Ohio Blue Sky Laws for Syndication

Navigating the complexities of securities laws is a critical aspect of raising capital, particularly for real estate developers, private equity fund managers, and business professionals engaged in syndications. Ohio’s Blue Sky Laws, alongside the SEC’s Regulation D, provide a regulatory framework that governs the offer and sale of securities within the state. Understanding these laws is essential to ensure compliance, protect investors, and facilitate successful capital-raising efforts.

This comprehensive guide delves into Ohio’s Blue Sky Laws and their interaction with federal Regulation D offerings. It explores why issuers might choose Regulation D exemptions over state-specific laws, outlines the notification requirements for Ohio, and details the state’s securities law exemptions and procedures. Additionally, it addresses the need for legal counsel when structuring offerings and contracts, emphasizing the importance of state-specific expertise.

Whether you are planning a real estate syndication, drafting a private placement memorandum, or considering the legal nuances of a securities offering, this guide provides the essential information needed to navigate Ohio’s regulatory landscape effectively.

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 both aim to regulate the offer and sale of securities, but they operate at different jurisdictional levels and have distinct scopes. Understanding their relationship is crucial for issuers looking to raise capital through real estate syndication or other private placements.

Federal Preemption under Regulation D:
Regulation D, established by the SEC, provides exemptions from federal registration requirements, allowing companies to raise capital more efficiently. Rule 506(b) and Rule 506(c) of Regulation D are particularly significant because they preempt state Blue Sky Laws under 15 U.S. Code § 77r(b)(4)(F). This means that offerings made under these rules are not subject to the state-level registration and qualification requirements that would otherwise apply. Instead, issuers only need to comply with federal requirements and certain state notice filings and fee payments.

Rule 506(b) Offerings:
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 the non-accredited investors are sophisticated and receive sufficient disclosure. General solicitation and advertising are not permitted under Rule 506(b). This exemption is widely used because it simplifies compliance by overriding state registration requirements while still providing robust investor protections.

Rule 506(c) Offerings:
Rule 506(c) permits issuers to engage in general solicitation and advertising to attract investors, provided that all purchasers are accredited investors and the issuer takes reasonable steps to verify their accredited status. Like Rule 506(b), Rule 506(c) offerings benefit from federal preemption of state Blue Sky Laws, streamlining the capital-raising process.

Intrastate Offerings and State Blue Sky Laws:
Despite the federal preemption provided by Regulation D, there are scenarios where an issuer might opt to comply with state Blue Sky Laws instead. If an offering involves a sponsor, all investors, and assets that are all located within a single state, the issuer may choose to structure the offering as an intrastate offering. Intrastate offerings can take advantage of state-specific exemptions designed to facilitate local investment and economic growth. These offerings are regulated primarily at the state level and must comply with the state’s Blue Sky Laws.

In summary, while Regulation D’s Rule 506(b) and Rule 506(c) provide significant benefits by preempting state Blue Sky Laws and simplifying compliance, there are instances where adhering to state laws may be advantageous. Issuers conducting intrastate offerings can leverage state-specific exemptions, but for broader offerings involving multiple states or general solicitation, Regulation D provides a streamlined and efficient regulatory pathway. Understanding the interplay between federal and state regulations ensures that issuers can choose the most appropriate and beneficial route for their capital-raising activities.

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

Choosing between Regulation D Rule 506(b) or Rule 506(c) and state Blue Sky Laws depends on the specifics of the offering and the locations of the sponsor and investors. Here are the key reasons why Regulation D exemptions are often preferred:

1. Broad Applicability:
Regulation D Rule 506(b) and Rule 506(c) exemptions are available to issuers regardless of the state in which the offering is made. This federal exemption allows issuers to raise capital from investors across multiple states without having to comply with each state’s Blue Sky Laws. In contrast, state Blue Sky Laws are applicable only within the issuing state. If any part of the offering—be it the sponsor, any investor, or the assets—is located outside the state, the issuer must comply with federal regulations.

