Pennsylvania Blue Sky Laws for Syndication

Navigating the complexities of securities regulations can be daunting for real estate developers, private equity fund managers, and syndicators. Understanding both federal and state-specific laws is crucial to ensure compliance and protect investor interests. In Pennsylvania, these regulations are governed by the state’s Blue Sky Laws, which aim to prevent securities fraud and provide transparency in the securities market.

This article delves into Pennsylvania’s Blue Sky Laws, explaining their relationship with the SEC’s Regulation D, and providing a comprehensive guide to the exemptions and procedures specific to the state. We will explore why issuers might choose Regulation D Rule 506(b) or Rule 506(c) over state-specific laws, the notification requirements for these federal exemptions, and the circumstances under which a Pennsylvania-licensed attorney is necessary.

Whether you are putting together a private placement memorandum for a multifamily deal in Philadelphia or considering an intrastate offering for a development project in Pittsburgh, understanding these regulations is essential. This article provides the insights you need to navigate Pennsylvania’s securities landscape effectively, ensuring that your capital-raising efforts are both legally compliant and strategically sound.

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

State Blue Sky Laws are designed to protect investors from fraudulent securities offerings by requiring issuers to register their securities and disclose pertinent financial information at the state level. However, these state laws intersect with federal securities regulations, particularly Regulation D, which provides exemptions from federal registration requirements for certain private placements.

Regulation D includes Rule 506(b) and Rule 506(c), which allow issuers to raise capital without registering with the SEC, provided they meet specific criteria. One significant aspect of these rules is that they preempt state Blue Sky Laws under 15 U.S. Code § 77r(b)(4)(F). This federal preemption means that if an offering qualifies under Rule 506(b) or Rule 506(c), state securities registration requirements are overridden, simplifying the compliance process for issuers.

Rule 506(b)

Rule 506(b) permits issuers to raise unlimited capital from accredited investors and up to 35 non-accredited investors, provided they do not engage in general solicitation or advertising. This exemption is popular because it allows access to a broader investor base while maintaining federal oversight, thus preempting the need for state registration.

Rule 506(c)

Rule 506(c) allows for general solicitation and advertising, but all investors must be accredited, and the issuer must take reasonable steps to verify their accreditation status. This rule offers more flexibility in marketing the offering while still enjoying federal preemption of state Blue Sky Laws.

Intrastate Offerings

While federal preemption under Regulation D simplifies compliance, there are scenarios where an issuer might prefer to use state Blue Sky Laws. If an offering is made where the sponsor, all investors, and the assets are located within the same state, the issuer may choose to register the offering as an intrastate offering. This approach leverages the specific state’s regulations and can be beneficial if the issuer wants to focus exclusively on local investors.

In summary, Regulation D Rule 506(b) and Rule 506(c) offer significant advantages by preempting state Blue Sky Laws, streamlining the capital-raising process for issuers. However, understanding both federal exemptions and state-specific regulations, such as those in Pennsylvania, is crucial for ensuring full compliance and making informed decisions about the best approach for a given offering.

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

Choosing Regulation D Rule 506(b) or Rule 506(c) over state Blue Sky Laws offers several significant advantages for issuers seeking to raise capital. Here are the key reasons why these federal exemptions are often preferred:

Broad Investor Reach

Regulation D Rule 506(b):

• Allows issuers to raise unlimited capital from an unlimited number of accredited investors and up to 35 non-accredited investors.
• Prohibits general solicitation and advertising, maintaining a more controlled offering environment.
• Provides access to a wider pool of potential investors, which is crucial for large-scale capital raises.

Regulation D Rule 506(c):

• Permits general solicitation and advertising, enabling issuers to publicly market their offerings.
• Requires that all investors be accredited and that issuers take reasonable steps to verify their accreditation status.
• Expands the reach to accredited investors nationwide, leveraging broader marketing strategies.

Federal Preemption of State Blue Sky Laws

Both Rule 506(b) and Rule 506(c) preempt state Blue Sky Laws under 15 U.S. Code § 77r(b)(4)(F). This federal preemption simplifies the compliance process by overriding state securities registration requirements, reducing the regulatory burden on issuers. This is particularly advantageous for issuers seeking to attract investors from multiple states, as it avoids the need to navigate varying state regulations.

