North Carolina Blue Sky Laws for Syndication

Navigating the complexities of securities regulations is a critical task for real estate developers, businesses, private equity fund managers, and other professionals seeking to raise capital through syndication. Understanding both federal and state-level requirements is essential to ensure compliance and to optimize the structuring of these financial offerings.

North Carolina’s Blue Sky Laws play a significant role in the regulatory landscape for securities issued within the state. These laws are designed to protect investors from fraud and to ensure transparency in securities transactions. However, when it comes to raising capital through Regulation D, particularly under Rule 506(b) and Rule 506(c), federal preemption can simplify the process by overriding some state-specific requirements.

This article provides an in-depth look at North Carolina’s Blue Sky Laws, how they interact with the SEC’s Regulation D, and the specific procedures and exemptions relevant to issuers in the state. Whether you are considering a local intrastate offering or a broader Regulation D syndication, understanding these regulations is crucial. We will also discuss the role of syndication attorneys in navigating these laws and provide practical insights for ensuring compliance.

From filing notifications and understanding exemptions to determining when you need local legal counsel, this comprehensive guide aims to equip you with the knowledge needed to successfully navigate North Carolina’s securities regulatory environment.

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

Understanding the interplay between state Blue Sky Laws and the SEC’s Regulation D is crucial for anyone involved in syndication, particularly real estate syndication. This section will clarify how these two regulatory frameworks coexist and when one might take precedence over the other.

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

Under 15 U.S. Code § 77r(b)(4)(F), Regulation D Rule 506(b) and Rule 506(c) offerings are preempted from state Blue Sky Laws. This means that when you structure your offering under either Rule 506(b) or Rule 506(c) of Regulation D, you primarily need to comply with federal securities laws, and state-level registration and qualification requirements are overridden.

• Rule 506(b): Allows for the raising of unlimited capital from an unlimited number of accredited investors and up to 35 non-accredited investors, provided they meet certain sophistication requirements. There is no general solicitation or advertising permitted under this rule.
• Rule 506(c): Permits general solicitation and advertising, but all investors must be accredited, and the issuer must take reasonable steps to verify this status.

Both of these rules are designed to facilitate capital raising while providing investor protections. Because of the federal preemption, sponsors benefit from a streamlined compliance process, focusing on the federal requirements without needing to navigate the diverse and often complex Blue Sky Laws in each state.

Intrastate Offerings

Despite the federal preemption for Regulation D offerings, there are scenarios where a sponsor might opt to rely on state Blue Sky Laws. This typically occurs in the context of intrastate offerings, where the entire investment process — from the sponsor to the investors to the assets — is contained within a single state.

For an offering to qualify as intrastate:

• The issuer must be based in the state.
• The offer and sale of securities must be made solely to residents of that state.
• The company’s primary business operations must be within the state.

In these cases, a sponsor might choose to register the offering under the state’s Blue Sky Laws, benefiting from state-specific exemptions that can sometimes offer more favorable or tailored conditions for local businesses and investors.

Practical Implications for Syndicators

For syndicators, especially in real estate, understanding these nuances is essential. When opting for a Regulation D offering under Rule 506(b) or Rule 506(c), the federal preemption simplifies compliance, reducing the regulatory burden by focusing on SEC requirements. However, if your project is strictly local, taking advantage of state Blue Sky Laws through an intrastate offering might provide strategic benefits.

The Role of a Syndication Attorney

Navigating these regulatory landscapes requires expertise. A syndication attorney can help determine the best approach, ensuring compliance with all applicable laws while optimizing the offering structure for success. Whether leveraging the federal preemption of Regulation D or taking a local approach with intrastate offerings, professional legal guidance is invaluable.

In summary, while Regulation D Rule 506(b) and Rule 506(c) offerings benefit from federal preemption, simplifying the compliance process, intrastate offerings under state Blue Sky Laws remain a viable option for wholly local ventures. Understanding when and how to apply these regulations will help you make informed decisions and successfully raise capital.

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

Choosing between Regulation D offerings and state Blue Sky Laws can be a critical decision for syndicators, especially in the realm of real estate syndication. Here are key reasons why opting for Regulation D Rule 506(b) or Rule 506(c) is often the preferred route over state Blue Sky Laws.

