Maryland Blue Sky Laws for Syndication

Navigating the complex landscape of securities laws is a critical step for anyone looking to raise capital through syndication, especially in the realm of real estate. Whether you’re a real estate developer, a private equity fund manager, or a business owner seeking to syndicate, understanding both federal and state regulations is paramount to ensuring compliance and achieving success. Maryland, like all states, has its own set of securities regulations, commonly referred to as Blue Sky Laws, which aim to protect investors from fraud and misrepresentation.

This article delves into the intricacies of Maryland’s Blue Sky Laws and their interaction with the SEC’s Regulation D. We’ll explore why many sponsors opt for Regulation D offerings over state-specific exemptions, outline the notification procedures required when utilizing Regulation D, and discuss the specific exemptions available under Maryland law. Furthermore, we’ll provide practical insights into whether you need a Maryland-licensed attorney to put together your offering and the limitations faced by out-of-state attorneys when reviewing purchase contracts.

By the end of this article, you will have a comprehensive understanding of how to navigate Maryland’s securities regulations, ensuring that your capital-raising efforts are both legally compliant and strategically sound. Whether you are conducting a multi-state offering or focusing solely on Maryland, this guide will equip you with the knowledge needed to make informed decisions and mitigate potential legal risks.

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

Understanding the relationship between state Blue Sky Laws and the SEC’s Regulation D is crucial for anyone involved in raising capital, particularly through real estate syndication. Blue Sky Laws are state securities regulations designed to protect investors from fraud. They require securities offerings to be registered with the state unless an exemption applies. However, Regulation D of the Securities Act of 1933, particularly Rules 506(b) and 506(c), provides federal exemptions that preempt state Blue Sky Laws, streamlining the process for issuers.

Preemption Under Regulation D

Regulation D, specifically Rule 506(b) and Rule 506(c), allows companies to raise capital without registering their securities with the SEC, provided they meet certain requirements. According to 15 U.S. Code § 77r(b)(4)(F), these offerings are exempt from state Blue Sky Laws, meaning that states cannot impose their own registration or qualification requirements on these offerings. This preemption significantly simplifies the process for sponsors, who can focus on federal compliance without navigating a patchwork of state regulations.

Rule 506(b) and Rule 506(c)

• Rule 506(b): Under this rule, issuers can raise an unlimited amount of money and sell securities to an unlimited number of accredited investors and up to 35 non-accredited investors, provided they meet sophisticated investor standards. General solicitation and advertising are prohibited.
• Rule 506(c): This rule permits general solicitation and advertising, but all investors must be accredited, and the issuer must take reasonable steps to verify their accredited status.

Both rules offer significant advantages by preempting state laws, thus providing a uniform framework for multi-state offerings.

Intrastate Offerings

While Regulation D provides a streamlined federal pathway, there are scenarios where a sponsor might choose to operate under state Blue Sky Laws instead. If an offering is made exclusively within one state—meaning the sponsor, all investors, and the assets are all located in that state—it may qualify as an intrastate offering. This can be advantageous for smaller, localized projects where compliance with a single set of state regulations is more practical and cost-effective.

For most real estate syndications and other capital-raising activities, utilizing Regulation D’s Rule 506(b) or Rule 506(c) offers significant benefits by preempting state Blue Sky Laws and providing a clear, federally regulated path. However, for entirely intrastate offerings, sponsors might find value in adhering to state-specific Blue Sky Laws. Consulting with a syndication attorney experienced in both federal and state securities laws can help determine the best approach for your specific situation, ensuring compliance and optimizing the capital-raising process.

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

When raising capital through syndication, particularly in real estate, choosing the right regulatory framework is essential to ensure compliance and avoid legal pitfalls. Regulation D, specifically Rules 506(b) and 506(c), offers significant advantages over state Blue Sky Laws, making it the preferred choice for many sponsors and investors.

