North Dakota Blue Sky Laws for Syndication

Navigating the complex landscape of securities laws is essential for any real estate developer, private equity fund manager, or business owner looking to raise capital through Regulation D offerings. Understanding how these federal regulations interact with state-specific Blue Sky Laws is crucial for ensuring compliance and protecting your investments. This comprehensive guide focuses on North Dakota’s Blue Sky Laws, providing detailed insights into their relationship with Regulation D, the exemptions available under North Dakota law, and the procedures for claiming these exemptions.

In this article, we will explore why many issuers choose Regulation D Rule 506(b) or Rule 506(c) over state-specific Blue Sky Laws, the notification rules and terms for informing the state about a Regulation D offering, and the scenarios in which a North Dakota-licensed attorney might be necessary. Additionally, we will address common questions such as whether a real estate syndication attorney licensed outside North Dakota can review your purchase contract.

Whether you are involved in a multifamily syndication in Fargo or a development project in Bismarck, this guide aims to equip you with the knowledge needed to navigate North Dakota’s securities regulations effectively. By understanding both the federal and state requirements, you can make informed decisions, mitigate legal risks, and successfully raise capital for your ventures.

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 issuers looking to raise capital through private placements. State Blue Sky Laws are designed to protect investors from fraudulent securities offerings and to ensure transparency in the securities markets. However, these laws can create a complex regulatory landscape for issuers, especially when raising capital across multiple states.

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

Under 15 U.S. Code § 77r(b)(4)(F), offerings made pursuant to Regulation D Rule 506(b) or Rule 506(c) are preempted from state Blue Sky Laws. This federal preemption means that issuers utilizing these rules for their securities offerings are not required to comply with the registration requirements of individual state securities laws. Instead, they must adhere to the federal regulations set forth by the SEC.

Rule 506(b) allows issuers to raise an unlimited amount of capital from an unlimited number of accredited investors and up to 35 non-accredited investors, provided that no general solicitation or advertising is used. Rule 506(c), on the other hand, permits general solicitation and advertising, but all investors must be accredited, and the issuer must take reasonable steps to verify their accreditation status.

This preemption significantly simplifies the process for issuers, as they only need to comply with federal requirements, avoiding the need to navigate the varied and often complex regulations of multiple states. This is particularly beneficial for real estate syndication projects and other types of syndications that involve investors from different jurisdictions.

Intrastate Offerings

While Regulation D provides a streamlined federal framework, there are scenarios where an issuer might opt to conduct an offering under a state’s Blue Sky Laws. This is typically the case with intrastate offerings, where the sponsor, all investors, and the assets are located within a single state.

Intrastate offerings allow issuers to take advantage of specific state exemptions and potentially more favorable terms under the state’s securities laws. For example, North Dakota’s Blue Sky Laws may offer certain benefits for local projects that align closely with state economic goals or provide more straightforward compliance requirements for purely in-state offerings.

However, it’s important to note that choosing to proceed under a state’s Blue Sky Laws rather than Regulation D means that the issuer must fully comply with the state’s registration and exemption processes. This includes understanding and adhering to state-specific filing requirements, fees, and ongoing compliance obligations.

Key Considerations for Issuers

When deciding whether to utilize Regulation D or a state’s Blue Sky Laws, issuers should consider several factors:

1. Scope of the Offering: If the offering involves investors from multiple states, Regulation D is generally the preferred route due to federal preemption.
2. Nature of the Investors: Rule 506(c) allows for general solicitation, but only accredited investors can participate, which may influence the decision based on the investor base.
3. State-specific Benefits: Some states may offer favorable conditions for intrastate offerings that could benefit certain projects, particularly in real estate syndications.

In summary, while Regulation D Rule 506(b) and Rule 506(c) provide a federally preempted pathway that simplifies compliance across states, intrastate offerings under state Blue Sky Laws can still be advantageous in certain scenarios. Issuers must carefully evaluate their specific situation, investor base, and the benefits of each regulatory framework to determine the best approach for their securities offering. Consulting with a knowledgeable syndication attorney is essential to navigate these decisions effectively and ensure full legal compliance.

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

When raising capital through a securities offering, issuers have the option to rely on state Blue Sky Laws or to use federal exemptions under Regulation D, specifically Rule 506(b) or Rule 506(c). While state Blue Sky Laws can be advantageous in certain intrastate offerings, there are several compelling reasons why an issuer might choose Regulation D instead.