Federal Preemption Simplifies Compliance

One of the main advantages of using Regulation D, particularly Rule 506(b) or Rule 506(c), is the preemption of state Blue Sky Laws. Under 15 U.S. Code § 77r(b)(4)(F), these federal rules override the need for state registration and qualification, significantly streamlining the regulatory process. This federal preemption means that issuers only need to comply with SEC regulations, avoiding the complexities and variations of different state securities laws.

Flexibility in Investor Base

Regulation D Rule 506(b) and 506(c) provide greater flexibility in terms of the investor base. Rule 506(b) allows for an unlimited number of accredited investors and up to 35 non-accredited but sophisticated investors, without the need for general solicitation or advertising. On the other hand, Rule 506(c) permits general solicitation and advertising, provided all investors are accredited, and the issuer takes reasonable steps to verify this status.

This flexibility is crucial for syndicators looking to reach a broader audience and raise significant capital without being constrained by the geographic limitations imposed by state Blue Sky Laws.

Avoiding Intrastate Offering Risks

While intrastate offerings under state Blue Sky Laws can be appealing for strictly local projects, they come with significant risks. If any part of the offering — whether an investor or the sponsor — is located outside of the state, the offering cannot qualify as intrastate. Furthermore, if it is later discovered that an investor is actually domiciled outside the state, the offering loses its intrastate status, leading to a potential securities law violation.

This risk is mitigated under Regulation D offerings, as these are designed to cater to a national investor base, ensuring compliance even if investors are domiciled in different states. Thus, choosing Rule 506(b) or 506(c) eliminates the uncertainty and potential legal issues associated with intrastate offerings.

Streamlined Capital Raising Process

By leveraging Regulation D, issuers benefit from a more streamlined and predictable capital-raising process. The SEC’s rules under Regulation D are well-defined, providing clear guidelines for compliance. This predictability is particularly beneficial for real estate syndicators who need to raise substantial funds within tight timelines.

Importance of Professional Guidance

Navigating the complexities of securities regulations requires expertise. A syndication attorney can provide invaluable assistance, ensuring that offerings are structured to comply with Regulation D, thus avoiding the pitfalls of state Blue Sky Laws. They can also help in the preparation of essential documents like the private placement memorandum (PPM), ensuring all regulatory requirements are met.

In conclusion, choosing Regulation D Rule 506(b) or Rule 506(c) over state Blue Sky Laws offers several advantages, including federal preemption, flexibility in the investor base, and a streamlined compliance process. These benefits make Regulation D the preferred choice for syndicators looking to raise capital effectively and efficiently, while minimizing legal risks and uncertainties.

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, compliance with state notification requirements remains essential despite federal preemption of state Blue Sky Laws. Here are the key notification rules and terms you need to know for notifying the state about such offerings.

Notification Requirements

Although Regulation D offerings are primarily governed by federal law, issuers must still file notices with the states where the securities are sold. This requirement ensures that state regulators are aware of securities activities within their jurisdictions and can monitor for any potential fraud or misconduct.

Form D Filing

To notify the state about a Regulation D offering, issuers must file a Form D with the SEC. This form contains essential information about the offering, including details about the issuer, the securities being sold, and the terms of the offering. Once the Form D is filed with the SEC, issuers must also submit copies to the states where the securities are being offered.

Filing Fee

In North Carolina, the notification filing for a Regulation D Rule 506(b) or Rule 506(c) offering requires a fixed filing fee. The fee structure is straightforward:

• New Notice Filing Fee: $350

This fee is required for each new notice filed with the state. It is a one-time fee per offering and is necessary to process the notification and ensure compliance with state regulations.

Late Filing

While it is crucial to submit the notification in a timely manner, North Carolina does not impose a late fee for late filings. However, it is always advisable to file promptly to avoid any potential scrutiny or complications with state regulators.

Filing Process

1. Complete Form D: Ensure all required information is accurately filled out on the Form D.
2. File with the SEC: Submit the completed Form D electronically through the SEC’s EDGAR system.
3. Submit to State: Use the NASAA Electronic Filing Depository (EFD) to send copies of the Form D to the North Carolina Securities Division. This centralized system simplifies the state filing process.
4. Pay the Filing Fee: The $350 filing fee can also be paid through the NASAA EFD.
5. Confirm Receipt: Ensure that the state has received and processed your filing. This can often be done through the NASAA EFD, which provides tracking and confirmation services.