2. Federal Preemption:
Regulation D provides a streamlined regulatory framework by preempting state Blue Sky Laws. Under 15 U.S. Code § 77r(b)(4)(F), offerings made under Rule 506(b) or Rule 506(c) are exempt from state registration requirements. This means issuers do not need to navigate the complex and varied securities regulations of each state where their investors are located, significantly reducing the legal and administrative burden.

3. Risk Mitigation:
One significant risk of relying solely on state Blue Sky Laws is the potential for inadvertent non-compliance if an investor is discovered to be domiciled outside the state. For example, an offering initially believed to qualify as an intrastate offering under state Blue Sky Laws can face severe legal issues if an investor’s out-of-state residency is discovered. This could result in the offering no longer being exempt under state laws, creating a securities law problem and potential penalties. By choosing Regulation D Rule 506(b) or Rule 506(c), issuers mitigate this risk since these rules cover interstate offerings.

4. General Solicitation Flexibility:
Rule 506(c) allows issuers to engage in general solicitation and advertising, provided all investors are accredited and the issuer takes reasonable steps to verify their status. This flexibility can be advantageous for issuers seeking to reach a broader audience of potential investors. State Blue Sky Laws generally do not offer this level of flexibility, often restricting public solicitation.

5. Unlimited Capital Raising:
Both Rule 506(b) and Rule 506(c) permit issuers to raise an unlimited amount of capital. This is particularly beneficial for large-scale real estate syndications and private placements where substantial funding is required. In contrast, some state-specific exemptions under Blue Sky Laws may impose caps on the amount of capital that can be raised.

6. Simplified Compliance:
The standardized requirements of Regulation D simplify compliance for issuers. Filing a Form D with the SEC satisfies federal requirements, and issuers only need to make notice filings with states where investors reside, rather than navigating a full registration process in each state. This consistency and predictability are valuable in managing a compliant offering efficiently.

Choosing Regulation D Rule 506(b) or Rule 506(c) over state Blue Sky Laws offers significant advantages in terms of broad applicability, federal preemption, risk mitigation, flexibility in general solicitation, unlimited capital raising, and simplified compliance. These benefits make Regulation D the preferred choice for issuers seeking to raise capital across multiple states while minimizing legal complexities and ensuring robust investor protections.

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), issuers must comply with specific state notification rules to ensure their offerings are properly recognized and remain in compliance with both federal and state regulations. Here’s what you need to know about the notification process for the state of Ohio:

1. Filing Requirements:
Issuers must file a notice with the Ohio Division of Securities when making an offering under Regulation D Rule 506(b) or Rule 506(c). This filing is necessary to inform the state of the securities being offered and to comply with Ohio’s Blue Sky Laws, despite the federal preemption of state registration requirements.

2. Form D Submission:
The primary document required for state notification is the SEC’s Form D. This form contains essential information about the offering, including the names and addresses of the company’s principals, the amount being raised, and the type of securities being offered. The Form D must be filed electronically with the SEC, and a copy submitted to the Ohio Division of Securities.

3. Submission Process via NASAA Electronic Filing Depository:
Notices are sent to the state through the NASAA Electronic Filing Depository (EFD). This online system simplifies the filing process for issuers by allowing them to submit Form D and other required documents electronically. The EFD can be accessed at https://www.efdnasaa.org/FAQ/answer?faq=2.

4. Filing Fee:
Ohio requires a fixed filing fee for submitting the notice of a Regulation D offering. The fee structure is straightforward:

• New Notice Fee: $100
  This fee applies to each new notice filing for an offering under Rule 506(b) or Rule 506(c).

5. Timing of Filing:
Timely filing is crucial to maintain compliance and avoid additional costs. The notice must be filed with the Ohio Division of Securities within 15 days after the date of the first sale of securities in the offering. This aligns with the SEC’s requirement for filing Form D.

6. Late Filing Penalties:
If the issuer fails to file the notice within the prescribed 15-day period, a late fee is imposed. The penalty for late filings is:

• Late Fee: $100
  This late fee is applied if the notice is filed more than 15 days after the date of the first sale. Timely submission of the filing helps avoid this additional cost and ensures that the offering remains in compliance with state regulations.