Avoiding Intrastate Offering Complications

State Blue Sky Laws may offer an exemption for intrastate offerings, but these come with strict requirements. To qualify, the sponsor, all investors, and the assets must be located within the same state. If any investor or the sponsor is outside of the state, the offering cannot fall under state Blue Sky Laws. This can lead to significant issues:

• Domicile Discovery Issues: If it is discovered that an investor is actually domiciled outside of the state, the offering is no longer considered intrastate. This reclassification can result in a securities law problem, as the offering would now be out of compliance with both state and federal regulations.
• Legal and Financial Risks: Such a discovery can lead to legal complications, potential penalties, and a loss of investor trust. Correcting these issues can be costly and time-consuming, undermining the effectiveness of the capital raise.

Streamlined Compliance and Cost Efficiency

Utilizing Regulation D exemptions reduces the complexity and cost associated with state-by-state compliance. Issuers benefit from a more streamlined process, which includes:

• Single Federal Filing: Filing Form D with the SEC satisfies federal requirements and provides a clear, consistent framework for compliance.
• Uniform Standards: Adhering to federal standards simplifies the legal and administrative workload, making it easier to manage the offering and maintain compliance.

In summary, choosing Regulation D Rule 506(b) or Rule 506(c) over state Blue Sky Laws provides issuers with broader reach, streamlined compliance, and protection against the risks associated with intrastate offerings. These advantages make Regulation D exemptions a preferred choice for many issuers seeking to raise capital efficiently and effectively.

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 both federal and state notification requirements. In Pennsylvania, this involves specific steps to notify the state about the offering to ensure compliance with the state’s securities regulations.

Filing Requirements in Pennsylvania

Form D Filing:

• Issuers must file Form D with the SEC within 15 days after the first sale of securities in the offering. This filing is a federal requirement and provides general information about the offering, the issuer, and the securities being offered.

State Notification:

• In addition to the federal filing, issuers must also notify the Pennsylvania Department of Banking and Securities about the offering. This state notification involves submitting a copy of the Form D and paying the required filing fee.

Filing Fee

Fixed Filing Fee:

• Pennsylvania requires a fixed filing fee for notifying the state about a Regulation D offering. The fee is $525. This fee is applicable to both Rule 506(b) and Rule 506(c) offerings.

Timing and Late Filings

Timely Filing:

• It is crucial to file the notice and pay the filing fee within the prescribed timeframe to avoid any compliance issues. The Form D should be submitted to the Pennsylvania Department of Banking and Securities promptly after filing with the SEC.

No Late Fee:

• Pennsylvania does not impose a late fee for late filings of the notice. However, it is advisable to file on time to maintain good standing and avoid any potential scrutiny or complications that could arise from delayed notifications.

Summary of Notification Process

Federal Filing:

• File Form D with the SEC within 15 days of the first sale of securities.

State Notification:

• Submit a copy of Form D to the Pennsylvania Department of Banking and Securities.
• Pay the fixed filing fee of $525.

Timeliness:

• Ensure timely submission to avoid any potential compliance issues, even though no late fee is imposed.

By adhering to these notification rules and terms, issuers can ensure that their Regulation D Rule 506(b) or Rule 506(c) offerings comply with both federal and Pennsylvania state securities laws. Proper and timely filing helps maintain transparency and regulatory compliance, thereby supporting a smooth and legally sound capital-raising process.

What are Pennsylvania’s Blue Sky Laws?

Pennsylvania’s Blue Sky Laws, encapsulated in the Pennsylvania Securities Act of 1972, serve as the cornerstone of the state’s regulatory framework for securities. These laws are designed to protect investors from fraud, ensure transparency, and maintain the integrity of the financial markets. Here’s a look at some critical sections that form the bedrock of these regulations:

Registration Requirements (Section 1-201)

Under Section 1-201, it is unlawful for any person to offer or sell any security in Pennsylvania unless the security is registered, exempted, or classified as a federally covered security. This requirement ensures that all securities comply with state regulations before being marketed to the public, protecting investors from unvetted and potentially fraudulent offerings.

