New Jersey Blue Sky Laws for Syndication

Navigating the complexities of securities laws is a critical task for anyone involved in raising capital through syndication. Whether you are a real estate developer, private equity fund manager, or business owner, understanding both federal and state regulations is essential to ensuring compliance and avoiding legal pitfalls. One crucial area to comprehend is the interplay between state Blue Sky Laws and the SEC’s Regulation D.

This article delves into the specifics of New Jersey’s Blue Sky Laws, comparing them to the federal framework provided by Regulation D, particularly Rules 506(b) and 506(c). We will explore why many sponsors prefer Regulation D over state-specific regulations, the notification procedures for informing New Jersey about a Regulation D offering, and the exemptions available under New Jersey’s securities laws. Additionally, we will discuss whether you need a New Jersey-licensed attorney to put together your offering and the limitations of using an out-of-state attorney for specific legal advice on New Jersey contracts.

By providing a detailed overview of these topics, this article aims to equip you with the knowledge needed to navigate the regulatory landscape effectively, ensuring your capital-raising efforts are both compliant and successful. Whether you’re planning a multifamily real estate syndication in Newark or a development project in Jersey City, understanding these legal nuances is vital to your project’s success.

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 the regulation of securities offerings in the United States. Understanding how these laws interact is essential for sponsors considering a Regulation D offering, particularly under Rules 506(b) and 506(c).

Preemption of State Blue Sky Laws by Regulation D

Under 15 U.S. Code § 77r(b)(4)(F), offerings made under Regulation D Rule 506(b) or Rule 506(c) are preempted from state Blue Sky Laws. This federal preemption means that if a sponsor complies with the requirements of Regulation D for a Rule 506(b) or Rule 506(c) offering, they are not subject to the registration requirements of individual state securities laws. This preemption significantly simplifies the process of raising capital, as it allows the sponsor to avoid the potentially complex and varied registration requirements of each state.

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

Regulation D provides exemptions that allow companies to raise capital without registering their securities with the SEC.

• Rule 506(b): Allows issuers to raise an unlimited amount of money from accredited investors and up to 35 non-accredited investors who meet certain sophistication requirements. General solicitation and advertising are prohibited under this rule.
• Rule 506(c): Allows issuers to engage in general solicitation and advertising, provided all purchasers in the offering are accredited investors and the issuer takes reasonable steps to verify their accredited status.

By leveraging these rules, sponsors can streamline their capital-raising efforts while ensuring compliance with federal securities laws.

Intrastate Offerings Under State Blue Sky Laws

Despite the federal preemption provided by Regulation D, there are scenarios where a sponsor might choose to conduct an offering under a state’s Blue Sky Laws. If an offering is made where the sponsor, all investors, and the assets are all located within a single state, the sponsor may opt for an intrastate offering. This type of offering is subject to the state’s Blue Sky Laws rather than federal regulation.

An intrastate offering might be advantageous for local businesses seeking to raise capital within their home state, as it can provide certain regulatory benefits and a more localized compliance framework. However, the sponsor must carefully navigate the specific requirements and exemptions provided under the state’s securities laws.

Key Considerations for Sponsors

When deciding between a Regulation D offering and an intrastate offering under state Blue Sky Laws, sponsors should consider:

• Scope of Investor Base: Regulation D offerings allow access to a broader pool of accredited investors across multiple states, whereas intrastate offerings are limited to investors within a single state.
• Regulatory Complexity: Regulation D offers a streamlined, federally preempted process, reducing the complexity of complying with multiple state laws.
• Verification Requirements: Rule 506(c) requires rigorous verification of investors’ accredited status, which may entail additional steps and documentation.

Understanding the interplay between state Blue Sky Laws and the SEC’s Regulation D is critical for sponsors seeking to optimize their capital-raising strategies. By leveraging the benefits of federal preemption and considering the potential advantages of intrastate offerings, sponsors can make informed decisions that align with their specific needs and regulatory environment.