Multi-State Reach and Compliance

One of the primary reasons to choose Regulation D Rule 506(b) or Rule 506(c) is their federal preemption of state Blue Sky Laws. This is crucial for offerings involving investors or sponsors from multiple states. Under Regulation D, an offering can be conducted nationwide without the need to comply with each state’s registration requirements, significantly reducing the complexity and administrative burden of the capital-raising process.

Avoiding Intrastate Offering Pitfalls

State Blue Sky Laws are applicable for intrastate offerings, where the sponsor, all investors, and the assets are located within a single state. However, this approach carries inherent risks. If any investor or the sponsor is outside the state, the offering cannot qualify under state Blue Sky Laws. An inadvertent discovery that an investor is domiciled outside the state can transform an intrastate offering into a potential securities law violation.

For example, if a sponsor relies on state Blue Sky Laws but later finds that an investor is actually domiciled outside of the state, the offering would no longer qualify as intrastate. This could lead to significant legal issues, including the need to retroactively comply with federal securities laws, which can be both time-consuming and costly.

Flexibility and Investor Reach

Regulation D provides greater flexibility in terms of the number and type of investors. Rule 506(b) allows for an unlimited number of accredited investors and up to 35 sophisticated non-accredited investors, without the need for general solicitation or advertising. Rule 506(c), on the other hand, permits general solicitation but requires all investors to be accredited, with the issuer taking reasonable steps to verify this status.

This flexibility is particularly beneficial for sponsors looking to raise large amounts of capital or reach a broader investor base. The ability to solicit publicly under Rule 506(c) can also enhance the visibility of the offering, attracting more potential investors.

Streamlined Compliance and Reduced Risk

By choosing Regulation D, sponsors can benefit from a streamlined compliance process. Federal preemption means that compliance is primarily with SEC regulations, which are uniform across all states. This reduces the risk of inadvertently violating state-specific securities laws, providing greater legal certainty and peace of mind for sponsors and investors alike.

Opting for Regulation D Rule 506(b) or Rule 506(c) over state Blue Sky Laws is a strategic decision that offers numerous advantages. It simplifies compliance, reduces legal risks, and provides greater flexibility in reaching and soliciting investors. Given the potential pitfalls associated with intrastate offerings, particularly the risk of inadvertently involving out-of-state investors, Regulation D serves as a more robust and secure framework for raising capital through syndication. Consulting with a knowledgeable syndication attorney can further ensure that your offering is structured to maximize these benefits while remaining fully compliant with all applicable securities laws.

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 important to understand and comply with the notification rules and terms for notifying the state. While these offerings are federally preempted from state registration requirements, specific state-level notifications and filings are still required to ensure full compliance.

Filing Fee

For a Regulation D Rule 506(b) or Rule 506(c) offering, there is a fixed filing fee that must be paid to the state. The current fee structure is as follows:

• New Notice Filing Fee: $100

This fee is required when submitting the initial notice of the offering to the state.

Notification Requirements

Although Regulation D offerings are exempt from state registration, issuers must still file a notice of the offering with the state securities regulator. This involves submitting Form D to the SEC and providing a copy to the state securities regulator through the NASAA Electronic Filing Depository (EFD).

Timing of the Notice

Timely filing of the notice is crucial. The rules stipulate that the notice must be filed within a specific period relative to the first sale of securities in the state:

• Initial Filing Deadline: The notice must be filed within 15 days after the first sale of securities in the state.

Late Filing Fee

If the filing is not made within the 15-day period, a late fee will be incurred. The late filing fee structure is as follows:

• Late Fee: $150 if the filing is made more than 15 days after the first sale in the state.

This late fee is in addition to the initial $100 filing fee, making timely filing essential to avoid additional costs.

Steps for Notification

1. File Form D with the SEC: Complete and submit Form D through the SEC’s EDGAR system. Form D provides details about the offering, including the issuer, the amount of securities offered, and the types of investors involved.
2. Submit Notice through NASAA EFD: Provide a copy of Form D to the state securities regulator through the NASAA Electronic Filing Depository (EFD). The EFD system streamlines the process of filing state notices and paying the associated fees.
3. Pay the Filing Fee: Pay the $100 filing fee through the NASAA EFD system at the time of submission.
4. Monitor Filing Deadlines: Ensure that the notice is submitted within 15 days after the first sale of securities in the state to avoid the $150 late fee.

