South Carolina Blue Sky Laws for Syndication

Navigating the complex landscape of securities laws is a critical task for anyone involved in raising capital, particularly through real estate syndication. Understanding both federal and state regulations is essential to ensure compliance and avoid potential legal pitfalls. This comprehensive guide delves into Missouri’s Blue Sky Laws, offering detailed insights into how they interact with the SEC’s Regulation D exemptions under Rule 506(b) and Rule 506(c). Whether you’re a real estate developer, business owner, or private equity fund manager, this article provides valuable information on the specifics of Missouri’s securities regulations, the benefits of federal preemption under Regulation D, and practical considerations for conducting compliant offerings. Additionally, we explore scenarios that necessitate the involvement of a local attorney and address common questions regarding cross-state legal advice. By the end of this guide, you will have a thorough understanding of how to effectively navigate Missouri’s Blue Sky Laws in conjunction with federal securities regulations to successfully raise capital for your projects.

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

Understanding how state Blue Sky Laws interact with the SEC’s Regulation D is crucial for anyone involved in syndication, particularly real estate syndication. Regulation D, specifically Rule 506(b) and Rule 506(c), provides exemptions from federal securities registration, allowing issuers to raise capital without the extensive disclosure requirements typically associated with public offerings. However, these federal exemptions also have significant implications at the state level.

Preemption of State Blue Sky Laws by Regulation D

Under 15 U.S. Code § 77r(b)(4)(F), offerings made under Regulation D Rule 506(b) or Rule 506(c) are preempted from state Blue Sky Laws. This federal preemption means that states cannot impose their registration requirements on these offerings, simplifying the process for issuers. Essentially, if you comply with the federal requirements of Rule 506(b) or Rule 506(c), you do not need to worry about state-level registration for your securities offering.

Rule 506(b) and Rule 506(c) Offerings

• Rule 506(b): This rule allows issuers to raise an unlimited amount of money from accredited investors and up to 35 non-accredited investors, provided they have sufficient knowledge and experience in financial and business matters. However, general solicitation and advertising are not permitted under this rule.
• Rule 506(c): Unlike Rule 506(b), Rule 506(c) permits general solicitation and advertising. However, all purchasers in the offering must be accredited investors, and the issuer must take reasonable steps to verify their accredited status.

By leveraging these rules, issuers can efficiently raise capital while avoiding the complex and varied registration requirements imposed by individual states. This makes Regulation D particularly attractive for syndications and other private placements.

Intrastate Offerings and State Blue Sky Laws

Despite the federal preemption, there are scenarios where a sponsor might choose to comply with state Blue Sky Laws instead. If an offering is made where the sponsor, all investors, and the assets are located within a single state, the sponsor may opt for an intrastate offering under the state’s Blue Sky Laws.

Intrastate offerings can be beneficial because they may offer more flexibility or lower compliance costs compared to federal exemptions. However, the issuer must ensure that the offering strictly adheres to the state’s regulations and that all activities remain within the state. This route can be particularly advantageous for smaller, localized projects where the sponsor has a deep understanding of the state regulations and a close-knit investor base.

Practical Considerations

When deciding between utilizing Regulation D or state Blue Sky Laws, sponsors should consider several factors:

• Scope of the Offering: For multi-state or national offerings, Regulation D provides a streamlined process due to its federal preemption.
• Investor Base: If the investors are primarily within one state, and the offering is localized, state Blue Sky Laws might be more appropriate.
• Compliance Costs and Requirements: Evaluate the cost and administrative burden of complying with federal versus state regulations.

In summary, Regulation D Rule 506(b) and Rule 506(c) offer significant advantages by preempting state Blue Sky Laws, thereby reducing the regulatory burden on issuers. However, for intrastate offerings, state Blue Sky Laws remain a viable option. Understanding the interplay between these federal and state regulations is crucial for effective syndication and capital raising. For tailored advice and compliance strategies, consulting with a knowledgeable syndication attorney is highly recommended.

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

Choosing between federal exemptions under Regulation D and state Blue Sky Laws is a critical decision for sponsors and issuers engaged in syndication, including real estate syndication. There are several compelling reasons to opt for Regulation D Rule 506(b) or Rule 506(c) over relying solely on state Blue Sky Laws.

1. Federal Preemption and Simplicity

One of the primary benefits of using Regulation D Rule 506(b) or Rule 506(c) is the federal preemption of state Blue Sky Laws. This means that compliance with the federal requirements effectively exempts the offering from the registration requirements of individual states. This preemption significantly simplifies the regulatory landscape for issuers, particularly when dealing with multi-state 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 they meet certain sophistication requirements. General solicitation and advertising are prohibited.
• Rule 506(c): Permits general solicitation and advertising but restricts participation to accredited investors only, with issuers required to take reasonable steps to verify their accredited status.

By following these rules, issuers can avoid the complexity and administrative burden of navigating different state regulations, making the capital-raising process more efficient and predictable.

