Michigan Blue Sky Laws for Syndication

Navigating the complex landscape of securities laws is a critical task for real estate developers, private equity fund managers, and syndicators. Understanding how state-specific regulations, like Michigan’s Blue Sky Laws, interact with federal securities exemptions under Regulation D is essential for successfully raising capital and ensuring compliance. This comprehensive guide delves into the intricacies of Michigan’s Blue Sky Laws, their relationship with Regulation D, and the practical steps required for compliance.

Whether you are a seasoned real estate professional looking to syndicate a multifamily property in Detroit or a private equity manager planning a development project in Grand Rapids, this article provides valuable insights into the legal framework governing securities offerings in Michigan. We will explore the notification rules, procedural requirements, and exemptions under Michigan law, helping you make informed decisions about your capital-raising strategies. Additionally, we address common questions about the necessity of engaging local legal counsel and the limitations of using out-of-state attorneys for specific legal advice.

By understanding these regulations and their implications, you can better navigate the regulatory landscape, avoid potential legal pitfalls, and effectively manage your securities offerings. Whether you’re relying on Regulation D Rule 506(b) or Rule 506(c) exemptions or considering state-specific Blue Sky Laws for intrastate offerings, this guide equips you with the knowledge needed to comply with all relevant legal requirements.

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 play crucial roles in regulating securities offerings, but they operate in different contexts. Understanding how these two sets of regulations interact is essential for anyone involved in real estate syndication or other types of private placements.

Preemption by Regulation D Rule 506(b) or Rule 506(c)

When a syndication offering is conducted under Regulation D, particularly under Rule 506(b) or Rule 506(c), it benefits from federal preemption of state Blue Sky Laws. This preemption is codified under 15 U.S. Code § 77r(b)(4)(F), which means that offerings under these rules are not subject to state securities registration requirements. This federal preemption simplifies the regulatory compliance process for sponsors, allowing them to focus on meeting federal requirements rather than navigating a patchwork of state laws.

Intrastate Offerings Under Blue Sky Laws

However, if a real estate syndication offering is confined to a single state—where the sponsor, all investors, and the assets are located within that state—the sponsor may choose to take advantage of the state’s Blue Sky Laws instead. Such intrastate offerings can be beneficial when the sponsor prefers to operate within the specific legal framework of their state or when the offering does not meet the criteria for a Regulation D exemption.

Regulation D and State Notification

Despite the preemption of state Blue Sky Laws under Regulation D Rule 506(b) and Rule 506(c), there are still notification requirements that must be fulfilled. Sponsors must file Form D with the SEC and provide copies of this form to the states where the offering is being made. This notification allows states to keep records of securities offerings within their jurisdiction, even though they do not have the authority to impose additional registration requirements on these federally exempt offerings.

Practical Implications for Real Estate Syndications

For real estate syndicators, understanding the relationship between state Blue Sky Laws and Regulation D is vital. Utilizing Rule 506(b) or Rule 506(c) under Regulation D provides a streamlined path to raising capital without the added complexity of state-level registration. This is particularly advantageous in large, multi-state offerings where complying with numerous state regulations would be cumbersome and costly.

In summary, while state Blue Sky Laws provide important investor protections, their applicability is largely preempted for offerings under Regulation D Rule 506(b) or Rule 506(c). However, for intrastate offerings, sponsors might opt to use state laws, taking into account the specific benefits and requirements of their state’s regulatory framework. For most syndicators, leveraging the federal preemption offered by Regulation D is the preferred approach, enabling efficient and compliant capital raising.

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

Choosing between Regulation D Rule 506(b) or Rule 506(c) and a state’s Blue Sky Laws is a critical decision for sponsors involved in syndication, particularly in real estate syndication. There are several compelling reasons to opt for Regulation D exemptions over state-specific regulations.