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 essential for maintaining compliance and avoiding unnecessary fees. By timely submitting the required notice through the NASAA Electronic Filing Depository (EFD) and paying the filing fee, sponsors can ensure their offerings adhere to both federal and state regulations. Working with a knowledgeable syndication attorney can help streamline this process, ensuring all regulatory requirements are met efficiently and accurately.

What are Maryland’s Blue Sky Laws?

Blue sky laws are state-level regulations designed to protect investors from securities fraud by requiring sellers of new securities to register their offerings and provide financial details. These laws aim to safeguard the public from deceitful practices and ensure transparency in the securities market. Maryland’s blue sky laws encompass a variety of provisions that govern the registration, exemption, and sale of securities within the state.

One of the fundamental aspects of these laws is the registration requirement under Maryland Code Section 11-501, which mandates that securities must be registered unless they fall under specific exemptions or are classified as federal covered securities. Furthermore, Section 11-304 prohibits false representations concerning the registration status of securities, emphasizing that regulatory filings do not equate to an endorsement of the security’s value or credibility.

Exemptions to these registration requirements are detailed in Section 11-601, which lists various categories of securities that do not need to be registered, such as those issued by government entities, certain financial institutions, and nonprofit organizations. However, the state retains the authority to deny or revoke these exemptions if necessary, as stipulated in Section 11-603, ensuring that all securities transactions remain under stringent scrutiny to protect investors.

Additionally, the state oversees specific activities within its jurisdiction, such as harness racing. According to Section 11-604, each harness race must be officiated by three judges to maintain the integrity and fairness of the races. This aspect of regulation highlights the comprehensive nature of Maryland’s blue sky laws, extending beyond traditional securities to include various forms of betting and gaming.

By understanding these regulations, investors can better navigate the securities market, ensuring their investments are secure and compliant with state laws.

MD CORP & ASSNS § 11-304 Prohibited representations concerning effect of registration or exemption.

Maryland Code Section 11-304 (2013) prohibits false representations regarding the registration, notice filing, or exemption of securities. Specifically, it states that the submission or approval of any document does not confirm its accuracy, completeness, or truthfulness, nor does it imply any endorsement of the entity or security involved. It is illegal to make misleading claims to potential buyers, customers, or clients that contradict this clarification.

MD CORP & ASSNS § 11-501 Sales of registered or exempt securities.

Maryland Code Section 11-501 mandates that securities cannot be offered or sold in the state unless they meet one of the following criteria: the security is registered under the Maryland Securities Act, the security or transaction is exempt under Subtitle 6 of this title, or the security qualifies as a federal covered security. This ensures that all securities offered in Maryland comply with state regulations, providing protection for investors.

MD CORP & ASSNS § 11-601 Securities exempted

Maryland Code Section 11-601 outlines various categories of securities that are exempt from the registration and notice requirements of Sections 11-205 and 11-501. These exemptions include securities issued or guaranteed by governmental entities (U.S., states, foreign governments), banks, insurance companies, and specific nonprofit organizations, among others. Additionally, certain securities listed on recognized stock exchanges and those involved in employee benefit plans are also exempt.

MD CORP & ASSNS § 11-603 Exemption revoked

Maryland Code Section 11-603 (2017) allows the Commissioner to deny or revoke exemptions for specific securities or transactions under certain conditions. This can be done after giving notice, opportunity for a hearing, and issuing written findings. A summary order can be issued but must promptly notify all parties, and they can request a hearing within 15 days. The order remains effective until modified or vacated, and it doesn’t apply retroactively. Violations of Sections 11-205 or 11-501 are not assumed if reasonable care was taken.

