Navigating the complexities of raising capital through securities offerings requires a deep understanding of both federal and state regulations. For real estate developers, private equity fund managers, and syndicators looking to utilize Regulation D exemptions, comprehending the interplay between the SEC’s Regulation D and individual state Blue Sky Laws is crucial. New York, with its own set of stringent securities laws, presents unique challenges and opportunities for issuers. This article delves into the intricacies of New York’s Blue Sky Laws, explores how they relate to Regulation D, and provides practical guidance on compliance, exemptions, and the procedural requirements for securities offerings within the state. Whether you’re considering a multifamily deal in New York City or a localized development project in Buffalo, understanding these regulations will help you make informed decisions and successfully navigate the legal landscape of securities offerings.
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 through securities offerings, particularly in real estate syndications. Here’s a detailed look at how these regulatory frameworks interact:
Federal Preemption Under Regulation D
Regulation D, promulgated under the Securities Act of 1933, provides exemptions from federal registration for certain securities offerings. Notably, Rule 506(b) and Rule 506(c) under Regulation D allow issuers to raise capital without registering their securities with the SEC, provided they comply with specific conditions. One of the significant advantages of using these rules is the preemption of state Blue Sky Laws.
Under 15 U.S. Code § 77r(b)(4)(F), offerings made pursuant to Rule 506(b) or Rule 506(c) are exempt from state registration requirements. This federal preemption means that while issuers must still comply with certain state notice filings and fee requirements, they are not subject to the full breadth of state securities registration laws. This preemption simplifies the process of raising capital across multiple states by creating a more uniform regulatory environment.
Intrastate Offerings and Blue Sky Laws
While federal preemption under Regulation D can provide significant relief from state regulations, there are instances where a sponsor might choose to operate under state Blue Sky Laws. If an offering is made entirely within one state—meaning the sponsor, all investors, and the assets are located within that state—the sponsor may opt to structure it as an intrastate offering.
Intrastate offerings fall under state Blue Sky Laws rather than federal regulations. In such cases, the offering must comply with the specific securities laws and regulations of that state. This approach can be beneficial for sponsors who prefer to navigate a single set of state laws rather than the federal requirements of Regulation D.
Practical Considerations for Sponsors
For sponsors and issuers, deciding between using Regulation D exemptions and state Blue Sky Laws involves several considerations:
- Scope of Offering: If the offering involves investors from multiple states, utilizing Rule 506(b) or Rule 506(c) under Regulation D can simplify compliance through federal preemption, avoiding the need to meet multiple state registration requirements.
- Local Focus: For offerings that are strictly local, an intrastate offering under state Blue Sky Laws might be more appropriate. This can streamline compliance by focusing on a single jurisdiction’s regulations.
- Investor Base: Rule 506(b) allows for up to 35 non-accredited investors, but Rule 506(c) mandates that all investors be accredited. Understanding your investor base can influence which regulatory path to choose.
- General Solicitation: Rule 506(c) permits general solicitation and advertising, provided all purchasers are verified as accredited investors. This option might be advantageous for sponsors looking to broadly market their offerings.
- Compliance and Costs: Both Regulation D and state Blue Sky Laws involve compliance and administrative costs. Sponsors must weigh these costs against the benefits of each regulatory framework to determine the most efficient and effective approach.
Navigating the relationship between state Blue Sky Laws and the SEC’s Regulation D requires a nuanced understanding of both regulatory environments. Regulation D provides valuable exemptions that preempt state laws, simplifying multi-state offerings. However, for intrastate offerings, state Blue Sky Laws can offer a viable alternative. Sponsors must carefully consider their specific circumstances and goals to choose the appropriate regulatory path, ensuring compliance and optimizing their capital-raising efforts.
Why Would I Choose Regulation D Rule 506(b) or Rule 506(c) Over the State’s Blue Sky Laws?