Federal Preemption and Simplification

One of the primary advantages of using Regulation D Rule 506(b) or Rule 506(c) is the preemption of state Blue Sky Laws. This federal preemption simplifies the regulatory landscape for issuers, allowing them to avoid the complex and varied registration requirements of individual states. Instead, issuers need only comply with the federal regulations set forth by the SEC, streamlining the process significantly.

Broad Applicability Across States

If an offering involves investors or sponsors from multiple states, or if there is any uncertainty about the residency of the investors, Regulation D provides a clear and consistent framework. Under Rule 506(b) and Rule 506(c), issuers can raise capital from investors across the United States without needing to navigate each state’s specific securities laws. This broad applicability is particularly beneficial for real estate syndications and other projects that attract a diverse investor base from different regions.

Mitigating Risk of Securities Law Problems

Relying solely on state Blue Sky Laws for an intrastate offering can be risky if there is any chance that an investor is domiciled outside the state. If it is later discovered that an investor is actually outside the state, the offering could be reclassified, resulting in a securities law problem. This misstep can lead to significant legal and financial consequences, including the invalidation of the offering and potential penalties.

By using Regulation D, issuers can mitigate this risk. Rule 506(b) allows for up to 35 non-accredited investors and unlimited accredited investors, provided there is no general solicitation. Rule 506(c) permits general solicitation but restricts participation to accredited investors only. These rules provide a safe harbor that protects issuers from the complexities and potential pitfalls associated with state-specific regulations.

Flexibility and Scalability

Regulation D offerings under Rule 506(b) and Rule 506(c) offer flexibility and scalability that state Blue Sky Laws may not provide. Issuers can raise an unlimited amount of capital without the constraints imposed by state limits. Additionally, the ability to use general solicitation under Rule 506(c) can be particularly advantageous for larger offerings or when seeking to reach a wider audience of accredited investors.

Attracting Accredited Investors

Rule 506(c) is specifically designed to attract accredited investors through general solicitation and advertising. This can be a crucial advantage for issuers looking to tap into a larger pool of sophisticated investors who meet the SEC’s criteria for accreditation. These investors are often more experienced and have the financial capacity to participate in significant investment opportunities, making them ideal targets for larger and more ambitious projects.

Choosing Regulation D Rule 506(b) or Rule 506(c) over state Blue Sky Laws provides issuers with a streamlined, flexible, and broadly applicable regulatory framework that minimizes the risk of legal complications and maximizes the potential to attract a diverse and accredited investor base. By leveraging the federal preemption of state laws, issuers can ensure compliance, simplify the capital-raising process, and focus on the success of their projects. For these reasons, many issuers, particularly those involved in real estate syndications and other large-scale investments, find Regulation D to be the optimal choice for their securities offerings.

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 Rule 506(b) or Rule 506(c), issuers must comply with certain notification rules and terms to inform state authorities about their offering. Although Regulation D preempts state Blue Sky Laws, states still require issuers to file a notice and pay a fee. This process ensures that state regulators are aware of securities transactions occurring within their jurisdiction and can monitor for compliance with federal and state securities laws.

Filing Requirements

For both Rule 506(b) and Rule 506(c) offerings, issuers must file a Form D with the Securities and Exchange Commission (SEC) within 15 days after the first sale of securities. In addition to the federal filing, issuers must also file a notice with each state where the securities are offered or sold. This state notice filing typically involves submitting a copy of the Form D along with any state-specific forms or information required by the state’s securities regulator.

In North Dakota, as in many other states, these notices are sent through the NASAA Electronic Filing Depository (EFD). The EFD is an online system that facilitates the electronic filing of Form D and related documents to state securities regulators. This centralized system streamlines the notification process, making it easier for issuers to comply with state requirements.

Filing Fees

The notification process includes a filing fee that must be paid to the state. The standard fee for submitting a new notice of a Regulation D Rule 506(b) or Rule 506(c) offering in North Dakota is $100. This fee is fixed and applies uniformly regardless of the size of the offering or the number of investors involved.

Late Filing Fees

Timely compliance with the notification requirements is crucial. If the issuer fails to file the necessary notice within the prescribed time frame, they may be subject to a late filing fee. In North Dakota, the late filing fee is $250. This penalty is imposed to encourage issuers to adhere to the filing deadlines and to ensure that state regulators are promptly informed of all securities offerings.

