Montana Blue Sky Laws for Syndication

Navigating the complex landscape of securities laws is crucial for anyone involved in raising capital through real estate syndication or other forms of private placements. Each state in the U.S. has its own set of securities regulations, known as Blue Sky Laws, which aim to protect investors from fraud and ensure transparency in securities offerings. Montana’s Blue Sky Laws are no exception and come with their own unique requirements and exemptions.

Understanding how Montana’s Blue Sky Laws interact with federal regulations, such as the SEC’s Regulation D, is essential for sponsors, real estate developers, private equity fund managers, and other professionals involved in syndication. These laws dictate how securities can be offered, sold, and exempted from registration within the state, and compliance with these regulations can significantly impact the success and legality of a syndication project.

In this comprehensive guide, we will explore the intricacies of Montana’s Blue Sky Laws, the relationship between state laws and Regulation D, and the specific procedures and exemptions that apply to securities offerings in Montana. Whether you are considering a multifamily deal in Billings or a development project in Missoula, this article will provide valuable insights into the regulatory framework and practical advice for ensuring compliance. Additionally, we will discuss the role of legal counsel in navigating these laws and whether you need a Montana-licensed attorney for your specific needs.

By understanding the nuances of Montana’s securities regulations, you can make informed decisions, minimize legal risks, and successfully raise capital for your real estate syndication projects.

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

Understanding how a state’s Blue Sky Laws interact with the SEC’s Regulation D is crucial for anyone involved in real estate syndication or other forms of securities offerings. Blue Sky Laws are state-level regulations designed to protect investors from fraud by requiring the registration of securities offerings and providing oversight of securities transactions. However, these laws can be preempted by federal regulations under certain circumstances, specifically when dealing with Regulation D offerings.

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

Under 15 U.S. Code § 77r(b)(4)(F), offerings made under Regulation D, specifically Rule 506(b) and Rule 506(c), are exempt from state registration requirements. This preemption means that for securities offerings that comply with Rule 506(b) or Rule 506(c), state Blue Sky Laws cannot impose their own registration or qualification requirements. This federal preemption significantly simplifies the regulatory compliance process for issuers, allowing them to focus on meeting the federal requirements set forth by the SEC.

Regulation D Rule 506(b):

• Allows issuers to raise an unlimited amount of capital.
• Permits sales to an unlimited number of accredited investors and up to 35 non-accredited investors, provided they meet certain sophistication requirements.
• Prohibits general solicitation and advertising.

Regulation D Rule 506(c):

• Also allows issuers to raise an unlimited amount of capital.
• Permits sales only to accredited investors.
• Allows general solicitation and advertising, provided that the issuer takes reasonable steps to verify that all purchasers are accredited investors.

Intrastate Offerings

Despite the federal preemption, there are scenarios where state Blue Sky Laws remain relevant. If an offering is made entirely within one state—meaning the sponsor, all investors, and the assets are all located in that state—the sponsor may choose to conduct the offering under the state’s Blue Sky Laws as an intrastate offering.

This option can be beneficial for certain local projects or smaller-scale syndications where the regulatory environment of the specific state may offer advantages, such as lower compliance costs or less stringent requirements compared to federal regulations. However, it’s important to note that such offerings would not enjoy the federal preemption provided under Regulation D and would need to fully comply with the state’s Blue Sky Laws.

In summary, while Regulation D Rule 506(b) and Rule 506(c) offerings are generally exempt from state Blue Sky Laws due to federal preemption, there are specific instances, such as intrastate offerings, where state laws still play a critical role. For sponsors and syndicators, understanding these nuances is essential for determining the most advantageous regulatory path for their offerings. Engaging a knowledgeable syndication attorney can provide invaluable guidance in navigating these complexities and ensuring compliance with the applicable regulations.

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

Choosing between federal Regulation D offerings and state Blue Sky Laws is a significant decision for sponsors and investors involved in real estate syndication or other securities offerings. There are several compelling reasons to opt for Regulation D Rule 506(b) or Rule 506(c) over a state’s Blue Sky Laws, particularly when considering the potential complications and broader reach of Regulation D.

Flexibility and Broader Reach

One of the primary advantages of Regulation D offerings, specifically Rule 506(b) and Rule 506(c), is their ability to accommodate investors from multiple states. If any investor or the sponsor is located outside of the state, the offering cannot rely solely on the state’s Blue Sky Laws and must comply with federal regulations. Regulation D provides a consistent framework that preempts state laws, allowing for a more streamlined and uniform approach to securities offerings.