Interstate Flexibility and Compliance Assurance

One of the primary advantages of using Regulation D Rule 506(b) or Rule 506(c) is the flexibility it offers in terms of interstate transactions. If any investor or the sponsor is located outside of the state, the offering cannot be considered under the state’s Blue Sky Laws. Relying on Regulation D ensures that the offering complies with federal securities laws regardless of the geographic locations of the investors or the sponsor. This flexibility is crucial for sponsors looking to attract a diverse group of investors from multiple states.

Avoiding Securities Law Violations

Relying solely on state Blue Sky Laws for an intrastate offering carries significant risks. One common issue is the potential discovery that an investor is actually domiciled outside of the state. This miscalculation can transform what was intended to be an intrastate offering into an interstate offering, thereby violating securities laws. Such a mistake can lead to severe legal consequences, including fines, sanctions, and the invalidation of the offering. By choosing Regulation D Rule 506(b) or Rule 506(c), sponsors mitigate this risk by adhering to a federally preemptive regulation that accommodates interstate investments.

Streamlined Regulatory Process

Regulation D Rule 506(b) and Rule 506(c) provide a streamlined process for raising capital. These rules preempt state registration requirements, simplifying compliance by reducing the need for multiple state filings and approvals. This streamlined process not only saves time and resources but also reduces the complexity and administrative burden associated with state-level compliance.

Investor Confidence and Marketability

Using Regulation D exemptions can enhance investor confidence and improve the marketability of the offering. Investors are often more familiar with the federal regulatory framework provided by the SEC, which can increase their trust and willingness to participate in the offering. The established procedures and protections under Regulation D can make the offering more attractive to sophisticated and accredited investors.

Greater Capital Raising Potential

Regulation D Rule 506(b) allows for an unlimited amount of capital to be raised from up to 35 non-accredited investors and an unlimited number of accredited investors, without the need for advertising or general solicitation. Rule 506(c) allows for general solicitation and advertising, provided that all investors are accredited and the issuer takes reasonable steps to verify their accreditation status. These provisions provide sponsors with greater flexibility and potential to raise significant capital compared to the limitations often imposed by state Blue Sky Laws.

Legal Certainty and Expert Guidance

Utilizing Regulation D exemptions provides greater legal certainty and the opportunity to seek guidance from experienced syndication attorneys. These professionals specialize in navigating the complexities of federal securities regulations and can help ensure that the offering is structured and executed in compliance with all relevant laws. This legal certainty is invaluable in avoiding potential pitfalls and ensuring the success of the capital-raising efforts.

In conclusion, while state Blue Sky Laws offer a regulatory framework for intrastate offerings, the broader applicability, legal certainty, and streamlined process provided by Regulation D Rule 506(b) and Rule 506(c) make them the preferred choice for most sponsors. By choosing these federal exemptions, sponsors can effectively manage compliance risks, attract a broader pool of investors, and achieve their capital-raising goals with confidence.

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 comply with both federal and state notification requirements. While federal regulations preempt state Blue Sky Laws, states still require issuers to file notices for record-keeping and oversight purposes.

Filing Fee

In Michigan, there is a fixed filing fee for notifying the state of a Regulation D offering. The fee for submitting a new notice is $100, which applies to both Rule 506(b) and Rule 506(c) offerings. This fee must be paid at the time of filing.

New Notice Filing

Issuers must file Form D with the Securities and Exchange Commission (SEC) when initiating a Regulation D Rule 506(b) or Rule 506(c) offering. This form contains essential information about the offering, including details about the issuer, the type of security, and the amount being offered.

To notify the state of Michigan, issuers must submit a copy of the Form D through the NASAA Electronic Filing Depository (EFD) system. This electronic system streamlines the filing process, ensuring that notices are sent efficiently and securely. The specific steps are as follows:

• File Form D with the SEC: Complete and submit Form D electronically through the SEC’s EDGAR system.
• Submit through EFD: Log in to the NASAA EFD system (https://www.efdnasaa.org/FAQ/answer?faq=2) and upload the Form D. Pay the $100 filing fee through the EFD system.