Incorporating these considerations, a syndication attorney can provide valuable guidance to ensure compliance and maximize the effectiveness of the offering, whether it is conducted under Regulation D or state Blue Sky Laws.

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, sponsors have to decide whether to comply with state Blue Sky Laws or utilize the exemptions provided under Regulation D, specifically Rules 506(b) and 506(c). Several compelling reasons make Regulation D a preferable choice for many sponsors.

Geographic Flexibility

One of the primary advantages of choosing Regulation D Rule 506(b) or Rule 506(c) over state Blue Sky Laws is the flexibility it provides in reaching investors across multiple states. State Blue Sky Laws are inherently limited to intrastate offerings, meaning all investors, the sponsor, and the assets must be located within the same state. If any investor or the sponsor is outside of the state, the offering cannot fall under state Blue Sky Laws.

Avoiding Securities Law Problems

There is a significant risk when relying on intrastate offerings: the discovery that an investor is domiciled outside of the state. Such a discovery could reclassify the offering as interstate rather than intrastate, creating a securities law problem. This reclassification could lead to non-compliance with both state and federal regulations, potentially resulting in legal and financial penalties.

By opting for Regulation D Rule 506(b) or Rule 506(c), sponsors can mitigate this risk. These rules preempt state Blue Sky Laws and allow for a streamlined process that ensures compliance with federal securities regulations, regardless of the geographic distribution of investors.

Regulation D Rule 506(b)

Under Rule 506(b), sponsors can raise an unlimited amount of capital from an unlimited number of accredited investors and up to 35 sophisticated but non-accredited investors. This rule prohibits general solicitation and advertising, ensuring a more controlled and private investment process. The absence of state registration requirements simplifies compliance and reduces the regulatory burden on the sponsor.

Regulation D Rule 506(c)

Rule 506(c) offers even greater flexibility by allowing general solicitation and advertising, provided all purchasers are accredited investors. Sponsors must take reasonable steps to verify the accredited status of each investor, which involves a more stringent verification process. However, the ability to broadly market the offering can significantly enhance capital-raising efforts, attracting a larger pool of potential investors.

Advantages of Choosing Regulation D Over State Blue Sky Laws

1. Wider Investor Base: Regulation D offerings can attract investors from multiple states, expanding the potential pool of capital beyond the limitations of a single state’s Blue Sky Laws.
2. Regulatory Simplicity: Federal preemption under Regulation D eliminates the need to navigate the complex and varied registration requirements of individual states, streamlining the compliance process.
3. Reduced Risk of Non-Compliance: By adhering to Regulation D, sponsors can avoid the pitfalls associated with inadvertent non-compliance with state securities laws, particularly the risk of discovering out-of-state investors in an intrastate offering.
4. Increased Marketing Opportunities: Rule 506(c) allows for general solicitation and advertising, providing greater opportunities to reach accredited investors and raise more capital.

Choosing Regulation D Rule 506(b) or Rule 506(c) over state Blue Sky Laws offers significant benefits in terms of geographic flexibility, regulatory simplicity, and reduced risk of non-compliance. For sponsors looking to raise capital through syndication, particularly those targeting a diverse and widespread investor base, Regulation D provides a robust and efficient framework to achieve their capital-raising goals. Engaging a knowledgeable syndication attorney can further ensure compliance and optimize the offering’s success.

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 offering under Rule 506(b) or Rule 506(c), sponsors must comply with specific notification requirements to inform the state about the offering. These requirements ensure transparency and adherence to state securities laws, despite the federal preemption provided by Regulation D. Here is an in-depth look at the notification rules and terms for notifying the state about a Regulation D offering:

Filing Requirements

For Rule 506(b) and Rule 506(c) offerings, the initial step involves filing Form D with the Securities and Exchange Commission (SEC). Form D is a brief notice containing essential information about the issuer and the offering. After filing with the SEC, issuers must also notify each state where the securities are sold. This state notification process is typically carried out via the NASAA Electronic Filing Depository (EFD).