Exempt Securities (Section 1-202)

Section 1-202 specifies categories of securities exempt from registration. These include government-issued securities, securities from banks and credit unions, and those listed on national exchanges. This provision allows the trading of stable or low-risk securities without the cumbersome process of state registration, facilitating smoother financial operations while maintaining investor protection.

Exemption Proceedings (Section 1-204)

Section 1-204 grants the regulatory department the flexibility to modify or waive conditions related to securities exemptions and summarily deny or revoke exemptions if necessary. This provision ensures that the regulatory body can swiftly address and rectify issues, maintaining the integrity of securities offerings within the state.

Misleading Filings and Representations (Section 1-407)

To prevent fraud, Section 1-407 makes it unlawful to include false or misleading statements in documents filed with the department or to misrepresent the department’s approval. It explicitly prohibits individuals from implying endorsement by the department, ensuring that investors are not misled about the legitimacy or safety of a security.

Burden of Proof (Section 1-612)

Section 1-612 outlines the burden of proof requirements for claims of federally covered security status, exemptions, or exclusions in civil and criminal proceedings. This section mandates that individuals asserting such claims must substantiate them with appropriate evidence, ensuring that all claims are legitimate and verifiable.

These sections collectively form a robust framework designed to protect investors, maintain market integrity, and ensure that securities offerings in Pennsylvania are transparent and trustworthy. By understanding these rules, investors can better navigate the financial landscape and make informed decisions.

PA ST 70 P.S. § 1-201 Registration requirement

Section 1-201 of the Pennsylvania Securities Act of 1972 mandates that it is unlawful for any person to offer or sell any security within the state unless the security is registered under the act, exempted under sections 202 or 203, or classified as a federally covered security. This section ensures that securities offered or sold in Pennsylvania comply with state registration requirements or fall under specific exemptions to protect investors and maintain market integrity.

PA ST 70 P.S. § 1-202 Exempt securities

Section 1-202 of the Pennsylvania Securities Act of 1972 outlines specific categories of securities that are exempt from registration requirements. These include securities issued or guaranteed by the U.S. government, states, and certain foreign governments; those issued by banks, public utilities, and credit unions; securities listed on recognized national exchanges; and those related to employee benefit plans, among others. This provision ensures that certain stable or low-risk securities can be traded without the need for state registration, facilitating smoother financial operations while maintaining investor protection.

PA ST 70 P.S. § 1-204 Exemption proceedings

Section 1-204 of the Pennsylvania Securities Act of 1972 grants the department the authority to modify or waive certain conditions related to securities or transactions, increasing the number of permitted purchasers or offerees. It also allows the department to summarily deny or revoke exemptions for specific securities or transactions without prior notice or hearing, provided that affected parties are promptly notified and given the opportunity for a hearing. This section ensures regulatory flexibility while safeguarding the integrity of securities offerings.

PA ST 70 P.S. § 1-407 Misleading filings; misrepresentations of commission approval

Section 1-407 of the Pennsylvania Securities Act of 1972 addresses the issue of misleading filings and misrepresentations regarding department approval. It makes it unlawful for any person to include false or misleading statements in documents filed with the department or in any proceedings under the act. Additionally, omitting necessary material facts that would make the statements misleading is also prohibited. The section explicitly forbids registered brokers, dealers, agents, investment advisers, and their representatives from implying that they are sponsored, recommended, or approved by the department. Furthermore, it clarifies that the effectiveness of a registration application or notice filing does not imply the department’s endorsement of the accuracy or merits of the documents filed. Any representation to the contrary is unlawful.

PA ST 70 P.S. § 1-612 Burden of proof

Section 1-612 of the Pennsylvania Securities Act of 1972 details the burden of proof requirements in legal proceedings involving securities. In civil actions or administrative proceedings, the responsibility falls on the person claiming a status as a federally covered security, adviser, or an exemption to prove the validity of such claims. Similarly, in criminal proceedings, the individual must present evidence supporting their claim to an exemption or specific status. This ensures that claims of exemptions or special statuses are substantiated, thereby maintaining the integrity and reliability of securities transactions.

What are Pennsylvania’s Securities Laws Exemptions?