Late Filing Fees

Michigan does not impose late fees for the delayed filing of notices for Regulation D offerings. While this provides some flexibility, it is still advisable to file all notices promptly to avoid any potential issues or misunderstandings with state regulators.

Process and Timeline

The process of filing involves:

• Electronic Filing with the SEC: Submit Form D through the EDGAR system.
• State Notification via EFD: Upload the Form D to the NASAA EFD system and pay the $100 fee.

These steps should be completed within 15 days of the first sale of securities in the offering to ensure compliance with both federal and state regulations.

Importance of Compliance

Properly notifying the state of Michigan about a Regulation D Rule 506(b) or Rule 506(c) offering is crucial for maintaining compliance and avoiding any potential legal issues. While Michigan’s lack of late fees provides some leeway, timely filing reflects the issuer’s commitment to adhering to regulatory requirements and fosters a positive relationship with state regulators.

Summary

• Filing Fee: Fixed fee of $100 for new notice filings.
• New Notice: Submit Form D to the SEC and upload a copy with the fee to Michigan via the NASAA EFD system within 15 days of the first sale.
• Late Fees: None, but timely filing is recommended.

By following these notification rules and ensuring the timely submission of necessary documents and fees through the NASAA EFD system, issuers can maintain compliance with both federal and state requirements, allowing their Regulation D offerings to proceed smoothly.

What are Michigan’s Blue Sky Laws?

Michigan’s Blue Sky Laws are designed to protect investors from securities fraud while promoting a fair and transparent financial market. These laws encompass a variety of regulations that govern the offering and sale of securities within the state. Key sections of the Michigan Compiled Laws (MCL) outline specific exemptions, rules, and conditions that apply to securities transactions, ensuring that both issuers and investors operate within a secure legal framework.

Section 451.2201 provides a detailed list of securities exempt from certain registration requirements. This includes securities issued by government entities, banks, insurance companies, and non-profit organizations. The aim is to streamline the issuance and trading of these securities without imposing onerous registration processes, thereby facilitating efficient market operations.

Section 451.2202a, known as the “Michigan Invests Locally Exemption” (MILE), focuses on promoting local investments by allowing issuers to offer securities to Michigan residents under specific conditions. This section mandates comprehensive disclosures to potential investors and sets out guidelines for using internet platforms for these offerings, thereby fostering a transparent and informed investment environment.

Section 451.2203 grants the administrator the authority to issue rules or orders that can exempt certain securities, transactions, or classes of transactions from registration requirements. This flexibility helps accommodate unique or situational needs in the securities market, ensuring that regulatory measures are appropriately applied without stifling legitimate financial activities.

Section 451.2204 outlines the procedures for the denial, suspension, revocation, or conditioning of exemptions by the administrator. This section ensures that exemptions are granted or withdrawn based on rigorous oversight, maintaining the integrity of the securities market. It also provides protections for individuals who unknowingly engage in transactions affected by these administrative orders, safeguarding against inadvertent legal violations.

Together, these sections form a comprehensive framework that balances the need for investor protection with the facilitation of legitimate securities transactions. Understanding these regulations is crucial for anyone involved in Michigan’s financial markets, from issuers and investors to legal and financial advisors. By adhering to these guidelines, participants can navigate the complexities of the securities market with confidence and compliance.

MI ST 451.2201 Exempt securities, generally

Michigan Compiled Laws Section 451.2201 outlines the types of securities that are exempt from certain registration requirements under Michigan law. Specifically, this section exempts various securities from the requirements set forth in sections 301 to 306 and section 504 of the Uniform Securities Act. The exemptions include securities issued, insured, or guaranteed by the United States government, state governments, or political subdivisions thereof, as well as certain foreign governments and international banking institutions. Additionally, securities issued by banks, insurance companies, and public utilities regulated by federal or state authorities are also exempt. Other exemptions apply to securities issued by nonprofit organizations and cooperative associations, as well as certain equipment trust certificates and federal covered securities. This exemption framework is designed to facilitate the issuance and trading of these types of securities without the burdensome registration requirements typically imposed on other securities