Choosing between Regulation D, specifically Rule 506(b) or Rule 506(c), and state Blue Sky Laws is a critical decision for sponsors and issuers involved in raising capital. Here’s why many prefer Regulation D exemptions over state-specific regulations:
Federal Preemption and Simplified Compliance
One of the primary reasons to choose Regulation D, particularly Rule 506(b) or Rule 506(c), is the federal preemption of state Blue Sky Laws. Under 15 U.S. Code § 77r(b)(4)(F), offerings made pursuant to these rules are exempt from state registration requirements. This preemption means that issuers do not have to navigate the varying and often complex securities regulations of multiple states. Instead, they can rely on a uniform set of federal rules, simplifying the compliance process and reducing administrative burdens.
Mitigating Jurisdictional Risks
When conducting an intrastate offering under state Blue Sky Laws, every aspect of the offering, including the sponsor, all investors, and the assets, must be located within the state. If it is later discovered that an investor is actually domiciled outside the state, the offering can no longer be considered intrastate. This discovery can lead to significant legal issues, including the potential invalidation of the offering’s exemption and exposure to regulatory penalties.
Regulation D, particularly Rules 506(b) and 506(c), mitigates this risk by allowing interstate offerings. Issuers can include investors from multiple states without fear of inadvertently breaching intrastate regulations. This flexibility is crucial for sponsors seeking to attract a broader investor base.
Advantages of Rule 506(b) and Rule 506(c)
Rule 506(b):
- Allows for raising an unlimited amount of capital.
- Permits up to 35 non-accredited investors, provided they are sophisticated and receive sufficient disclosure materials, often in the form of a Private Placement Memorandum (PPM).
- Prohibits general solicitation and advertising, which can help maintain a more private and controlled offering environment.
Rule 506(c):
- Also allows for raising an unlimited amount of capital.
- Requires that all investors be accredited, but permits general solicitation and advertising, enabling issuers to broadly market their offerings.
- Mandates that issuers take reasonable steps to verify the accredited status of investors, providing an additional layer of protection.
Broadening Investor Base
Regulation D exemptions, especially Rule 506(c), enable issuers to market their offerings to a wider audience through general solicitation. This can be particularly advantageous for real estate syndications and other private placements seeking to reach a larger pool of potential investors. By allowing general advertising, Rule 506(c) helps issuers raise awareness and attract accredited investors who might not have been reachable through traditional means.
Streamlined Process and Cost Efficiency
While state Blue Sky Laws often require extensive registration processes, Regulation D provides a more streamlined and cost-effective path. Issuers must still comply with certain state notice filings and fees, but these requirements are generally less onerous than full state registration. The streamlined process under Regulation D can significantly reduce legal and administrative costs, allowing issuers to allocate more resources towards their investment projects.
Legal and Regulatory Certainty
Navigating multiple state securities laws can create legal uncertainty, especially if an offering inadvertently crosses state lines. Regulation D offers a clear and federally recognized framework, providing issuers with greater legal certainty and reducing the risk of regulatory issues. This certainty is crucial for maintaining investor confidence and ensuring the smooth execution of the offering.
Choosing Regulation D, specifically Rule 506(b) or Rule 506(c), over state Blue Sky Laws offers significant advantages, including federal preemption, reduced compliance complexity, and the ability to reach a broader investor base. By mitigating jurisdictional risks and providing a streamlined process, Regulation D enables issuers to focus on raising capital and executing their investment strategies effectively. Whether you are engaged in real estate syndication or another form of private placement, leveraging Regulation D can enhance your ability to attract and secure the necessary investment.
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 securities offering under Regulation D, specifically Rule 506(b) or Rule 506(c), issuers must comply with both federal and state notification requirements. These requirements ensure that the offering is transparent and that the state has the necessary information to oversee the offering. Here’s what you need to know about notifying New York State:
Filing Requirements
Federal Filing:
- Form D Filing: Issuers must file Form D electronically with the SEC within 15 days after the first sale of securities in the offering. Form D includes essential details about the offering, such as the names and addresses of the issuer, the offering amount, and the identities of the principals involved.
State Filing:
- New York State Notification: In addition to the federal filing, issuers must submit a copy of the Form D to the New York Department of Law, along with a state-specific filing fee.