7. Practical Steps for Filing:

• Prepare Form D: Gather all necessary information and complete the SEC’s Form D.
• Submit via EFD: Use the NASAA Electronic Filing Depository to submit Form D and pay the $100 filing fee electronically.
• Monitor Compliance: Ensure that the filing is made within 15 days of the first sale to avoid late fees.

Navigating the notification rules and terms for a Regulation D Rule 506(b) or Rule 506(c) offering in Ohio requires careful attention to filing deadlines and fees. By promptly submitting the necessary forms and payments through the NASAA Electronic Filing Depository, issuers can maintain compliance with Ohio’s Blue Sky Laws while benefiting from the streamlined federal exemptions provided by Regulation D. Ensuring timely and accurate filings not only avoids late fees but also supports the legal integrity of the capital-raising effort, making it essential for successful real estate syndications and other private placements.

What are Ohio’s Blue Sky Laws?

Blue sky laws are state regulations in the United States designed to protect investors from securities fraud. Ohio’s blue sky laws, found in Chapter 1707 of the Ohio Revised Code, cover various aspects of securities regulation, including exemptions, registration, and the burden of proof in securities-related legal actions. Sections 1707.02, 1707.04, 1707.09, and 1707.45 specifically address exemptions for certain securities, the issuance of securities during reorganizations, the process of registration by qualification, and the burden of proof in securities cases. These laws ensure transparency and fairness in Ohio’s securities market.

OH ST § 1707.02 Exempt securities

Ohio Revised Code Section 1707.02 outlines the categories of securities that are exempt from certain state regulations. Exempt securities include those issued or guaranteed by the U.S. government, recognized foreign governments, and various governmental entities. Additional exemptions apply to securities from regulated financial institutions, interim certificates, listed securities, public utility securities, non-public commercial paper, insurance company securities, and non-profit organization securities, provided specific conditions are met. The section also provides procedures for approving and revoking exemptions.

OH ST § 1707.04 Issuance of securities in reorganization

Ohio Revised Code Section 1707.04 governs the issuance of securities during reorganizations, recapitalizations, or refinancing of corporations in Ohio. The law allows the Division of Securities to review and approve such plans after conducting hearings to ensure the fairness of the terms. These securities, once approved, are exempt from certain registration requirements. The section defines “reorganization,” “recapitalization,” and “refinancing” to include activities such as mergers, exchanges of securities, and asset acquisitions. An application fee and potential investigation costs are required for this process.

OH ST § 1707.09 Registration by qualification; application for qualification

Ohio Revised Code Section 1707.09 details the process for registering securities by qualification in Ohio. It requires issuers or dealers to submit a detailed application to the Division of Securities, providing information about the issuer’s business, financial condition, and the specifics of the securities being offered. The division reviews the application to ensure the offering is not fraudulent or misleading. If approved, a registration fee is required, and the securities can be sold by licensed dealers in the state.

OH ST § 1707.45 Burden of proof

Ohio Revised Code Section 1707.45 addresses the burden of proof in cases involving securities regulations. It states that when bringing indictments, complaints, or information under Section 1707.44, it is not required to disprove the existence of conditions that would exempt a security or transaction under Sections 1707.02, 1707.03, 1707.04, or 1707.06. Instead, the responsibility to prove the applicability of these exemptions lies with the party claiming them.

What are Ohio’s Securities Laws Exemptions?

Ohio’s securities laws provide a range of exemptions to facilitate capital raising while ensuring investor protection. These exemptions allow certain entities and securities to be offered without undergoing the full registration process, simplifying compliance for qualifying issuers. Here are the primary exemptions available under Ohio law:

1. Governmental Entities:
Securities issued by governmental entities, including government corporations and certain foreign governmental entities, are exempt from registration. This exemption helps streamline the issuance of public sector securities, ensuring that government-backed projects can be financed efficiently.