NASAA Electronic Filing Depository (EFD)

The NASAA Electronic Filing Depository (EFD) is an online system that facilitates the submission of Form D filings to state securities regulators. Using the EFD, issuers can:

• Submit Form D filings electronically to multiple states.
• Pay filing fees online.
• Track the status of filings and receive confirmation of receipt.

Using the EFD simplifies the notification process, ensuring that filings are timely and accurately submitted to the relevant state authorities.

Role of a Syndication Attorney

Engaging a syndication attorney can simplify the notification process. They can assist with preparing the Form D, ensuring that all information is accurate and complete, and handle the submission to both the SEC and state authorities via the EFD. This professional guidance helps mitigate risks and ensures compliance with all regulatory requirements.

Importance of Compliance

Timely and accurate notification is critical for maintaining regulatory compliance and fostering trust with investors. It demonstrates a commitment to transparency and adherence to legal standards, which can be beneficial in attracting and retaining investors.

In summary, while Regulation D Rule 506(b) and Rule 506(c) offerings benefit from federal preemption, state notification requirements, including a $350 filing fee in North Carolina, must still be observed. Ensuring timely and accurate filings through the NASAA Electronic Filing Depository helps maintain compliance and supports successful capital-raising efforts.

What are North Carolina’s Blue Sky Laws?

North Carolina’s blue sky laws are designed to protect investors from fraud and ensure transparency in securities transactions within the state. These laws encompass several key statutes, including requirements for registration (NC Gen Stat § 78A-24), regulations on unlawful representations (NC Gen Stat § 78A-10), criteria for exempt securities (NC Gen Stat § 78A-16), and provisions for the denial and revocation of exemptions (NC Gen Stat § 78A-18). Each statute plays a critical role in maintaining the integrity of the state’s securities market by ensuring that securities are properly vetted, accurately represented, and subject to oversight. Understanding these laws is essential for both investors and issuers to navigate the regulatory landscape effectively and to promote a fair and transparent market environment.

NC ST § 78A-10 Unlawful representations concerning registration or exemption

North Carolina General Statutes § 78A-10 (2021) prohibits making misleading representations about the registration or exemption status of securities. Specifically, the filing or approval of registration does not imply the accuracy, completeness, or endorsement of the related documents by the Administrator. Furthermore, it is illegal to make any claims to potential buyers or clients that contradict this provision.

NC ST § 78A-16 Exempt securities

North Carolina General Statutes § 78A-16 outlines various types of securities that are exempt from certain state registration and filing requirements. These exemptions include securities issued or guaranteed by the U.S. government, states, or their subdivisions, as well as securities from Canadian and other foreign governments with which the U.S. has diplomatic relations. Additionally, securities from banks, savings institutions, trust companies, insurance companies, and various associations, among others, are also exempt. This statute ensures that certain well-regulated securities can be issued without the need for extensive state-level registration.

NC ST § 78A-18 Denial and revocation of exemptions

North Carolina General Statutes § 78A-18 grants the Administrator the authority to deny or revoke exemptions for certain securities or transactions. This action requires prior notice, a hearing, and written findings, although summary orders can be issued pending final determination. In civil or administrative proceedings, the burden of proving an exemption falls on the claimant, while in criminal proceedings, the state must disprove the exemption only after the defendant provides evidence of its applicability.

NC ST § 78A-24 Registration requirement

North Carolina General Statutes § 78A-24 mandates that it is illegal for any person to offer or sell any security in the state unless the security is registered under the relevant chapter, qualifies for an exemption under G.S. 78A-16 or 78A-17 (without having the exemption denied or revoked under G.S. 78A-18), or is a security covered under federal law. This ensures that securities are properly vetted and regulated before being offered to the public.

What are North Carolina’s Securities Laws Exemptions?

In North Carolina, certain securities transactions and entities are exempt from the registration requirements typically imposed by the state’s Blue Sky Laws. Understanding these exemptions can help syndicators and other financial professionals navigate compliance more efficiently. Here is an overview of the primary exemptions under the North Carolina Securities Act, specifically outlined in § 78A-16.