New Notice Filing

In New Jersey, sponsors must file a notice through the NASAA EFD when conducting a Regulation D offering. The notice generally includes a copy of the Form D that was filed with the SEC and any additional state-specific forms that may be required. The filing of this notice comes with a fixed fee.

• Filing Fee: The filing fee for notifying New Jersey about a Regulation D offering is $500. This fee is required to process the notice and ensure compliance with state notification requirements.

Timeliness of Filing

Sponsors are encouraged to file the notice with the state promptly to avoid any potential issues with state regulators. While New Jersey does not impose a specific late fee for late filings, timely filing is crucial to maintain good standing and demonstrate a commitment to compliance.

• Late Fee for Late Filings: There is no late fee for late filings in New Jersey. However, it is advisable to file on time to avoid any regulatory scrutiny or complications that could arise from delayed notifications.

Notification Process

1. Prepare Form D: Complete Form D with all required information about the issuer and the offering. This includes details such as the type of securities offered, the amount of money raised, and the identities of the executive officers and directors.
2. File with the SEC: Submit Form D electronically through the SEC’s EDGAR system within 15 days after the first sale of securities in the offering.
3. File with New Jersey via NASAA EFD:

• Access the NASAA Electronic Filing Depository (EFD) at NASAA EFD.
• Submit a copy of the filed Form D, along with any required state-specific forms, and pay the $500 filing fee through the EFD system.
• Ensure that all materials are complete and accurate to facilitate a smooth filing process.

Maintaining Compliance

While the notification process for Regulation D offerings is straightforward, maintaining compliance with both federal and state requirements is crucial. Sponsors should keep accurate records of all filings and communications with state regulators. Regularly reviewing and updating compliance practices can help avoid any potential issues and ensure the offering proceeds without regulatory complications.

Notifying the state about a Regulation D Rule 506(b) or Rule 506(c) offering involves a few key steps and a fixed filing fee. By understanding and adhering to these notification rules, sponsors can ensure they remain in compliance with state requirements while benefiting from the federal preemption provided by Regulation D. Engaging a knowledgeable syndication attorney can provide additional assurance and guidance throughout the process, helping navigate the regulatory landscape efficiently and effectively.

What are New Jersey’s Blue Sky Laws?

Blue sky laws are state regulations designed to protect investors from securities fraud. In New Jersey, these laws encompass various statutes ensuring the legitimacy and transparency of securities transactions. Key provisions include Section 49:3-50, which exempts certain securities and transactions from registration requirements; Section 49:3-55, clarifying that filing a registration does not guarantee its accuracy or endorse the security; and Section 49:3-60, mandating that securities must be exempt, registered, or compliant as federal covered securities to be legally sold in the state. Understanding these rules helps safeguard investors and maintain market integrity. For more detailed information, visit the Justia website.

NJ ST 49:3-50 Exemption of certain securities and certain transactions

New Jersey Code Section 49:3-50 outlines exemptions for certain securities from the registration requirements of sections 13 and 16 of P.L.1967, c.93. Exempt securities include those issued by the U.S. government, states, and their subdivisions; foreign governments with diplomatic relations with the U.S.; banks and insurance companies; and specific securities listed on major stock exchanges. Exempt transactions include isolated nonissuer transactions, unsolicited broker-dealer transactions, and certain sales to institutional buyers. The Bureau Chief can revoke exemptions for specific securities or transactions and require notice and a hearing for such actions.

NJ ST 49:3-55 Unlawful representations concerning registration

Section 49:3-55 of the 2016 New Jersey Revised Statutes specifies that the filing of a registration application or statement for a person or security does not imply that the bureau chief has verified its truth, completeness, or accuracy. It also states that having a registration, exemption, or exception does not mean the bureau chief has endorsed the person, security, or transaction. Misrepresentations to potential purchasers, clients, or customers regarding these facts are unlawful.

NJ ST 49:3-60 Offer or sale; registration requirement; exemptions

Section 49:3-60 of the 2013 New Jersey Revised Statutes stipulates that it is illegal to offer or sell securities in New Jersey unless they meet specific conditions. These conditions include being exempt under section 49:3-50, being registered under the act, or being a federal covered security with the necessary notice filing and fees submitted as required by section 49:3-60.1. Certain previous amendments have deleted additional provisions.