2. Financial Institutions:
Securities issued by financial institutions such as banks, savings banks, savings and loan associations, and credit unions are exempt. This exemption recognizes the regulated nature of these institutions and their established oversight mechanisms, reducing the need for additional state-level securities registration.

3. Interim Certificates:
Interim certificates representing a temporary interest in a security that will later be exchanged for the actual security are exempt. This exemption facilitates the issuance and transfer of provisional securities pending the finalization of the formal securities.

4. Listed Stock Exchange Securities:
Securities listed on recognized stock exchanges are exempt from registration. This exemption acknowledges the rigorous listing standards and regulatory oversight of major stock exchanges, ensuring investor protection while streamlining the trading of these securities.

5. Industrial or Economic Development, and Port Authority Bonds:
Bonds issued by industrial or economic development authorities and port authorities are exempt. These bonds are typically used to finance projects that promote economic growth and infrastructure development, making it easier for these entities to access capital.

6. Public Utilities and Insurance Companies:
Securities issued by public utilities and insurance companies are exempt from registration. Given the extensive regulatory frameworks governing these entities, the exemption reduces redundancy and facilitates capital raising for essential services and insurance products.

7. Non-Defaulted 5-Year+ Securities:
Securities that have not defaulted in the past five years and meet certain other criteria are exempt. This exemption provides relief for stable, long-term securities, recognizing their lower risk profile and established track record of performance.

8. Non-Profit Persons, Corporations, etc.:
Securities issued by non-profit organizations, including charitable, religious, and educational institutions, are exempt. This exemption supports the fundraising efforts of non-profits, enabling them to focus resources on their missions rather than compliance burdens.

9. Commercial Paper:
Short-term commercial paper, typically issued by corporations for financing immediate operational needs, is exempt. This exemption acknowledges the nature of commercial paper as a low-risk, short-duration instrument commonly used in corporate finance.

10. Reorganization Plan Related Securities:
Securities issued in connection with a court-approved reorganization plan are exempt. This exemption facilitates the restructuring of financially distressed companies, allowing them to issue new securities as part of their reorganization efforts.

Ohio’s securities laws exemptions play a crucial role in enabling various entities to raise capital efficiently while maintaining investor protection. These exemptions cover a wide range of issuers and security types, reflecting the diverse needs of the market and the importance of tailored regulatory relief. Understanding and leveraging these exemptions can significantly streamline the compliance process for eligible issuers, making it easier to achieve their financing goals.

What are Ohio’s Procedures for Securities Law Exemptions?

To take advantage of Ohio’s securities law exemptions, issuers must follow specific procedures to ensure compliance with the state’s regulatory framework. These procedures vary depending on the type of exemption being sought but generally involve several common steps. Here’s an overview of the key procedures for claiming securities law exemptions in Ohio:

1. Identify the Applicable Exemption:
The first step is to determine which exemption(s) apply to the securities being offered. Ohio law provides a range of exemptions, each with specific eligibility criteria. Issuers should carefully review the Ohio Revised Code and consult with a legal professional to identify the most appropriate exemption for their offering.

2. Prepare Necessary Documentation:
Even though certain securities are exempt from registration, issuers may still be required to prepare and maintain specific documentation. This typically includes:

• Disclosure Documents: Providing detailed information about the issuer, the securities being offered, and any associated risks.
• Offering Memorandum: A document outlining the terms of the offering, including financial statements, business plans, and other relevant details.
• Supporting Evidence: Documents proving eligibility for the exemption, such as certificates of incorporation for non-profits or evidence of government entity status.

3. File Notices and Forms:
For some exemptions, issuers must file a notice or form with the Ohio Division of Securities to claim the exemption formally. This step ensures that the state is aware of the offering and that it meets the necessary legal requirements. Key filings may include:

• Form 3-Q: For intrastate offerings and other specific exemptions.
• Form D: For federal Regulation D offerings, which must also be filed with the SEC and a copy provided to Ohio.
• Additional State Forms: Depending on the type of exemption, other state-specific forms may be required.