MD CORP & ASSNS § 11-604 Proof of exemption

Maryland Code Section 11-604, under the Business Regulation title, specifies the requirement for harness racing events. It mandates that each race conducted by a licensee must be officiated by three harness judges. This regulation ensures proper oversight and fairness in the conduct of harness racing events, maintaining the integrity of the sport.

What are Maryland’s Securities Laws Exemptions?

Maryland’s securities laws provide several exemptions that allow certain securities and transactions to bypass the registration requirements typically imposed under the state’s Blue Sky Laws. These exemptions are designed to streamline the process for entities and transactions that are deemed lower risk or already regulated under other stringent frameworks. Understanding these exemptions can be crucial for sponsors and investors involved in various types of securities offerings, including real estate syndication.

Governmental Entities and Certain Foreign Governments

Securities issued by governmental entities, including federal, state, and local governments, are exempt from registration. Additionally, securities issued by certain foreign governments, such as Canada, are also exempt.

Financial Institutions

Securities issued by financial institutions are exempt from registration. This includes:

• Banks
• Savings institutions
• Trust companies
• Savings and loan associations
• Building and loan associations
• Credit unions
• Industrial loan associations

These institutions are heavily regulated and are considered lower risk, justifying their exemption.

Electric Cooperatives

Securities issued by electric cooperatives, which provide electricity to their members, are exempt from registration due to their unique structure and purpose.

Other Entities

Several other types of entities also enjoy exemptions, including:

• Railroads
• Common carriers
• Public utilities
• Holding companies
• Insurance companies

These entities are typically subject to other regulatory oversight, reducing the need for additional securities regulation.

Listed Stock Exchange Securities

Securities listed on national securities exchanges are exempt from registration under Maryland law. This ensures that publicly traded companies that comply with federal regulations do not face redundant state requirements.

Clearing Agency Options

Options issued by a clearing agency registered under the Securities Exchange Act of 1934 are exempt. This category includes options traded on recognized exchanges.

Exempt Securities Under the Securities Exchange Act of 1934

Securities that are exempt under the federal Securities Exchange Act of 1934 are also exempt under Maryland law. This includes various categories of securities that the SEC has deemed appropriate for exemption.

Non-Profit Persons

Securities issued by non-profit organizations are exempt. These organizations include charitable, religious, educational, and other non-profit entities that meet specific criteria.

Current Transaction Commercial Paper

Commercial paper, which is a short-term debt instrument issued by corporations, is exempt if it is part of a current transaction and meets certain conditions.

Employee Benefit Plans

Securities issued as part of an employee benefit plan are exempt. This includes securities such as stock options and retirement plan interests provided to employees as part of their compensation.

Understanding the exemptions available under Maryland’s securities laws is essential for sponsors and investors to navigate the regulatory landscape efficiently. These exemptions reflect a balance between investor protection and reducing the regulatory burden on certain low-risk or heavily regulated entities and transactions. For those engaged in real estate syndication or other capital-raising activities, consulting with a syndication attorney can help determine whether an exemption applies to your specific situation, ensuring compliance while optimizing the capital-raising process.

What are Maryland’s Procedures for Securities Law Exemptions?

Navigating the procedures for obtaining a securities law exemption in Maryland is crucial for sponsors, investors, and businesses seeking to raise capital efficiently. While exemptions can simplify the regulatory process by bypassing the need for full registration, understanding the specific steps and requirements is essential to ensure compliance with Maryland’s securities laws.

Identifying Applicable Exemptions

The first step in the process is identifying which exemption applies to your offering. As outlined in Maryland’s securities laws, exemptions cover a range of entities and securities, including those issued by governmental entities, financial institutions, electric cooperatives, and certain other regulated entities. Detailed information on these exemptions can be found under Maryland Corporations and Associations Code Title 11, Subtitle 6, Section 11-601.

Preparing Documentation

Once the appropriate exemption is identified, the next step involves preparing the necessary documentation to support the exemption claim. This typically includes:

1. Description of the Security: Detailed information about the security being offered.
2. Issuer Information: Information about the entity issuing the security, including its organizational structure and regulatory status.
3. Investor Information: Details about the intended investors and their qualifications, if applicable.