MI ST 451.2202a Exemptions from §§ 451.2301 to 451.2306 and 451.2504; requirements and limitations; powers and duties of administrator; quarterly report by issuer; registration of website; violations

Michigan Compiled Laws Section 451.2202a, known as the “Michigan Invests Locally Exemption” (MILE), provides guidelines for the offer or sale of securities by issuers under specific exemptions from registration requirements. This section stipulates that issuers must be organized and authorized to do business in Michigan, and sales must be limited to residents of the state. Issuers must provide detailed disclosure statements to prospective investors, including information about ownership, management, the terms of the securities offered, and any legal proceedings involving the issuer. Additionally, there are specific conditions regarding the use of internet websites for the offer and sale of these securities, including the necessity for escrow agreements and the provision of quarterly reports to investors until the securities are no longer outstanding. This law aims to facilitate local investment while ensuring transparency and investor protection.

MI ST 451.2203 Additional exemptions; waivers

Michigan Compiled Laws Section 451.2203 allows for exemptions and waivers from certain securities registration requirements. Specifically, it authorizes the issuance of rules or orders that can exempt a security, transaction, or offer, or a class of securities, transactions, or offers, from the requirements detailed in sections 301 to 306 and section 504 of the Uniform Securities Act (2002). Additionally, this provision permits the waiver of any conditions necessary for exemptions or offers under sections 201 and 202. This flexibility is designed to facilitate specific securities activities without the full burden of registration, aiming to streamline processes while maintaining regulatory oversight where needed.

MI ST 451.2204 Denial, suspension, limitation, revocation, etc., of exemption or waiver; liability for certain conduct following entry of order under section

Michigan Compiled Laws Section 451.2204 addresses the authority of the administrator to deny, suspend, revoke, condition, or limit exemptions related to securities. Specifically, except for federal covered securities, the administrator can issue an order to affect exemptions granted under sections 201 and 202, or waivers under section 203, concerning specific securities, transactions, or offers. These actions must follow the procedures outlined in sections 306(4) and 604 of the Uniform Securities Act. Additionally, a person does not violate sections 301, 303 to 306, 504, or 510 by engaging in transactions after such an order is issued if they were unaware and could not have reasonably known about the order.

What are Michigan’s Securities Laws Exemptions?

Michigan’s securities laws provide various exemptions to facilitate certain types of securities offerings without requiring full compliance with registration requirements. These exemptions are designed to streamline the process for specific issuers and types of transactions, reducing the regulatory burden while maintaining investor protections.

General Exemptions

Under the Michigan Uniform Securities Act, several categories of issuers and securities are exempt from the registration requirements specified in sections 301 to 306 and 504. These exemptions apply to a variety of entities and transactions, allowing them to offer or sell securities without the need for extensive regulatory filings.

Categories of Exempt Entities and Securities

1. Governmental Entities: Securities issued by governmental entities, including certain foreign governments such as Canada, are exempt. This includes bonds and other securities issued by these entities.
2. Financial Institutions: This exemption covers securities issued by banks, savings institutions, trust companies, savings and loan associations, building and loan associations, small loan corporations, credit unions, and industrial loan associations. These institutions are subject to other regulatory frameworks, reducing the need for additional state securities registration.
3. Cooperative Corporations: Securities issued by cooperative corporations are exempt, facilitating capital raising for cooperative ventures.
4. Other Entities: Certain other entities, such as railroads, common carriers, public utilities, holding companies, and insurance companies, are also exempt. These entities often operate under extensive regulatory oversight, making additional securities registration redundant.
5. Listed Stock Exchange Securities: Securities listed on recognized stock exchanges are exempt. These securities are subject to rigorous listing and disclosure requirements imposed by the exchanges and federal regulators.
6. Non-Profit Persons: Securities issued by non-profit organizations are exempt. This allows non-profits to raise funds without the administrative burden of state securities registration.
7. Current Transaction Commercial Paper: Commercial paper issued in current transactions, typically short-term debt securities, is exempt due to its nature and the profile of its investors.
8. Employee Benefit Plans: Securities issued as part of an employee benefit plan are exempt, facilitating the provision of stock options, retirement plans, and other benefits to employees.