What are New Jersey’s Securities Laws Exemptions?

New Jersey’s securities laws provide various exemptions from registration requirements for specific entities and transactions. Understanding these exemptions is crucial for sponsors and issuers who might qualify for them, as they can significantly simplify the compliance process. Here is a detailed look at the key exemptions under New Jersey’s securities laws:

1. Governmental Entities

Securities issued or guaranteed by governmental entities are exempt from registration. This includes:

• The United States government.
• Any state, territory, or possession of the United States, or any political subdivision thereof.
• Any agency or instrumentality of any of the foregoing.

2. Certain Foreign Governments

Securities issued or guaranteed by certain foreign governments are also exempt. This exemption specifically includes securities from:

• The government of Canada.
• Any Canadian province.
• Any political subdivision of the Canadian government or its provinces.

3. Financial Institutions

Several types of financial institutions benefit from exemptions, including:

• Banks and savings institutions.
• Trust companies.
• Other similar institutions supervised by federal or state authority.

4. Other Entities

Certain entities involved in public services and utilities are exempt from securities registration in New Jersey. These entities include:

• Railroads.
• Common carriers.
• Public utilities.
• Holding companies.
• Insurance companies supervised by state or federal authority.

5. Listed Stock Exchange Securities

Securities that are listed or approved for listing on recognized stock exchanges are exempt. This also includes securities listed on:

• The New York Stock Exchange (NYSE).
• The American Stock Exchange (AMEX).
• Any other exchange designated by the New Jersey Bureau of Securities.

6. Non-Profit Persons

Securities issued by non-profit organizations are exempt if the organization is:

• Organized and operated exclusively for religious, educational, benevolent, fraternal, charitable, social, athletic, or reformatory purposes.
• Not for pecuniary profit.

7. Current Transaction Commercial Paper

Commercial paper that is part of a current transaction and has a maturity of not more than nine months is exempt. This includes:

• Drafts.
• Bills of exchange.
• Bankers’ acceptances.

8. Employee Benefit Plans

Securities issued in connection with an employee benefit plan are also exempt. This applies to plans such as:

• Stock bonus plans.
• Pension plans.
• Profit-sharing plans.
• Other similar employee benefit plans.

These exemptions under New Jersey’s securities laws are designed to simplify the regulatory requirements for specific entities and types of transactions. By understanding and leveraging these exemptions, sponsors and issuers can navigate the securities compliance landscape more efficiently. However, it is essential to consult with a knowledgeable syndication attorney to ensure all conditions for exemptions are met and to avoid any potential legal pitfalls.

What are New Jersey’s Procedures for Securities Law Exemptions?

Navigating the procedures for securities law exemptions in New Jersey requires a clear understanding of the state’s regulatory framework. While certain securities and transactions may qualify for exemptions from registration, specific procedural steps must be followed to ensure compliance. Here’s a detailed overview of the procedures for claiming securities law exemptions in New Jersey:

1. Determine Eligibility for Exemption

The first step is to ascertain whether the securities or transactions qualify for any of the exemptions provided under New Jersey law. These exemptions cover a range of entities and circumstances, including governmental entities, certain foreign governments, financial institutions, railroads, public utilities, holding companies, insurance companies, non-profit organizations, commercial paper, and employee benefit plans.

2. Documentation and Record-Keeping

Even when an exemption applies, maintaining thorough documentation is crucial. This includes:

• Records demonstrating the basis for claiming the exemption.
• Copies of any documents provided to investors.
• Details of the securities issued and the terms of the offering.

Proper documentation helps ensure transparency and can protect against future legal challenges or inquiries from regulators.