Notification Terms

The notification terms for a Regulation D offering typically include the following steps:

1. Prepare the Form D: Ensure that the Form D is accurately completed with all necessary information about the issuer, the offering, and the securities being sold.
2. Submit to the SEC: File the Form D electronically with the SEC within 15 days of the first sale of securities.
3. State Notice Filing: Submit a copy of the Form D through the NASAA Electronic Filing Depository (EFD) to the North Dakota Securities Department. Include the $100 filing fee with the submission.
4. Monitor Filing Deadlines: Keep track of filing deadlines to avoid incurring the $250 late filing fee. It is essential to file promptly to maintain compliance and avoid additional costs.
5. Ongoing Compliance: Be prepared to respond to any follow-up inquiries or requests for additional information from the North Dakota Securities Department to ensure ongoing compliance with state regulations.

Importance of Compliance

Adhering to these notification rules and terms is critical for maintaining compliance with both federal and state securities laws. Failure to properly notify the state can result in penalties, delays, and potential legal complications that could impact the success of the offering. By ensuring timely and accurate filings, issuers can avoid these issues and focus on successfully raising capital through their Regulation D offerings.

In summary, while Regulation D provides a streamlined federal framework for securities offerings, issuers must still comply with state notification requirements. In North Dakota, this involves filing a Form D through the NASAA Electronic Filing Depository (EFD), paying a $100 filing fee, and adhering to the filing deadlines to avoid a $250 late fee. By following these steps, issuers can ensure compliance and avoid potential legal and financial consequences.

What are North Dakota’s Blue Sky Laws?

North Dakota’s “blue sky laws” are designed to protect investors from fraud and ensure transparency in the sale and issuance of securities within the state. These regulations encompass several key provisions:

1. Registration of Securities: All securities sold or offered within North Dakota must be registered unless exempt under specific sections or federally covered.
2. Exempt Securities: Certain securities, such as those issued by government entities or non-profits, are exempt from registration to reduce regulatory burden.
3. Suspension and Revocation of Exemptions: The commissioner can suspend or revoke exemptions if necessary, ensuring ongoing compliance.
4. Unlawful Representations: It is illegal to misrepresent the approval or endorsement of securities based on their registration status.

These rules collectively aim to maintain market integrity and protect investors from fraudulent activities.

ND ST 10-04-04 Registration of securities

North Dakota Century Code Section 10-04-04 mandates that it is illegal to sell or offer for sale any securities within the state unless they are registered under the specified chapter. Exceptions to this requirement include securities or transactions that are exempt under Sections 10-04-05 or 10-04-06, or if the securities are federally covered. This law ensures proper oversight and regulation of securities to protect investors and maintain market integrity.

ND ST 10-04-05 Exempt securities

North Dakota Century Code Section 10-04-05 outlines specific exemptions for certain securities from registration requirements. These exempt securities include those issued or guaranteed by government entities, banks, insurance companies, and non-profit organizations. Additional exemptions apply to securities related to public utilities, certain commercial paper, long-standing securities with no default history, and various other specific financial instruments. These exemptions ensure that securities with established reliability or those under substantial regulation are not burdened with additional registration requirements.

ND ST 10-04-06.1 Suspension and revocation of exemptions

North Dakota Century Code Section 10-04-06.1 grants the commissioner the authority to suspend or revoke exemptions for securities or transactions initially exempt under Sections 10-04-05 or 10-04-06. This can be done if deemed necessary, with prior notice, an opportunity for a hearing, and documented findings. The commissioner may summarily suspend exemptions pending a final decision. Affected parties must be notified and can request a hearing within fifteen days. The order remains effective until modified or vacated by the commissioner following due process.

ND ST 10-04-08.3 Unlawful representations concerning registration or exemption

North Dakota Century Code Section 10-04-08.3 prohibits misleading representations regarding the registration or exemption of securities. It clarifies that filing an application or having a security registered does not imply the commissioner’s approval of the document’s accuracy or the merits of the security or transaction. Furthermore, it is unlawful to suggest to potential buyers, clients, or customers that such filings or registrations constitute an endorsement or validation by the commissioner.

What are North Dakota’s Securities Laws Exemptions?

North Dakota’s Blue Sky Laws, codified in the North Dakota Century Code, provide a range of exemptions from securities registration. These exemptions are designed to facilitate the issuance and sale of certain types of securities and transactions that are deemed to pose less risk to investors or to serve public interests. Understanding these exemptions is crucial for issuers to determine whether their offerings may qualify, thereby simplifying the compliance process. Below are the primary exemptions under North Dakota law as outlined in Section 10-04-05:

Governmental Entities

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

• Securities issued or guaranteed by the United States, any state, any political subdivision of a state, or any agency or instrumentality thereof.
• Securities issued by foreign governments with which the United States maintains diplomatic relations, provided these securities have a comparable level of government backing.