- Filing Fee: The fee for submitting the Form D in New York varies between $300 and $1,200, depending on the specifics of the offering. The exact fee is determined based on the amount of the offering and other factors.
- No Late Fees: Unlike some other states, New York does not impose a late fee for delayed filings. However, timely submission is crucial to ensure compliance and avoid potential legal issues.
Steps for Notifying New York State
Prepare Form D:
- Complete Form D with all necessary information about the offering.
- Ensure that all details are accurate and up-to-date to avoid issues with compliance.
File Form D with the SEC:
- Submit Form D electronically through the SEC’s EDGAR system within 15 days after the first sale of securities.
- Retain a copy of the submitted Form D for state filing purposes.
Submit Form D to New York State:
- Prepare a copy of the filed Form D to be submitted to the New York Department of Law.
- Include any required state-specific documentation or cover letters as stipulated by New York regulations.
Calculate and Pay the Filing Fee:
- Determine the appropriate filing fee based on the specifics of the offering.
- Prepare payment for the fee, which ranges from $300 to $1,200.
- Submit the fee along with the Form D copy to the New York Department of Law.
Confirm Receipt:
- Follow up with the New York Department of Law to confirm receipt of your filing and fee.
- Retain all records of correspondence and submission for future reference and compliance verification.
Importance of Compliance
Adhering to the notification rules and filing requirements is critical for maintaining the Regulation D exemption and avoiding potential legal complications. Proper and timely filing not only demonstrates compliance but also helps build trust with investors by ensuring transparency and adherence to regulatory standards.
Notifying New York State about a Regulation D Rule 506(b) or Rule 506(c) offering involves filing Form D with both the SEC and the New York Department of Law, along with paying a variable filing fee. By following these steps diligently, issuers can ensure they meet all regulatory requirements, avoid legal issues, and maintain the integrity of their offering. While New York does not impose late fees, timely compliance is essential to uphold the validity of the Regulation D exemption and protect the interests of all parties involved.
What are New York’s Blue Sky Laws?
Blue sky laws are state-level regulations designed to protect investors from fraudulent securities practices by requiring full disclosure of pertinent details before new securities can be offered to the public. In New York, several sections under the General Business Law outline these requirements. Section 352-e governs real estate syndications, mandating detailed offering statements. Section 352-g allows the Attorney General to exempt certain offerings. Section 352-i provides for injunctive relief against violations, while Section 352-j clarifies the application of these laws. Sections 359-e and 359-f define registration requirements and exemptions for dealers, brokers, and salesmen, ensuring transparency and investor protection. Lastly, Section 359-ff requires comprehensive disclosure through an offering prospectus. These rules collectively aim to maintain fair and transparent securities markets in New York.
NY GEN BUS § 352-e Real estate syndication offerings
New York General Business Law Section 352-e, also known as the Real Estate Syndication Offerings law, governs the public offering and sale of securities related to real estate syndications within the state of New York. The law mandates that no individual or entity can engage in these transactions without first filing a detailed offering statement or prospectus with the New York Department of Law. This document must include comprehensive information about the property, the financial background of the involved parties, the terms of the transaction, and the use of the funds raised. Additionally, it ensures transparency by requiring annual reports to participants and maintaining funds in trust until the transaction is completed. The attorney general must review and approve these filings, ensuring they meet all regulatory requirements before any securities can be sold.
NY GEN BUS § 352-g Exemptions
New York General Business Law Section 352-g grants the Attorney General the authority to exempt certain securities offerings from the stringent requirements of sections 352-e, 352-f, and 352-h. These exemptions can apply to offerings made to a limited number of persons (not exceeding forty) or under other specific conditions deemed appropriate. This provision allows for flexibility in the regulation of smaller or less impactful securities offerings, ensuring they are not subject to the same rigorous scrutiny as larger, more complex transactions.