Filing the Exemption Notice

While some exemptions may not require formal filing, others necessitate submitting a notice to the Maryland Securities Division. This notice provides the state with basic information about the offering and the claimed exemption. The specific requirements can vary depending on the exemption category.

1. Prepare Form D: For offerings under Regulation D (Rule 506(b) or Rule 506(c)), prepare Form D, which is also filed with the SEC.
2. Submit through NASAA EFD: File the exemption notice and any required documentation through the NASAA Electronic Filing Depository (EFD). This streamlined system allows for efficient submission and processing of exemption notices.
3. Pay Filing Fee: If applicable, pay the required filing fee through the NASAA EFD system. The fee structure and payment process are clearly outlined within the EFD platform.

Compliance with Ongoing Obligations

After filing the exemption notice, it is important to comply with any ongoing obligations that may apply. This can include:

• Periodic Reporting: Providing updates to the Maryland Securities Division if there are significant changes to the offering or the issuer.
• Record-Keeping: Maintaining thorough records of the offering and any communications with investors.

Monitoring Regulatory Changes

Securities laws and regulations can evolve, so it is crucial to stay informed about any changes that might impact your exemption status or compliance requirements. Regularly reviewing updates from the Maryland Securities Division and consulting with a knowledgeable syndication attorney can help ensure continued compliance.

Securing a securities law exemption in Maryland involves identifying the appropriate exemption, preparing and filing the necessary documentation, and complying with any ongoing obligations. By following these procedures, sponsors and issuers can take advantage of the streamlined regulatory process offered by exemptions, facilitating efficient capital raising while remaining compliant with state laws. Consulting with a syndication attorney can provide further guidance and support, ensuring that all procedural steps are properly followed and documented.

Frequently Asked Questions

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

Whether you need an attorney from Maryland to put together an offering largely depends on the specific nature of your offering and the applicable regulations. If your offering falls under Regulation D rather than Maryland-specific Blue Sky Laws, you likely do not need a Maryland-licensed attorney.

For instance, if you are seeking a real estate syndication attorney to draft a private placement memorandum (PPM) for a multifamily deal in Baltimore, Maryland, that will be offered across multiple states, and you do not require counsel on issues specifically related to Maryland laws, a licensed syndication lawyer from another state can generally assist. Such an attorney can handle the preparation of the PPM, formation of the entity, and drafting of the operating agreement. However, they would not be able to provide legal advice on Maryland-specific securities laws and how they might impact your offering.

Conversely, if you are preparing a PPM for a development project in Columbia, Maryland, and all the investors are from Maryland, and you plan to use one of Maryland’s Blue Sky Laws as an exemption from registration, it would be essential to work with an attorney licensed in Maryland. This ensures that the legal advice and documentation you receive are fully compliant with state-specific regulations.

In summary, while a non-Maryland attorney can handle many aspects of a Regulation D offering, any offering relying on Maryland’s specific Blue Sky Laws for an exemption would necessitate the expertise of a Maryland-licensed attorney to ensure full compliance and to navigate the particularities of state law effectively.

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

If you have a real estate syndication attorney who is not licensed in Maryland, they can certainly review your purchase contract, but they cannot provide legal advice specific to Maryland law. For example, Tilden Moschetti, Esq., a syndication attorney with the Moschetti Syndication Law Group, can review the contract underlying your purchase of a property in Germantown, Maryland. However, he will clearly communicate that while he can offer business consulting advice—such as discussing the price and broad deal points like the length of time until closing—he cannot provide legal advice on any specific terms within the contract because he is not licensed in Maryland.

This distinction is crucial to understand. While an out-of-state attorney can provide valuable insights and advice from a business perspective, they are restricted from addressing legal specifics governed by Maryland law. To ensure all legal aspects of your contract are properly addressed, it is advisable to consult with or retain an attorney who is licensed in Maryland. This ensures that all local legal requirements are met and that you receive comprehensive legal guidance tailored to Maryland’s regulations.