4. Pay Applicable Fees:
Issuers must pay any applicable fees associated with filing for an exemption. These fees vary based on the type of exemption and the specific filing requirements. For example:

• Notice Filing Fee: A standard fee for filing notices with the Ohio Division of Securities, such as the $100 fee for Regulation D filings.
• Late Filing Fees: Additional fees may apply if notices are filed after the required deadline.

5. Comply with Disclosure Requirements:
Even exempt securities must comply with anti-fraud provisions under Ohio law. Issuers are required to provide truthful, complete, and non-misleading information to potential investors. Key requirements include:

• Accurate Disclosures: Ensuring all information provided in disclosure documents and offering memoranda is accurate and complete.
• Risk Factors: Clearly outlining any risks associated with the investment.

6. Record Keeping and Reporting:
Issuers must maintain accurate records of the offering and any associated filings. This includes keeping copies of all documents submitted to the Ohio Division of Securities and any communications with investors. Additionally, some exemptions may require periodic reporting to the state.

7. Seek Legal and Professional Advice:
Given the complexity of securities laws, it is highly recommended that issuers seek the advice of a qualified syndication attorney or securities law professional. Legal experts can help navigate the specific requirements of Ohio’s exemptions, prepare necessary documentation, and ensure compliance with all relevant laws and regulations.

Claiming an exemption under Ohio’s securities laws involves a series of detailed steps to ensure compliance with state regulations. By identifying the appropriate exemption, preparing the necessary documentation, filing required notices and forms, paying applicable fees, and maintaining accurate records, issuers can efficiently navigate the exemption process. Professional legal advice is invaluable in this process, helping to avoid potential pitfalls and ensure a smooth, compliant offering.

Frequently Asked Questions

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

The necessity of hiring an attorney from Ohio to put together a securities offering depends on the specifics of the offering and the legal requirements involved. If your offering is under Regulation D and not specifically governed by Ohio’s Blue Sky Laws, you may not need an attorney licensed in Ohio.

For instance, if you are organizing a real estate syndication and need an attorney to prepare a private placement memorandum (PPM) for a multifamily deal in Columbus, Ohio, which will be offered in multiple states, a licensed syndication lawyer from any state could likely assist you. Such an attorney could help draft the PPM, set up the entity, and create the operating agreement. They would, however, be unable to provide legal counsel on Ohio-specific securities laws and how they might apply to your offering.

Conversely, if your project involves a private placement memorandum for a development in Cleveland, Ohio, with all investors residing in Ohio, and you plan to utilize one of Ohio’s Blue Sky Law exemptions, you would need to work with an attorney licensed in Ohio. This is because state-specific knowledge and legal counsel are crucial for ensuring compliance with Ohio’s regulatory requirements.

In summary, the need for an Ohio-licensed attorney hinges on whether the offering is strictly under Regulation D or requires adherence to Ohio’s Blue Sky Laws. For multi-state offerings under Regulation D, an attorney from outside Ohio can generally suffice. However, for offerings relying on Ohio-specific exemptions, engaging a local attorney is essential to navigate the state’s legal landscape effectively.

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

It is permissible for a real estate syndication attorney licensed outside of Ohio to review your purchase contract; however, their ability to provide specific legal advice regarding Ohio law is limited. For instance, Tilden Moschetti, Esq., a syndication attorney with the Moschetti Syndication Law Group, can review a purchase contract for a property in Cincinnati, Ohio. While he can offer business consulting advice—such as discussing price, negotiating broad deal points, and advising on timelines—he cannot provide legal counsel on specific contract terms as he is not licensed in Ohio.

The distinction is important: while a non-Ohio licensed attorney can offer valuable insights and general business advice, they cannot address or interpret Ohio-specific legal issues. For precise legal guidance related to Ohio laws, it is essential to consult with an attorney who is licensed in Ohio. This ensures that all aspects of the contract comply with local legal requirements and protects your interests within the jurisdiction of Ohio.