NY GEN BUS § 352-i Injunctive relief
New York General Business Law Section 352-i empowers the attorney general to seek injunctive relief against any entity or individual violating specific securities laws, including sections 352-e, 352-ee, 352-f, 352-g, 352-h, and 359-ff. If a violation is deemed a fraudulent practice, the Supreme Court may issue a permanent injunction to prevent further infractions. This provision is designed to protect investors by enabling swift legal action to halt fraudulent activities in the securities market.
NY GEN BUS § 352-j Application of article
New York General Business Law Section 352-j outlines that all provisions within Article 23-A apply to real estate syndication offerings and security transactions as defined in subdivision one of Section 352-e. This includes additional regulations specified in Sections 352-e, 352-ee, 352-f, 352-g, 352-h, and 352-i. This ensures comprehensive regulatory coverage for these types of transactions, encompassing protections and requirements aimed at preventing fraudulent practices in securities and real estate syndications.
NY GEN BUS § 359-e Definitions. Registration requirements
New York General Business Law Section 359-e defines the registration requirements for dealers, brokers, and salesmen involved in the sale and purchase of securities within the state. It specifies that dealers and brokers must file a “state notice” with the Department of State, detailing their business and personal information. Additionally, these entities must submit a “broker-dealer statement” and “salesman’s statement” to the Department of Law, providing extensive information on their business history, criminal record, and educational background. This ensures transparency and helps protect investors by requiring thorough documentation and disclosure from those engaged in securities transactions
NY GEN BUS § 359-f Exemptions from certain provisions of section three hundred fifty-nine-e
New York General Business Law Section 359-f provides exemptions from certain provisions of Section 359-e for specific securities transactions. The exemptions include securities issued or guaranteed by the U.S. government, state or political subdivisions, Canadian government, public service corporations, and educational or benevolent institutions. Additional exemptions cover securities with a longstanding record of payment, negotiable promissory notes, bonds and mortgages sold as whole units, and certain sales by judicial or bankruptcy proceedings. The Attorney General can also grant further exemptions upon written application.
NY GEN BUS § 359-ff Registration of intra-state offerings
New York General Business Law Section 359-ff mandates that it is unlawful for any person to offer or sell any security within the state unless an offering prospectus making full and fair disclosure is filed with the Department of Law. This section ensures that all intra-state securities offerings are transparent and provide necessary information to protect potential investors. Compliance with these regulations is critical to maintain the integrity and legality of securities transactions within New York.
What Are New York’s Securities Laws Exemptions?
New York’s securities laws provide a variety of exemptions from registration under General Business Law § 359-f. These exemptions are designed to accommodate various types of issuers and transactions that, due to their nature, present a lower risk of fraud or are otherwise regulated. Understanding these exemptions is crucial for issuers looking to navigate New York’s regulatory landscape effectively.
Governmental Entities
Securities issued by governmental entities are exempt from registration. This includes securities issued by the U.S. government, any state, political subdivision, or any agency or instrumentality thereof. Additionally, securities issued by certain foreign governments, such as Canada, are also exempt.
Financial Institutions
Various financial institutions benefit from exemptions under § 359-f. These include:
- Banks and land banks
- Farm loan associations
- Trust companies
- Savings institutions or savings banks
These institutions are typically subject to stringent regulatory oversight, which justifies their exemption from additional state securities registration requirements.
Non-Profit Corporations and Certain Corporations
Securities issued by non-profit corporations are exempt, provided they meet specific conditions set forth in the statute. Additionally, certain other corporations that meet defined criteria may also be eligible for exemptions. These exemptions recognize the lower risk associated with these types of issuers and their operations.
Public Service or Utility Corporations
Public service or utility corporations issuing securities can also take advantage of exemptions. These entities, given their regulated nature and the essential services they provide, are deemed to pose less risk to investors, thus warranting an exemption from state registration.
Commercial Paper and Negotiable Documents
Short-term commercial paper and negotiable documents of title, which are typically used in regular business transactions and are backed by specific assets, are exempt from registration. These instruments are generally considered low-risk due to their commercial nature and asset backing.
Undivided Whole Bond and Mortgage
Securities that represent undivided interests in whole bonds and mortgages are exempt. These securities are backed by tangible assets, providing a level of security that reduces the need for state registration.