Avoiding Legal Complications

Relying on state Blue Sky Laws for an intrastate offering carries inherent risks, especially if there is any uncertainty about the domicile of investors. If an investor is discovered to be domiciled outside the state, what was initially intended as an intrastate offering can suddenly violate securities laws, creating significant legal and regulatory challenges.

For instance, if a sponsor unknowingly includes an investor who is actually domiciled outside the state, the offering could lose its intrastate status and consequently fall afoul of federal securities laws. This can result in severe penalties, rescission rights for investors, and potential lawsuits, all of which can be costly and damaging to the project’s success.

Regulation D Rule 506(b)

Regulation D Rule 506(b) offers several advantages:

• Unlimited Capital Raising: There is no cap on the amount of capital that can be raised.
• Diverse Investor Base: Sales can be made to an unlimited number of accredited investors and up to 35 sophisticated non-accredited investors.
• Confidentiality: General solicitation and advertising are prohibited, allowing for a more private and controlled fundraising process.

Regulation D Rule 506(c)

Regulation D Rule 506(c) also has distinct benefits:

• General Solicitation: Issuers can publicly advertise their offerings, expanding their reach to a larger pool of potential investors.
• Accredited Investors Only: Ensures that all investors meet accredited investor criteria, providing a level of investor protection and reducing regulatory risks.
• Unlimited Capital Raising: Similar to Rule 506(b), there is no limit on the amount of capital that can be raised.

Consistency and Compliance

By opting for Regulation D Rule 506(b) or Rule 506(c), sponsors can ensure that they are compliant with a single set of federal regulations, rather than navigating the potentially varying and complex requirements of multiple state Blue Sky Laws. This consistency not only simplifies the compliance process but also reduces the risk of inadvertent violations that can occur when dealing with different state regulations.

Expert Guidance

Engaging a syndication attorney with expertise in Regulation D offerings can further mitigate risks and ensure that the offering is structured correctly from the outset. Such legal counsel can provide invaluable assistance in drafting the Private Placement Memorandum (PPM), verifying investor status, and ensuring all regulatory requirements are met.

In conclusion, while state Blue Sky Laws can be suitable for purely intrastate offerings, the flexibility, broader reach, and regulatory consistency offered by Regulation D Rule 506(b) and Rule 506(c) make them a more attractive and safer choice for most sponsors and investors. These federal regulations provide a robust framework that accommodates a diverse investor base and minimizes the risk of legal complications, ensuring a smoother and more secure fundraising process.

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’s crucial to comply with both federal and state notification requirements to ensure legal compliance and avoid potential penalties. In Montana, specific notification rules and terms must be followed when notifying the state about a Regulation D offering.

Filing Fees for Regulation D Offerings

Montana requires the payment of filing fees when submitting a notice for a Regulation D Rule 506(b) or Rule 506(c) offering. These fees are structured as follows:

• Fixed Fee: There is a fixed fee of $200 that must be paid when filing the notice.
• Variable Fee: In addition to the fixed fee, there is a variable fee of 0.1% of the total offering amount. This variable fee is capped at $1,000,000. Therefore, the maximum combined fee (fixed and variable) that an issuer would need to pay is $1,000.

These fees ensure that the state is adequately notified and compensated for the regulatory oversight provided.

Filing Procedures

1. Filing the Notice: Issuers must file a notice with the Montana Securities Division, which includes submitting Form D. Form D is the official notice form used to report offerings of securities under Regulation D.
2. Electronic Submission: Notices are sent to the state through the NASAA Electronic Filing Depository (EFD) system. This online platform streamlines the filing process and ensures that all documentation is submitted correctly. More information about the EFD system can be found here.
3. Timing of the Notice: The notice should be filed as soon as the first sale of securities is made in the state. Timely filing is essential to ensure compliance with state requirements.
4. Required Documentation: Along with Form D, issuers must include any additional documentation required by the state, which may detail the terms of the offering and the securities being sold.

Late Filing Fees

One advantage of filing a Regulation D notice in Montana is that there are no late fees for late filings. However, it is still highly advisable to file promptly to maintain good standing with state regulators and avoid any potential issues that could arise from delayed notification.