Governmental Entities

Securities issued by various governmental bodies are exempt from state registration requirements. This includes:

• Securities issued or guaranteed by the United States government, any state, or any political subdivision or public instrumentality thereof.
• Securities issued by certain foreign governments, including Canada.

Financial Institutions

Several types of financial institutions benefit from exemptions, including:

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

These entities are generally subject to comprehensive regulation and oversight, which provides a basis for their exemption.

Professional Corporations

Securities issued by professional corporations are exempt. This includes corporations formed under specific professional services statutes that adhere to professional regulatory frameworks.

Cooperative Organizations

Certain cooperative organizations, including electric or telephone membership corporations, are exempt from securities registration requirements. These organizations often operate on a membership basis, providing services to their members rather than the general public.

Other Entities

Exemptions extend to various other entities, such as:

• Railroads and common carriers.
• Public utilities.
• Holding companies of public utilities.
• Insurance companies.

These entities typically operate in highly regulated industries, providing an additional layer of investor protection.

Vessel Lien Secured Bonds or Notes

Bonds or notes secured by a lien on vessels are exempt. This specific exemption acknowledges the unique nature of maritime financing and the collateral involved.

Listed Stock Exchange Securities

Securities listed on a recognized stock exchange are exempt from state registration requirements. This exemption is based on the assumption that such securities are subject to significant scrutiny and regulation by the exchange.

Non-Profit Persons

Non-profit organizations, including various charitable and educational institutions, benefit from exemptions. This category includes organizations that do not distribute profits to shareholders and typically operate for the public good.

Current Transaction Commercial Paper

Commercial paper that arises out of a current transaction or the proceeds of which are used for current transactions is exempt. This type of short-term debt instrument is often used by businesses to meet immediate funding needs.

Employee Benefit Plans

Securities issued in connection with employee benefit plans are also exempt. This includes various retirement plans, stock purchase plans, and other employee compensation arrangements.

Practical Implications for Syndicators

For those involved in syndication, particularly real estate syndication, understanding these exemptions is crucial. While many real estate syndications may not fall directly under these specific exemptions, knowing the landscape can help in structuring offerings and ensuring compliance.

The Role of a Syndication Attorney

A syndication attorney can provide invaluable assistance in navigating North Carolina’s securities laws. They can help identify applicable exemptions and structure offerings to comply with both state and federal regulations, including the preparation of necessary documentation like the private placement memorandum (PPM).

North Carolina’s securities laws provide a range of exemptions that can simplify compliance for various entities and transactions. By understanding these exemptions, syndicators and other financial professionals can better navigate the regulatory landscape, ensuring their offerings are structured effectively and legally. Engaging a knowledgeable syndication attorney can further enhance compliance efforts, providing peace of mind and supporting successful capital-raising initiatives.

What are North Carolina’s Procedures for Securities Law Exemptions?

Navigating the securities law exemptions in North Carolina requires a clear understanding of the procedures and documentation necessary to comply with state regulations. While certain entities and transactions are exempt from registration under North Carolina’s Blue Sky Laws, issuers must still follow specific steps to ensure they qualify for these exemptions. Here’s a detailed guide on the procedures for claiming securities law exemptions in North Carolina.

Identify the Appropriate Exemption

The first step in the process is to determine which exemption applies to your specific situation. North Carolina’s securities law exemptions, as outlined in § 78A-16, cover a variety of entities and transactions, including:

• Governmental entities and certain foreign governments
• Financial institutions
• Professional corporations
• Cooperative organizations
• Railroads, common carriers, public utilities, and insurance companies
• Vessel lien secured bonds or notes
• Listed stock exchange securities
• Non-profit organizations
• Current transaction commercial paper
• Employee benefit plans

Documentation and Record-Keeping

Even though certain securities may be exempt from registration, issuers must maintain thorough documentation to substantiate their claim to an exemption. This includes:

• Detailed records of the nature of the securities issued
• Information about the investors and their qualifications
• Documentation of the transaction and its compliance with exemption criteria

Filing a Notice of Exemption (if applicable)

While not all exemptions require formal notice filings, some do. For example, intrastate offerings under Rule 147A or certain other exemptions may necessitate filing a notice with the North Carolina Securities Division. Here are the general steps for such filings:

1. Prepare the Notice Filing: Gather all necessary information and complete the appropriate forms. This may include Form D for certain federal exemptions that require state notice.
2. Submit Through NASAA EFD: Utilize the NASAA Electronic Filing Depository (EFD) to file the notice. The EFD streamlines the process by allowing issuers to submit filings electronically to multiple states.
3. Pay the Filing Fee: If a filing fee is required, it must be paid at the time of submission. North Carolina typically requires a $350 fee for new notice filings.
4. Confirm Receipt and Compliance: Ensure that the notice has been received and processed by the North Carolina Securities Division. The NASAA EFD provides tracking and confirmation services.