Fiduciary Sales and Debt Liquidation
Sales conducted by courts or other fiduciaries, as well as securities issued as part of debt liquidation processes, are exempt. These transactions are often supervised by legal authorities, ensuring that they are conducted fairly and transparently.
Listed Stock Exchange Securities
Securities listed on recognized stock exchanges are exempt from state registration. The rigorous listing requirements and continuous oversight by the exchanges themselves provide sufficient investor protection.
Limited Offerings
Offerings made to a maximum of 40 persons may qualify for an exemption. This provision helps small issuers raise capital without the burden of full state registration, provided they meet all conditions of the exemption.
Employee Benefit Plans
Securities offered as part of an employee benefit plan are exempt. These plans are typically regulated under federal laws, such as ERISA, providing additional layers of protection and oversight.
Real Estate Offerings
Certain real estate offerings are exempt under specific provisions, including § 359-f(2) and § 352-g. These exemptions can apply to transactions involving real estate syndications, provided they meet the detailed criteria set forth in the statutes.
In-State Offerings
Offerings confined within the state of New York, where all parties and assets involved are located in the state, may also qualify for exemptions under certain conditions listed in § 359-f. This allows for more localized fundraising efforts without the complexity of state registration.
New York’s General Business Law § 359-f outlines numerous exemptions from securities registration that cater to various types of issuers and transactions. Understanding these exemptions can significantly simplify the process of raising capital within the state. For issuers, particularly those involved in real estate syndication, recognizing and utilizing these exemptions effectively can facilitate smoother and more compliant offerings. Consulting with a syndication attorney can provide further clarity and ensure all regulatory requirements are met.
What are New York’s Procedures for Securities Law Exemptions?
Navigating New York’s securities law exemptions requires a clear understanding of the procedural steps involved. The process ensures that issuers comply with state regulations while benefiting from the available exemptions. Here’s a detailed guide to the procedures for claiming securities law exemptions in New York:
Understanding the Applicable Exemption
The first step in the process is to identify the specific exemption under General Business Law § 359-f that applies to your offering. This requires a thorough analysis of the nature of the securities being offered, the type of issuer, and the transaction details. It’s crucial to ensure that your offering meets all the criteria of the chosen exemption to avoid any compliance issues.
Preparation of Required Documentation
Once the applicable exemption is identified, the next step is to prepare the necessary documentation. This typically includes:
- Form D (if applicable): For offerings under Regulation D, a Form D must be prepared and filed with the SEC. A copy of this form is also required for state filings.
- Disclosure Documents: While specific disclosure documents may not be mandated for all exemptions, providing detailed information about the offering can help establish transparency and compliance.
- Supporting Documents: Depending on the exemption, additional supporting documents such as financial statements, corporate resolutions, or evidence of the issuer’s qualifications may be needed.
Filing with the New York Department of Law
For many exemptions, particularly those involving intrastate offerings or those relying on federal Regulation D, issuers must file certain documents with the New York Department of Law. This involves:
- Submitting Form D: A copy of the SEC-filed Form D must be submitted to the New York Department of Law if the offering is under Rule 506(b) or Rule 506(c).
- Cover Letter: A cover letter outlining the exemption being claimed and providing a brief description of the offering can facilitate the review process.
- Filing Fee: The applicable filing fee, which varies between $300 and $1,200 depending on the specifics of the offering, must be included with the submission.
Timely Filing and Compliance
It’s essential to adhere to the timelines specified by the regulations. For Regulation D offerings, Form D must be filed within 15 days after the first sale of securities. Ensuring timely submission of all required documents and fees helps maintain the validity of the exemption and avoids potential legal complications.
Follow-Up and Confirmation
After filing, issuers should follow up with the New York Department of Law to confirm receipt and review the status of their submission. Retaining copies of all correspondence, filings, and confirmations is crucial for record-keeping and future reference.