Conditional Exemptions

In addition to these general exemptions, the Michigan Uniform Securities Act allows for conditional exemptions. A rule or order under the Act can exempt a security, transaction, or offer from any or all of the registration requirements of sections 301 to 306 and 504. Furthermore, a rule or order may waive any or all conditions for an exemption under sections 201 and 202. This provides flexibility for regulators to accommodate unique or special circumstances where traditional registration requirements may not be necessary or appropriate.

Practical Implications

These exemptions significantly ease the regulatory burden on eligible issuers, enabling them to raise capital more efficiently. However, it is crucial for issuers to ensure that they meet all applicable criteria for the exemption to avoid inadvertently violating securities laws.

Summary

• Governmental Entities: Exempt from registration.
• Financial Institutions: Includes banks, savings institutions, and others.
• Cooperative Corporations: Exempt.
• Other Entities: Includes railroads, public utilities, and insurance companies.
• Listed Stock Exchange Securities: Exempt due to stringent listing requirements.
• Non-Profit Persons: Exempt.
• Current Transaction Commercial Paper: Exempt.
• Employee Benefit Plans: Exempt.
• Conditional Exemptions: Flexibility for additional exemptions through rules or orders.

Understanding these exemptions helps issuers navigate the regulatory landscape more effectively, ensuring compliance while taking advantage of the streamlined processes available under Michigan’s securities laws.

What are Michigan’s Procedures for Securities Law Exemptions?

Navigating the procedures for securities law exemptions in Michigan is essential for issuers seeking to raise capital while avoiding the extensive requirements of full registration. Michigan’s securities laws provide a clear framework for these exemptions, enabling various entities to benefit from reduced regulatory burdens under specific conditions. Below are the key steps and procedures to follow for securing securities law exemptions in Michigan.

Identifying Applicable Exemptions

The first step for any issuer is to determine whether their securities offering qualifies for one of the exemptions outlined in Michigan’s securities laws. As previously mentioned, these exemptions cover a range of entities, including governmental entities, financial institutions, cooperative corporations, certain other entities like public utilities, non-profits, and those issuing listed stock exchange securities, among others.

Filing Requirements

Even when an offering is exempt from full registration, issuers may still need to file certain notices or documentation to inform state regulators of the offering. This helps maintain transparency and regulatory oversight. Key steps include:

• Notice Filing: Issuers often need to file a notice with the Michigan Department of Licensing and Regulatory Affairs (LARA), Corporations, Securities & Commercial Licensing Bureau. This notice typically includes basic information about the issuer and the offering.
• Form D: For offerings relying on federal Regulation D exemptions, issuers must file Form D with the SEC. A copy of this Form D, along with the appropriate filing fee, must be submitted through the NASAA Electronic Filing Depository (EFD) system to notify Michigan.

Using the NASAA Electronic Filing Depository (EFD) System

Michigan has adopted the NASAA EFD system to streamline the filing process for exempt securities offerings. The EFD system allows issuers to file notices and pay fees electronically, ensuring efficient and accurate processing. Here’s how to use the system:

• Access the EFD System: Go to the NASAA EFD website (https://www.efdnasaa.org/FAQ/answer?faq=2).
• Create an Account: If you don’t already have an account, create one to gain access to the filing platform.
• Upload Form D: Log in and upload the completed Form D that was filed with the SEC.
• Pay Filing Fee: Pay the $100 filing fee electronically through the EFD system.
• Submit: Submit the notice filing to Michigan via the EFD system.

Conditional and Additional Exemptions

For certain unique or specific securities, transactions, or offers, issuers may seek conditional exemptions. These can be granted by a rule or order under the Michigan Uniform Securities Act. To apply for such an exemption:

• Petition for Exemption: Submit a petition to LARA outlining the details of the securities offering and the reasons for seeking an exemption.
• Review Process: The petition will be reviewed by the appropriate regulatory authority.
• Decision: If approved, the exemption will be granted via a rule or order, potentially waiving certain conditions of the standard exemptions.