Financial Institutions

Securities issued by certain financial institutions are also exempt. These institutions include:

• Depository and banking institutions, such as banks and trust companies.
• Building and loan associations, which are often involved in real estate financing.

Cooperatives

Securities issued by cooperatives, which are member-owned organizations typically involved in agriculture or other local industries, are exempt from registration. This exemption supports local economic activities and community-based enterprises.

Venture Capital Corporations

North Dakota provides an exemption for securities issued by venture capital corporations. These entities invest in startups and early-stage companies, contributing to economic development and innovation within the state.

North Dakota Education Association

Securities issued by the North Dakota Education Association, a prominent organization supporting educational initiatives, are exempt. This exemption ensures that educational financing activities can proceed without the burden of securities registration.

Other Entities

Several other entities and types of securities benefit from exemptions, including:

• Railroads, common carriers, and public utilities, which are essential services regulated by public authorities.
• Public utility holding companies, which manage groups of utility companies.
• Insurance companies, given their regulation under state insurance laws.

Collateral Secured Bonds and Equipment Trust Certificates

Bonds secured by a mortgage or trust deed on real or personal property, as well as equipment trust certificates, are exempt. These instruments are typically backed by tangible assets, reducing investment risk.

Execution of Security Purchase Orders

Securities involved in the execution of purchase orders are exempt. This facilitates routine financial transactions and market operations without the need for registration.

Fixed Return Securities or Foreign Margin Securities

Securities that provide a fixed return or are margin securities regulated by foreign financial authorities are exempt. These securities are generally considered less risky due to their fixed income nature or regulation by reputable foreign entities.

Listed Stock Exchange Securities and Clearing Agency Options

Securities listed on a recognized stock exchange or involved in options and futures transactions through a clearing agency are exempt. The regulation and oversight of these exchanges and agencies provide investor protections.

Current Transaction Commercial Paper

Commercial paper, which is a short-term debt instrument used by companies to finance their operations, is exempt. This exemption supports liquidity and short-term financing needs in the business sector.

Non-Profit Persons

Securities issued by non-profit organizations are exempt from registration. This exemption recognizes the public benefit and typically lower risk associated with non-profit activities.

Understanding and utilizing these exemptions can significantly simplify the process for issuers in North Dakota, allowing them to raise capital more efficiently while remaining compliant with state securities laws. Each exemption is designed to balance the need for investor protection with the practicalities of financing various entities and projects. Issuers should carefully review the specific criteria and conditions for each exemption to determine their applicability. Consulting with a knowledgeable syndication attorney can provide further clarity and ensure proper compliance with North Dakota’s securities regulations.

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

Navigating the securities law exemptions in North Dakota requires understanding the specific procedures that must be followed to ensure compliance. These procedures help streamline the process for issuers and ensure that they are in line with state regulations. Below is an overview of the steps and requirements for claiming securities law exemptions in North Dakota:

1. Determine Eligibility for Exemption

The first step for issuers is to determine whether their securities offering qualifies for an exemption under North Dakota law. As detailed in the previous section, various types of securities and entities, such as governmental entities, financial institutions, cooperatives, venture capital corporations, and non-profits, may qualify for exemptions. Issuers should review Section 10-04-05 of the North Dakota Century Code to identify applicable exemptions.

2. Prepare Documentation

Even when an offering qualifies for an exemption, issuers must prepare and maintain thorough documentation to support their exemption claim. This documentation may include:

• Detailed descriptions of the securities being offered.
• Information about the issuing entity, including financial statements and business plans.
• Evidence of compliance with the specific conditions of the exemption being claimed.

3. File a Notice of Exemption (if required)

Certain exemptions may require issuers to file a notice with the North Dakota Securities Department, even if full registration is not required. This notice typically involves submitting:

• A completed exemption form, available from the North Dakota Securities Department.
• Copies of the offering documents, such as the private placement memorandum (PPM).
• Any additional supporting materials that demonstrate the offering’s eligibility for the exemption.

4. Pay Applicable Fees

Some exemptions may require the payment of a filing fee when submitting the notice of exemption. The fee structure can vary depending on the type of exemption and the specifics of the offering. Issuers should consult the North Dakota Securities Department’s fee schedule to determine the applicable fees.