Under the Pennsylvania Securities Act of 1972, certain securities are exempt from the registration requirements that typically apply to securities offerings. These exemptions are designed to facilitate various types of securities transactions that are deemed to pose less risk to investors or serve specific purposes. Here are the primary categories of exemptions available under Pennsylvania law:

Governmental Entities

Securities issued by governmental entities, including those of the United States, any state, any foreign government with which the United States maintains diplomatic relations (including Canada), and any political subdivisions or agencies thereof, are exempt from registration.

Financial Institutions

Securities issued by banks, savings associations, credit unions, and industrial loan associations are exempt. These institutions are subject to stringent regulatory oversight, thereby reducing the need for additional securities registration requirements.

Intra-Office Registered Broker Dealer Securities

Securities issued in intra-office transactions by registered broker-dealers are exempt. This exemption applies to transactions within the broker-dealer’s own offices and between its own personnel.

Professional Services Limited Liability Company

Securities issued by a professional services limited liability company (LLC) are exempt. This includes companies providing professional services such as legal, accounting, or medical services.

Security Regulated by Interstate Commerce Commission

Securities that are regulated by the Interstate Commerce Commission (ICC) are exempt. The ICC oversees and regulates specific transportation-related securities, thus negating the need for state-level registration.

Security Registered Under Public Utility Law or Public Utility Holding Company Act of 1935

Securities registered under the Public Utility Law or the Public Utility Holding Company Act of 1935 are exempt. These laws impose comprehensive regulatory requirements on utility companies, ensuring investor protection.

Listed Stock Exchange Securities

Securities listed on recognized stock exchanges are exempt. This includes securities listed on major exchanges such as the New York Stock Exchange (NYSE) or NASDAQ. These securities are subject to rigorous exchange listing standards and regulatory scrutiny.

Current Transaction Commercial Paper

Commercial paper, which is a short-term debt instrument issued by corporations, is exempt if it is part of a current transaction. This exemption typically applies to commercial paper with a maturity of nine months or less, issued to finance current transactions rather than for capital investments.

Non-Profit Issuer

Securities issued by non-profit organizations are exempt. Non-profit issuers include charitable, religious, educational, or other organizations not organized for profit.

Employee Benefit Plan

Securities issued as part of an employee benefit plan are exempt. This includes securities issued under stock bonus, pension, profit-sharing, or similar plans established by employers for their employees.

Understanding these exemptions is crucial for issuers and investors alike. These exemptions under Pennsylvania’s Blue Sky Laws facilitate specific transactions and reduce the regulatory burden for certain types of securities offerings while maintaining essential investor protections. For issuers, leveraging these exemptions can streamline the process of raising capital within the state. However, it is advisable to consult with a syndication attorney to ensure full compliance with both state and federal securities laws.

What are Pennsylvania’s Procedures for Securities Law Exemptions?

To benefit from the exemptions available under Pennsylvania’s Blue Sky Laws, issuers must follow specific procedures to ensure compliance. These procedures involve detailed steps for documentation, filing, and maintaining compliance with both state and federal regulations. Here is an overview of the procedures for claiming securities law exemptions in Pennsylvania:

Documentation and Record-Keeping

Identify Applicable Exemption:

• Determine which specific exemption applies to the securities offering. Refer to the Pennsylvania Securities Act of 1972, particularly Section 1-202, to identify the relevant exemption category.

Prepare Necessary Documentation:

• Gather all required documentation to support the claim for exemption. This may include financial statements, organizational documents, descriptions of the securities, and information about the issuer.
• Ensure that all documents are accurate, complete, and up to date to facilitate the review process.

Filing Requirements

File Form D (if applicable):

• For offerings relying on federal Regulation D exemptions (such as Rule 506(b) or Rule 506(c)), file Form D with the SEC within 15 days after the first sale of securities. This form provides essential information about the offering and serves as a notice filing at the federal level.

Submit Notice Filing to Pennsylvania:

• Even though certain securities are exempt from state registration, issuers may still need to submit a notice filing to the Pennsylvania Department of Banking and Securities. This typically involves submitting a copy of Form D, along with any additional state-specific forms required.
• Pay the fixed filing fee of $525 to the Pennsylvania Department of Banking and Securities. This fee applies to both Rule 506(b) and Rule 506(c) offerings.
• Submit the notice filing and fee promptly to avoid any compliance issues. While there is no late fee for late filings, timely submission is crucial for maintaining good standing.