Ongoing Compliance and Documentation

Even when exempt from registration, issuers must maintain diligent records and ensure ongoing compliance with all applicable conditions of their exemption. This includes:

• Record Keeping: Maintain detailed records of the offering, including investor information and communications.
• Periodic Reporting: Some exemptions may require periodic reporting to state regulators, ensuring continued compliance with exemption conditions.
• Legal and Professional Advice: Consult with a securities attorney to navigate complex exemption processes and ensure adherence to all regulatory requirements.

Summary

Navigating the procedures for securities law exemptions in Michigan involves:

• Identifying Applicable Exemptions: Determine eligibility under Michigan’s securities laws.
• Notice Filing: File necessary notices, including Form D for Regulation D offerings.
• Using the EFD System: Submit filings and fees electronically through the NASAA EFD system.
• Conditional Exemptions: Petition for unique or specific exemptions as needed.
• Ongoing Compliance: Maintain records and comply with any ongoing requirements.

By understanding and following these procedures, issuers can effectively leverage Michigan’s securities law exemptions to facilitate their capital-raising efforts while ensuring compliance with state and federal regulations.

Frequently Asked Questions

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

The necessity of retaining a Michigan-licensed attorney for structuring a securities offering largely depends on the nature of the offering and the applicable regulations. If your offering is structured under Regulation D, rather than relying on Michigan-specific Blue Sky Laws, it is generally not required to engage an attorney licensed in Michigan.

For instance, if you are a real estate syndicator preparing a private placement memorandum (PPM) for a multifamily deal in Detroit, Michigan, that will be marketed to investors in multiple states, and your legal questions do not specifically pertain to Michigan laws, a licensed syndication attorney from another state should be sufficient. Such an attorney can draft the PPM, form the entity, and create the operating agreement for the syndication. However, they would not be able to provide legal counsel on Michigan-specific regulations and how they might affect your offering.

Conversely, if you are organizing a PPM for a development project in Grand Rapids, Michigan, where all investors are Michigan residents and you plan to utilize one of Michigan’s Blue Sky Law exemptions, it is essential to consult with an attorney licensed in Michigan. This is because navigating the intricacies of Michigan’s Blue Sky Laws and ensuring compliance with state-specific requirements necessitates specialized knowledge that only a local attorney can provide.

In summary, while a licensed syndication lawyer can handle most aspects of a Regulation D offering, particularly when it involves interstate investors, a Michigan-licensed attorney is indispensable when dealing with intrastate offerings that rely on Michigan’s Blue Sky Laws for exemptions from registration. Engaging the appropriate legal expertise ensures that your offering is fully compliant with all relevant laws and regulations, thereby safeguarding your investment and reputation.

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

Having a real estate syndication attorney who is not licensed in Michigan review your purchase contract is permissible, but their ability to provide advice will be limited. For example, Tilden Moschetti, Esq., a syndication attorney with the Moschetti Syndication Law Group, can review the contract underlying your purchase in Warren City, Michigan. However, he will clarify that while he can offer business consulting advice—such as discussing price and broad deal points like the length of time until closing—he cannot provide legal advice on specific terms of the contract due to his lack of licensure in Michigan.

This limitation is important to understand because it affects the scope of the attorney’s guidance. A non-Michigan licensed attorney can offer valuable insights on general business considerations and strategic advice. However, they cannot advise on specific legal clauses or compliance with Michigan state laws, which may impact the enforceability and legal standing of the contract.

Therefore, while a syndication attorney licensed outside of Michigan can provide a useful overview and business-oriented perspective on your purchase contract, you will need to consult with a Michigan-licensed attorney for detailed legal advice related to Michigan-specific regulations and contractual obligations. This approach ensures that all aspects of your transaction comply with local laws, safeguarding your interests in the real estate deal.