Ongoing Compliance and Reporting

Issuers must ensure ongoing compliance with the conditions of the exemption throughout the life of the securities offering. This includes:

• Monitoring investor qualifications to ensure continued eligibility for the claimed exemption
• Maintaining up-to-date records and documentation
• Filing any required updates or amendments if there are significant changes to the offering

Seeking Professional Advice

Given the complexities involved in navigating securities law exemptions, it is advisable to consult with a syndication attorney. A qualified attorney can:

• Help identify the appropriate exemption for your offering
• Assist in preparing and filing the necessary documentation
• Ensure ongoing compliance with both state and federal regulations
• Provide legal advice tailored to your specific circumstances

Claiming a securities law exemption in North Carolina involves a thorough understanding of the applicable laws and diligent adherence to procedural requirements. By identifying the correct exemption, maintaining proper documentation, and following the appropriate filing procedures, issuers can ensure their offerings comply with state regulations. Engaging a syndication attorney can provide additional assurance and support, helping to navigate the complexities of securities law and facilitating successful capital-raising efforts.

Frequently Asked Questions

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

Whether you need an attorney from North Carolina to put together an offering depends largely on the specifics of your project and the legal requirements involved. If your offering falls under Regulation D, rather than North Carolina-specific Blue Sky Laws, you may not necessarily need a North Carolina-based attorney.

For instance, consider a scenario where you need a real estate syndication attorney to draft a private placement memorandum (PPM) for a multifamily deal in Charlotte, North Carolina. If this offering is intended for investors across various states and does not require counsel on issues specific to North Carolina laws, a licensed syndication attorney from another state would likely be able to assist. This attorney could handle the creation of the PPM, establish the necessary legal entity, and draft the operating agreement. However, they would not be able to provide legal advice on specific North Carolina statutes and regulations pertinent to your offering.

On the other hand, if your project is more localized, the requirements might be different. For example, if you are putting together a PPM for a development project in Raleigh, North Carolina, where all the investors are from North Carolina, and you intend to utilize one of North Carolina’s Blue Sky Laws exemptions to avoid registration, you would need to collaborate with an attorney licensed in North Carolina. This local attorney would have the necessary expertise in state-specific securities laws and could guide you through the complexities of complying with those regulations.

In summary, while a syndication attorney from outside North Carolina can handle many aspects of a Regulation D offering, including drafting key documents and structuring the deal, the need for a North Carolina-based attorney arises when specific state laws and exemptions come into play. Ensuring compliance with local regulations is crucial, and having a licensed attorney who understands the nuances of North Carolina’s Blue Sky Laws can provide the assurance and legal protection necessary for a successful offering.

Is It OK if the Real Estate Syndication Attorney, Licensed Outside of North Carolina, Looks Over My Purchase Contract?

When working with a real estate syndication attorney who is not licensed in North Carolina, it is important to understand the limitations of the legal advice they can provide. While an out-of-state attorney can review your purchase contract, they cannot offer legal advice specific to North Carolina law.

For example, Tilden Moschetti, Esq., a syndication attorney with the Moschetti Syndication Law Group, can examine the underlying details of your purchase contract for a property in Greensboro, North Carolina. He can provide business consulting advice, such as discussing the purchase price and broader deal points like the timeline for closing. However, he cannot comment on or provide legal advice about specific terms of the contract as it pertains to North Carolina law because he is not licensed there.

This distinction is crucial to ensure compliance with state-specific legal requirements and to avoid any unauthorized practice of law. While out-of-state attorneys can offer valuable insights and general business advice, for specific legal guidance on the terms and implications of a purchase contract within North Carolina, it is necessary to consult with a local attorney licensed in the state. This ensures that all legal aspects of the contract are properly addressed and that you are fully informed about any state-specific legal issues that may arise.