Steps for Filing

1. Prepare Form D: Complete Form D, ensuring all information is accurate and reflects the specifics of the offering.
2. Calculate Fees: Determine the total filing fee by calculating both the fixed fee ($200) and the variable fee (0.1% of the offering amount, capped at $1,000).
3. Submit Documentation: Use the NASAA Electronic Filing Depository (EFD) system to file Form D and any required documents with the Montana Securities Division, along with the calculated fees.
4. Confirmation: After submission, confirm receipt with the Montana Securities Division through the EFD system to ensure the filing is processed and accepted.

Importance of Compliance

Complying with the notification rules and terms for Regulation D offerings is crucial for several reasons:

• Legal Compliance: Ensures the offering meets state regulatory requirements, protecting the issuer from legal repercussions.
• Investor Confidence: Demonstrates to investors that the issuer is following proper regulatory procedures, which can enhance trust and credibility.
• Avoiding Complications: Timely and accurate filing helps avoid potential complications or delays in the offering process.

In summary, notifying the state of a Regulation D Rule 506(b) or Rule 506(c) offering in Montana involves paying a combination of fixed and variable fees, submitting the appropriate forms and documentation through the NASAA Electronic Filing Depository, and adhering to the state’s filing procedures. While there are no late fees, timely filing is recommended to ensure compliance and maintain good standing with state regulators. Engaging a knowledgeable syndication attorney can help navigate these requirements smoothly and ensure all regulatory obligations are met.

What are Montana’s Blue Sky Laws?

Montana’s Blue Sky Laws are designed to protect investors from securities fraud through rigorous regulation and oversight. These laws encompass various provisions, including exemptions for certain securities (MCA 30-10-104), the burden of proof for claiming exemptions (MCA 30-10-106), mandatory registration requirements (MCA 30-10-202), and prohibitions against misleading representations about security registrations or exemptions (MCA 30-10-303). Collectively, these statutes aim to ensure transparency and integrity in the securities market, safeguarding investors from deceptive practices.

MT ST 30-10-104 Exempt securities

Montana Code Annotated 30-10-104 outlines various types of securities exempt from certain regulatory sections (30-10-202 through 30-10-207 and 30-10-211). Exempt securities include those issued or guaranteed by the U.S. government, states, municipalities, banks, savings institutions, and certain foreign governments. Other exemptions cover securities from regulated common carriers, public utilities, nonprofit organizations, commercial paper, employee benefit plans, and securities listed on major stock exchanges. The law ensures specific securities do not require the same level of registration and regulatory oversight as others.

MT ST 30-10-106 Proof of exemption

Montana Code Annotated 30-10-106 states that in any legal proceedings under parts 1 through 3 of Chapter 10 (Securities Regulation), the responsibility to prove an exemption or exception from a definition rests on the individual or entity claiming it. This means that if someone asserts that they are exempt from certain regulatory requirements or definitions, they must provide sufficient evidence to support their claim.

MT ST 30-10-202 Registration of securities

Montana Code Annotated 30-10-202 makes it unlawful to offer or sell any security in Montana unless the security is either exempt under MCA 30-10-104 or sold in transactions exempt under MCA 30-10-105. Alternatively, the security must be registered by notification, coordination, or qualification under parts 1 through 3 of this chapter, or, for federal covered securities, filed with the commissioner and the prescribed fee paid.

MT ST 30-10-303 Unlawful representation concerning registration or exemption

Montana Code Annotated 30-10-303 addresses unlawful representations regarding the registration or exemption of securities. It clarifies that filing an application, notice, or registration statement, or having an effective registration or notice, does not indicate that the commissioner has verified the truthfulness, completeness, or non-misleading nature of the documents. Furthermore, it prohibits any claims suggesting that the commissioner has endorsed or approved any person, security, or transaction based on these filings. Making such misleading representations to potential purchasers, customers, or clients is unlawful.

What are Montana’s Securities Laws Exemptions?

Montana’s securities laws provide various exemptions from registration requirements, designed to facilitate certain types of transactions and issuances without the need for extensive regulatory oversight. These exemptions are crucial for various entities, including governmental bodies, financial institutions, and specific types of securities offerings. Understanding these exemptions can help sponsors and investors navigate the regulatory landscape more efficiently.

Governmental Entities

• Governmental Entities: Securities issued by the U.S. government, any state, any political subdivision of a state, or any agency or instrumentality of these entities are exempt from Montana’s securities registration requirements. This includes bonds, notes, and other debt securities.
• Certain Foreign Governments: Securities issued by foreign governments, including Canada and its political subdivisions, are also exempt, provided that diplomatic relations are maintained with the United States.

