attorney from Kentucky to put together an offering depends on the specifics of your securities offering and the legal requirements involved. For offerings under Regulation D, it is generally not necessary to have an attorney licensed in Kentucky, as federal securities laws preempt state Blue Sky Laws for these types of offerings.

For instance, if you require a real estate syndication attorney to prepare a private placement memorandum (PPM) for a multifamily deal in Louisville, Kentucky, that will be offered in multiple states, you likely do not need a Kentucky-licensed attorney. In this scenario, a licensed syndication lawyer, regardless of their state of licensure, can assist in drafting the PPM, forming the entity, and writing the operating agreement. The key here is that you do not need counsel on Kentucky-specific laws; thus, the expertise of a general syndication attorney is sufficient.

However, if your offering is confined to Kentucky and you plan to use one of Kentucky’s Blue Sky Laws as an exemption to registration, a Kentucky-licensed attorney becomes essential. For example, if you are preparing a PPM for a development project in Lexington, Kentucky, and all investors are from Kentucky, you would need to comply with Kentucky-specific securities laws. In this case, the attorney must be licensed in Kentucky to provide accurate legal counsel on how Kentucky’s Blue Sky Laws apply to your offering.

In summary, while a general syndication attorney can handle most aspects of a Regulation D offering across various states, consulting a Kentucky-licensed attorney is crucial when dealing with Kentucky-specific exemptions and ensuring full compliance with local securities regulations. This distinction ensures that your offering is legally sound and that you are adequately advised on any state-specific legal intricacies.

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

It is generally acceptable for a real estate syndication attorney licensed outside of Kentucky to review your purchase contract, but there are limitations on the advice they can provide regarding Kentucky-specific legal matters. For instance, an attorney like Tilden Moschetti, Esq., from the Moschetti Syndication Law Group, can review a purchase contract for a property in Bowling Green, Kentucky. However, he would make it clear that while he can offer business consulting advice—such as discussing the price and broad deal points like the closing timeline—he cannot provide legal advice on specific contract terms related to Kentucky law, as he is not licensed in that state.

This distinction is important because while out-of-state attorneys can offer valuable insights and general advice, they cannot delve into the legal specifics that pertain to Kentucky’s statutes and regulations. Therefore, while an out-of-state syndication attorney can help you understand the broader aspects of your deal, ensure the contract aligns with your business objectives, and negotiate general terms, they cannot advise on compliance with Kentucky law or interpret Kentucky-specific contractual provisions.

For comprehensive legal advice on your purchase contract, particularly regarding local laws and regulations, it is advisable to consult with a Kentucky-licensed attorney. This approach ensures that all legal aspects are thoroughly covered, protecting your interests and ensuring full compliance with state laws.