Compliance with Conditions

Adhere to Specific Conditions:

• Ensure that all conditions associated with the chosen exemption are met. For example, if claiming an exemption for an intrastate offering, verify that the offering is limited to in-state investors and that all aspects of the transaction occur within Pennsylvania.
• Regularly review and update compliance practices to align with any changes in Pennsylvania securities laws or regulations.

Ongoing Compliance and Reporting

Maintain Ongoing Compliance:

• Keep detailed records of all transactions, communications, and filings related to the exempt offering. This includes maintaining copies of filed forms, correspondence with regulatory agencies, and records of investor communications.
• Ensure continuous compliance with both state and federal securities laws throughout the offering period and beyond.

Respond to Regulatory Inquiries:

• Be prepared to respond to any inquiries or requests for additional information from the Pennsylvania Department of Banking and Securities. Timely and accurate responses are essential to demonstrate compliance and address any potential concerns.

Practical Tips for Issuers

Consult with a Syndication Attorney:

• Engaging a syndication attorney with experience in Pennsylvania securities laws can provide valuable guidance and ensure that all procedural requirements are met. An attorney can help navigate complex regulations, prepare necessary documentation, and manage the filing process.
• An experienced attorney can also assist in identifying the most suitable exemptions and advising on compliance strategies to minimize legal risks.

By following these procedures, issuers can effectively claim securities law exemptions under Pennsylvania’s Blue Sky Laws, facilitating a smoother and legally compliant capital-raising process. Proper adherence to these steps ensures that issuers can leverage available exemptions while maintaining transparency and investor protection.

Frequently Asked Questions

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

Whether you need an attorney from Pennsylvania to put together a securities offering depends on the specifics of your situation. If your offering is under Regulation D and does not require reliance on Pennsylvania-specific Blue Sky Laws, you may not need a Pennsylvania-licensed attorney. For instance, if you are working on a real estate syndication deal for a multifamily property in Philadelphia and plan to offer it in various states, a syndication attorney who is not licensed in Pennsylvania can likely assist you. This attorney could help you draft the private placement memorandum (PPM), set up the entity, and create the operating agreement, provided you do not require specific legal advice on Pennsylvania’s laws.

In such scenarios, the attorney’s expertise in Regulation D offerings and general syndication law would be sufficient. They would ensure compliance with federal regulations and the laws of the other states where the offering will be made. However, they would not be able to provide guidance on how Pennsylvania-specific securities laws might impact your offering.

Conversely, if you are preparing a private placement memorandum for a development project in Pittsburgh and all your investors are from Pennsylvania, you might prefer to rely on one of Pennsylvania’s Blue Sky Laws for an exemption from registration. In this case, you would need the expertise of an attorney licensed in Pennsylvania. Such an attorney would be familiar with the state’s specific securities regulations and procedures, ensuring full compliance with local laws and leveraging the appropriate exemptions.

In summary, the necessity of a Pennsylvania-licensed attorney hinges on whether your offering will depend on Pennsylvania-specific securities exemptions or primarily adhere to federal Regulation D requirements. Engaging the right legal expertise is crucial to ensure that your offering is both compliant and strategically structured to meet your investment goals.

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

A real estate syndication attorney licensed outside of Pennsylvania can certainly review your purchase contract; however, they cannot provide legal advice specific to Pennsylvania law. For instance, Tilden Moschetti, Esq., a syndication attorney with the Moschetti Syndication Law Group, can look over a purchase contract for a property in Allentown, Pennsylvania, and offer business consulting advice. This might include discussing the price, broad deal points like the length of time until closing, and general transaction strategy.

However, because he is not licensed in Pennsylvania, he cannot provide legal guidance on specific terms within the contract that pertain to Pennsylvania law. This limitation means he cannot interpret or advise on state-specific legal clauses or compliance issues that might arise under Pennsylvania’s real estate regulations. For detailed legal advice and to ensure full compliance with Pennsylvania law, you would need to consult with a Pennsylvania-licensed attorney who can address these specific legal nuances.

In summary, while an out-of-state syndication attorney can provide valuable business insights and general advice, any legal advice related to Pennsylvania-specific aspects of your purchase contract should be sought from a licensed attorney in Pennsylvania to ensure thorough and compliant legal counsel.