Ongoing Compliance and Reporting
Even after securing an exemption, issuers must remain vigilant about ongoing compliance. This includes:
- Amendments to Form D: Any material changes to the offering require amendments to Form D, which must be filed with both the SEC and the New York Department of Law.
- Annual Reporting: Depending on the nature of the exemption, some offerings may require periodic reporting to ensure continued compliance.
Consulting with a Syndication Attorney
Given the complexities of securities laws and the importance of maintaining compliance, consulting with a knowledgeable syndication attorney is highly recommended. An attorney can provide tailored advice, assist with document preparation, and ensure that all procedural requirements are met, minimizing the risk of regulatory issues.
Securing an exemption from New York’s securities registration requirements involves a detailed and methodical process. By understanding the specific exemption criteria, preparing the necessary documentation, and adhering to filing procedures, issuers can effectively navigate the regulatory landscape. Ongoing compliance and proactive legal consultation further ensure the smooth execution of securities offerings within the state.
Frequently Asked Questions
Do I Need an Attorney from New York Then to Put Together an Offering?
The necessity of retaining an attorney licensed in New York largely depends on the nature and scope of your securities offering. If your offering is structured under Regulation D, specifically using exemptions like Rule 506(b) or Rule 506(c), and does not rely on New York-specific Blue Sky Laws, then a New York-licensed attorney may not be essential.
For instance, if you are organizing a real estate syndication and need a syndication attorney to prepare a Private Placement Memorandum (PPM) for a multifamily project in New York City, but the offering will be made to investors in multiple states, a licensed syndication lawyer from any state could likely assist you. This attorney could handle tasks such as forming the entity, drafting the operating agreement, and ensuring compliance with federal securities regulations. However, they would not be able to provide legal counsel on specific New York laws or how these might impact your offering.
On the other hand, if your project is more localized, such as a development project in Buffalo where all investors are from New York, and you plan to use New York’s Blue Sky Laws for exemption from registration, you would need to work with an attorney licensed in New York. This is because navigating the specific nuances of New York’s securities regulations and ensuring compliance with state laws requires expertise and authorization that only a New York-licensed attorney possesses.
In summary, the need for a New York-licensed attorney hinges on whether your offering will be conducted under federal Regulation D exemptions or if it will utilize New York’s specific Blue Sky Laws. For multi-state offerings under Regulation D, a general syndication attorney can be sufficient. However, for offerings relying on state-specific exemptions or dealing exclusively within New York, engaging a New York-licensed attorney is crucial to ensure full legal compliance and proper handling of all state-specific legal issues.
Is it Okay if the Real Estate Syndication Attorney, Licensed Outside of New York, Looks Over My Purchase Contract?
A real estate syndication attorney who is licensed outside of New York can certainly review your purchase contract, but there are limitations to the advice they can provide, especially regarding state-specific legal issues. For example, Tilden Moschetti, Esq., a syndication attorney with the Moschetti Syndication Law Group, can review the contract for a property purchase in Yonkers, New York. However, while he can offer business consulting advice—such as discussing the price, overall deal structure, and timing until closing—he cannot provide legal advice on specific terms of the contract that pertain to New York law because he is not licensed in New York.
This distinction is important because while an out-of-state attorney can help identify broad business issues and suggest general contractual improvements, they cannot ensure compliance with New York’s specific legal requirements or interpret how New York law applies to particular contract clauses. For these legal specifics, you would need to consult with an attorney who is licensed in New York and familiar with the state’s real estate laws and regulations.
In summary, while an out-of-state syndication attorney can provide valuable business insights and general advice on your purchase contract, any legal advice specific to New York law should come from a New York-licensed attorney to ensure full compliance and accurate interpretation of the state’s legal nuances.
Tilden Moschetti, Esq., is a highly sought-after syndication attorney with nearly two decades of experience. His clientele ranges from real estate developers and startups to established businesses and private equity funds. Tilden’s expertise in syndication law comes not only from his knowledge of syndication and securities law but from real, hands-on experience as an active syndicator himself in every real estate product type and nearly all markets in the US. His knowledge and experience set him apart and established him as the Reg D legal services leader.