Financial Institutions

• Banks and Savings Institutions: Securities issued by banks, savings institutions, and trust companies are exempt. This includes savings and loan associations, building and loan associations, credit unions, and industrial loan associations. These institutions are heavily regulated at the state and federal levels, which provides sufficient oversight without the need for additional state registration.

Other Entities

• Railroads and Common Carriers: Securities issued by railroads and other common carriers regulated by the Interstate Commerce Commission are exempt. This includes entities engaged in transportation or communication businesses that are subject to federal regulatory oversight.
• Public Utilities and Holding Companies: Public utilities and holding companies, especially those involved in providing essential services such as electricity, water, and natural gas, are exempt from registration due to their extensive regulation by state and federal authorities.
• Insurers: Securities issued by insurance companies are exempt. These companies are regulated by state insurance commissions, ensuring investor protection without the need for additional securities registration.

Listed Stock Exchange Securities

• Listed Securities: Securities listed on a national stock exchange or designated as a national market system security on an interdealer quotation system by the Financial Industry Regulatory Authority (FINRA) are exempt. This exemption recognizes the rigorous listing standards and regulatory oversight of national exchanges.

Non-Profit Persons

• Non-Profit Organizations: Securities issued by non-profit organizations are exempt. This includes charitable, religious, educational, and other non-profit entities, provided they operate exclusively for non-profit purposes.

Commercial Paper

• Current Transaction Commercial Paper: Short-term commercial paper arising out of current transactions, which has a maturity of not more than nine months, is exempt. This type of security is typically used for financing current operations and is considered low-risk due to its short duration.

Employee Benefit Plans

• Employee Benefit Plans: Securities issued in connection with employee benefit plans are exempt. This includes stock options, pension plans, and other benefit programs designed to incentivize and reward employees.

Out-of-State Securities

• Out-of-State Securities: Securities offered and sold outside of Montana, which comply with the securities laws of the state in which they are issued, are exempt from Montana’s registration requirements.

Other Specific Conditions

• Securities Meeting Certain Conditions: Montana law also provides exemptions for securities that meet specific conditions outlined in the state’s securities regulations. These conditions can vary, so it is essential for issuers to review the criteria to determine eligibility for exemption.

Understanding the exemptions under Montana’s securities laws can significantly simplify the process of issuing securities and conducting transactions within the state. These exemptions cater to a wide range of entities and securities, ensuring that those already under substantial regulatory oversight or deemed low-risk can operate without additional state registration burdens. For sponsors and syndicators, knowing these exemptions can aid in structuring offerings efficiently and compliantly. Consulting with a knowledgeable syndication attorney can further ensure that all applicable exemptions are correctly utilized, avoiding unnecessary regulatory hurdles and fostering smoother transaction processes.

What are Montana’s Procedures for Securities Law Exemptions?

Navigating the procedures for claiming securities law exemptions in Montana is crucial for issuers who wish to benefit from the various exemptions available under state law. These procedures ensure that issuers comply with the state’s regulatory framework while avoiding the need for full registration. Here’s a detailed guide on the steps involved:

Understanding the Basis for Exemption

Before proceeding with any filings, issuers must first determine whether their securities offering qualifies for an exemption under Montana law. This involves:

• Identifying Applicable Exemptions: Review the specific exemptions outlined in Montana securities laws to confirm eligibility. These may include exemptions for governmental entities, financial institutions, certain non-profit organizations, and specific types of securities, as detailed in the previous section.
• Consultation with Legal Counsel: Engage a knowledgeable syndication attorney to verify that the offering meets the necessary criteria for an exemption. This step helps avoid any misinterpretation of the law and ensures compliance.

Preparing the Necessary Documentation

Even if an offering is exempt from registration, certain documentation and filings may still be required to officially recognize the exemption:

• Disclosure Documents: Prepare any disclosure documents that may be necessary to demonstrate the nature of the exemption. These documents provide transparency and protect both the issuer and the investors.
• Form D Filing: If the offering is conducted under Regulation D, issuers must file Form D with the SEC. This form provides essential details about the offering and confirms its exempt status at the federal level.