3. Filing Requirements

While some exemptions may not require any formal filing with the New Jersey Bureau of Securities, others might necessitate submitting specific forms or notices. Common steps include:

• Notice Filing: Some exemptions, particularly those involving commercial paper or employee benefit plans, might require a notice filing with the Bureau of Securities. This notice typically includes information about the issuer, the nature of the exemption being claimed, and details of the securities offering.
• Form Submission: Depending on the exemption, certain forms may need to be completed and submitted. These forms provide the Bureau with essential information about the issuer and the transaction.

4. Compliance with Ongoing Obligations

For certain exemptions, ongoing compliance obligations may exist. These could include:

• Periodic reporting to the Bureau of Securities.
• Ensuring that the conditions for the exemption continue to be met throughout the life of the securities.

5. Engaging Legal Counsel

Given the complexity and potential variability of securities law exemptions, consulting with a knowledgeable syndication attorney is advisable. Legal counsel can:

• Help determine the appropriate exemption.
• Assist in preparing and submitting necessary documentation.
• Ensure that all procedural requirements are met.

6. Review by the Bureau of Securities

Once the necessary filings are made, the New Jersey Bureau of Securities may review the submission to verify that the claimed exemption is appropriate. This review process ensures that the issuer complies with state securities regulations and that the exemption is validly claimed.

7. Response to Regulatory Inquiries

Issuers should be prepared to respond to any inquiries or requests for additional information from the Bureau of Securities. Prompt and thorough responses can facilitate a smooth exemption process and help maintain regulatory compliance.

Claiming securities law exemptions in New Jersey involves several critical steps, from determining eligibility and maintaining proper documentation to making necessary filings and ensuring ongoing compliance. By understanding these procedures and working closely with a qualified syndication attorney, issuers can effectively navigate the regulatory landscape and take full advantage of the available exemptions. This approach not only helps in compliance but also in efficiently raising capital through exempt securities offerings.

Frequently Asked Questions

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

Whether you need an attorney licensed in New Jersey to put together your offering largely depends on the specifics of the offering and the jurisdictions involved. If your offering is under Regulation D and does not fall under New Jersey-specific Blue Sky Laws, you likely do not need an attorney licensed in New Jersey.

For instance, if you require a real estate syndication attorney to create a private placement memorandum for a multifamily deal in Newark, New Jersey, that will be offered in various states, and you do not need legal advice on specific New Jersey laws, a licensed syndication lawyer from another state can typically assist you. This attorney can prepare the private placement memorandum, form the necessary entity, and draft the operating agreement. However, they would not be able to advise you on the specific securities laws of New Jersey and how they might impact your offering.

Conversely, if you are preparing a private placement memorandum for a development project in Jersey City, New Jersey, where all the investors are from New Jersey, and you intend to utilize one of New Jersey’s Blue Sky Laws as an exemption from registration, you would need to work with an attorney licensed in New Jersey. A New Jersey-licensed attorney would be essential for navigating the state-specific regulations, ensuring compliance with New Jersey’s securities laws, and properly advising on the applicable exemptions.

In summary, while a qualified syndication attorney from outside New Jersey can handle many aspects of a Regulation D offering, if your offering requires intricate knowledge of New Jersey’s Blue Sky Laws or involves state-specific legal considerations, engaging a New Jersey-licensed attorney becomes necessary. This approach ensures full compliance with local regulations and helps avoid potential legal complications.

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

A real estate syndication attorney licensed outside of New Jersey can certainly review your purchase contract, but their ability to provide specific legal advice regarding New Jersey law is limited. For example, Tilden Moschetti, Esq., a syndication attorney with the Moschetti Syndication Law Group, is available to review the contract underlying your purchase in Paterson, New Jersey. However, he will clarify 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 term of the contract due to not being licensed in New Jersey.

This distinction is important because legal advice on specific contractual terms, clauses, and compliance with New Jersey state laws requires a deep understanding of the local legal landscape, which only a New Jersey-licensed attorney can provide. While an out-of-state syndication attorney can offer valuable general insights and help with the broader aspects of the deal, you will need to consult with a New Jersey-licensed attorney for advice on the specific legal implications and compliance issues related to your contract. This ensures that all aspects of the purchase comply with New Jersey laws and that your interests are fully protected.