5. Submit Through NASAA Electronic Filing Depository (EFD)

North Dakota utilizes the NASAA Electronic Filing Depository (EFD) for the submission of Form D and other exemption-related filings. Issuers should:

• Create an account on the EFD system if they do not already have one.
• Upload the necessary documents, including the Form D and any state-specific exemption forms.
• Pay the required filing fees through the EFD system.

6. Monitor and Respond to State Inquiries

After filing, issuers should monitor their filings and be prepared to respond to any inquiries or requests for additional information from the North Dakota Securities Department. Prompt and thorough responses help ensure a smooth review process and avoid delays.

7. Maintain Compliance Records

Issuers must maintain detailed records of their exemption filings and any correspondence with the North Dakota Securities Department. These records should be kept for several years as part of the issuer’s compliance documentation, in case of future audits or reviews.

Key Considerations for Issuers

1. Accuracy and Completeness: Ensure all filings and documentation are accurate and complete to avoid processing delays or rejection of the exemption claim.
2. Timeliness: File all required notices and documentation promptly to comply with statutory deadlines and avoid late fees or penalties.
3. Legal and Financial Advice: Consider consulting with a syndication attorney or financial advisor to ensure that all aspects of the exemption claim are handled correctly and to stay informed about any changes in the regulatory environment.

By following these procedures, issuers can effectively navigate North Dakota’s securities law exemptions, ensuring that their offerings comply with state regulations while taking advantage of the benefits provided by these exemptions. Proper adherence to these steps not only simplifies the process but also helps mitigate legal and financial risks associated with non-compliance. Consulting with a knowledgeable syndication attorney can further ensure that issuers are fully compliant and can successfully raise capital through their securities offerings.

Frequently Asked Questions

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

Whether you need an attorney from North Dakota to put together a securities offering largely depends on the specifics of your offering and the applicable laws. If your offering falls under Regulation D and not under North Dakota’s specific Blue Sky Laws, then you likely do not need an attorney licensed in North Dakota.

For instance, suppose you are a real estate syndication sponsor preparing a private placement memorandum (PPM) for a multifamily deal in Fargo, North Dakota, and you plan to offer this investment in multiple states. In this case, if you do not require legal counsel on matters specifically related to North Dakota’s laws, a licensed syndication attorney from another state could effectively assist you. This attorney could prepare the PPM, form the necessary entity, and draft the operating agreement. However, it’s important to note that while they can handle the federal Regulation D aspects and general legal structure, they cannot provide specific legal advice on North Dakota’s state laws and their implications for your offering.

On the other hand, if your project involves a private placement memorandum for a development in Bismarck, North Dakota, and all your investors are from North Dakota, you might opt to use one of North Dakota’s Blue Sky Laws as an exemption from registration. In such a scenario, you would need an attorney licensed in North Dakota. This is because specific knowledge of North Dakota’s securities regulations is essential to ensure compliance and to navigate the nuances of the state’s legal framework.

In summary, while a syndication attorney from another state can assist with offerings under Regulation D, any offering that seeks to rely on North Dakota-specific Blue Sky Laws for exemptions or involves a purely intrastate context would require the expertise of a North Dakota-licensed attorney. This ensures that all state-specific legal requirements are thoroughly addressed, thereby protecting both the issuer and the investors from potential legal complications.

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

When engaging a real estate syndication attorney licensed outside of North Dakota to review your purchase contract, it’s essential to understand the limitations of their advice. Attorneys not licensed in North Dakota can review the contract and provide general business consulting advice. For example, Tilden Moschetti, Esq., a syndication attorney with the Moschetti Syndication Law Group, is able to review purchase contracts for properties in places like Grand Forks, North Dakota. He can offer insights on broad deal points such as pricing strategies and timelines until closing.

However, it is crucial to note that while these attorneys can offer general guidance, they cannot provide specific legal advice pertaining to North Dakota law. This means they cannot interpret or advise on any specific terms or legal implications under North Dakota’s legal framework. Their guidance would be limited to general business considerations and federal securities law compliance.

For any legal advice specific to North Dakota’s laws and regulations, it is necessary to consult with an attorney who is licensed in North Dakota. This ensures that you receive accurate and legally sound advice that fully complies with the state’s legal requirements. Utilizing a local attorney can help mitigate risks and ensure that your contract adheres to all applicable state laws, ultimately protecting your investment and interests.