Filing Procedures

Montana requires issuers to follow specific filing procedures to claim an exemption:

1. Electronic Filing: Use the NASAA Electronic Filing Depository (EFD) system to submit the required forms and documentation. The EFD system streamlines the filing process and ensures that all necessary information is provided to the Montana Securities Division.
2. State-Specific Forms: Depending on the exemption, issuers may need to submit additional state-specific forms. These forms are designed to capture detailed information about the offering and the basis for claiming the exemption.

Filing Fees

While exempt offerings do not require full registration, there may still be associated filing fees:

• Fee Calculation: Calculate the appropriate filing fees based on the specific exemption being claimed. This may include a combination of fixed and variable fees, as outlined by the Montana Securities Division.
• Payment Submission: Ensure that all fees are paid at the time of filing. The EFD system typically facilitates electronic payment, simplifying the process.

Compliance and Record-Keeping

Maintaining compliance and thorough record-keeping is essential even for exempt offerings:

• Record Maintenance: Keep detailed records of all filings, disclosure documents, and correspondence related to the exemption. This documentation is crucial for any future audits or reviews by the state.
• Ongoing Compliance: Adhere to any ongoing compliance requirements specified by the exemption. This may include periodic reporting or notifications to the Montana Securities Division.

Confirmation and Verification

After submitting the necessary documentation and fees:

• Confirmation Receipt: Verify receipt of the filing with the Montana Securities Division through the EFD system. Confirmation ensures that the exemption is recognized and that the issuer is in compliance with state requirements.
• Follow-Up: Be prepared to respond to any follow-up questions or requests for additional information from state regulators.

Practical Tips for Issuers

1. Early Preparation: Start the exemption determination and filing process early to avoid any last-minute issues or delays.
2. Legal Advice: Regularly consult with a syndication attorney to navigate the complexities of securities law exemptions and ensure all procedural steps are correctly followed.
3. Stay Informed: Keep up-to-date with any changes in Montana’s securities laws and filing procedures to maintain compliance.

In summary, while Montana offers various exemptions from securities registration, issuers must still follow specific procedures to claim these exemptions legally. Utilizing the NASAA Electronic Filing Depository system, preparing thorough documentation, and ensuring timely fee payment are crucial steps in this process. By adhering to these procedures, issuers can efficiently navigate the regulatory landscape and focus on the successful execution of their offerings.

Frequently Asked Questions

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

The necessity of hiring an attorney licensed in Montana to put together a securities offering depends on the specific circumstances of your offering. If your offering is under Regulation D and does not rely on Montana-specific Blue Sky Laws, then you likely do not need a Montana-licensed attorney. For example, if you are working on a real estate syndication for a multifamily deal in Billings, Montana, and you plan to offer it across multiple states without needing counsel on Montana-specific laws, a syndication attorney licensed in another state could assist you. This attorney could help you draft the private placement memorandum (PPM), establish the entity, and write the operating agreement. However, they would not be able to provide legal advice on how Montana’s specific laws might impact your offering.

On the other hand, if you are putting together a PPM for a development project in Missoula, Montana, with all investors based in Montana, and you intend to utilize one of Montana’s Blue Sky Laws as an exemption to registration, then it is crucial to work with an attorney licensed in Montana. This is because Montana-specific legal advice would be essential in ensuring compliance with state regulations and properly navigating the exemptions available under Montana’s securities laws.

In summary, whether you need a Montana-licensed attorney depends on whether your offering requires specific knowledge of Montana’s securities laws. For multi-state offerings under Regulation D, an attorney from another state can typically provide the necessary legal services. However, for intrastate offerings relying on Montana’s Blue Sky Laws, local legal expertise is indispensable.

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

It is permissible for a real estate syndication attorney licensed outside of Montana to review your purchase contract; however, their ability to provide legal advice will be limited. For instance, Tilden Moschetti, Esq., a syndication attorney for the Moschetti Syndication Law Group, can examine the contract underlying your purchase agreement in Great Falls, Montana. While he can offer business consulting advice, such as discussing price and broad deal points like the closing timeline, he cannot provide legal advice on any specific terms of the contract, as he is not licensed to practice law in Montana.

This limitation means that while the attorney can give you valuable insights into the general structure and business implications of your deal, they cannot advise on how Montana law might impact specific clauses or terms in your contract. For legal advice specific to Montana, it is essential to consult with an attorney who is licensed in the state and familiar with local laws and regulations. This ensures that you are fully informed about any legal nuances and compliance issues that may arise under Montana law.