2. Flexibility in Investor Base

Another significant advantage of Regulation D exemptions is the flexibility they provide regarding the investor base. For intrastate offerings under state Blue Sky Laws, all investors and the sponsor must be located within the state. This restriction can be limiting, especially for larger projects that aim to attract a broader pool of investors.

If any investor or the sponsor is outside the state, the offering cannot rely on the state’s Blue Sky Laws. Additionally, there is the risk of discovering that an investor is domiciled outside the state, which can inadvertently transform an intrastate offering into an interstate one. This misstep can lead to serious securities law problems, including the need to retroactively comply with federal regulations or face legal penalties.

Using Regulation D exemptions, issuers can attract investors from across the country without the worry of violating state-specific registration requirements. This broadens the potential investor base and helps in raising larger amounts of capital.

3. Avoiding Legal Pitfalls

Compliance with state Blue Sky Laws requires careful adherence to state-specific regulations. In contrast, Regulation D provides a unified set of federal guidelines, reducing the risk of legal pitfalls associated with state-level compliance. Missteps in state compliance, such as inadvertently including an out-of-state investor in an intrastate offering, can lead to significant legal issues.

Choosing Regulation D Rule 506(b) or Rule 506(c) mitigates these risks by providing a clear, federally-recognized path for securities offerings. This is particularly important for sponsors who may not have the resources to navigate the regulatory nuances of multiple states.

4. Streamlined Process and Cost Efficiency

The process of complying with Regulation D is generally more streamlined and cost-efficient compared to dealing with multiple state registrations. The federal filing requirements are straightforward:

• Form D Filing: Issuers must file Form D with the SEC within 15 days of the first sale of securities.
• Notice Filings: While state notice filings and fees are still required, these are typically simpler and less burdensome than full state registrations.

By leveraging Regulation D exemptions, issuers can reduce administrative overhead, expedite the fundraising process, and focus more on their projects rather than regulatory compliance.

Choosing Regulation D Rule 506(b) or Rule 506(c) over state Blue Sky Laws offers significant advantages in terms of regulatory simplicity, flexibility in attracting investors, and avoiding legal complications. These federal exemptions allow issuers to raise capital more efficiently and with greater confidence, knowing they are in compliance with a unified set of federal guidelines. For sponsors and issuers, particularly in real estate syndication, consulting with a knowledgeable syndication attorney can help navigate these options and ensure a successful offering.

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, it is essential to understand the notification rules and terms for informing the state about your securities offering. Even though federal regulations preempt state registration requirements, states still require issuers to file notices and pay associated fees. Here’s what you need to know about the notification process for these offerings.

Notification Requirements

Form D Filing with the SEC:

• Timeline: Issuers must file Form D with the Securities and Exchange Commission (SEC) within 15 days of the first sale of securities in the offering.
• Content: Form D includes details about the issuer, the offering, and the types of securities being sold.

State Notice Filing:

• Timeline: States typically require a copy of the Form D to be filed along with their specific notice filing forms and fees. This should also be done within 15 days of the first sale of securities in the state.
• Content: The state notice filing generally includes a copy of the Form D submitted to the SEC, a consent to service of process, and the applicable filing fee.
• Electronic Filing: Notices are sent to the state through the NASAA Electronic Filing Depository (EFD). The EFD system streamlines the process of submitting state notice filings for Regulation D offerings.

Fees and Terms

Filing Fee:

• Fixed Fee: The filing fee for notifying the state about a Regulation D Rule 506(b) or Rule 506(c) offering is fixed.
• New Notice Fee: The fee for a new notice filing is $300. This fee applies to the initial filing when notifying the state of the offering.

Late Filing:

• Late Fee: Unlike some states that impose penalties for late filings, there is no late fee for filing the notice after the deadline. However, timely filing is crucial to ensure compliance and avoid potential regulatory scrutiny.

Practical Steps for Compliance

Prepare Form D: Gather all necessary information about the offering and complete Form D for submission to the SEC. This form includes details about the issuer, the offering, the amount of money raised, and the types of securities offered.

Submit Form D to the SEC: File Form D with the SEC electronically through the EDGAR system within 15 days of the first sale of securities.

File State Notice through EFD:

• Access EFD: Go to the NASAA Electronic Filing Depository (EFD) website here.
• Complete State-Specific Forms: Use the EFD system to complete the necessary state-specific notice filing forms.
• Include Form D: Attach a copy of the Form D filed with the SEC within the EFD system.
• Consent to Service of Process: Provide a consent to service of process, which designates a state official to receive legal documents on behalf of the issuer.
• Pay the Filing Fee: Submit the $300 filing fee through the EFD system.

Track Filing Deadlines: Keep a detailed record of filing deadlines and ensure all notices are filed within the required timeframe to maintain compliance.

Importance of Compliance

Filing the required notices and paying the associated fees is a crucial step in ensuring compliance with state securities laws, even under the federal exemptions provided by Regulation D. Proper notification helps to:

• Maintain Transparency: Ensures that state regulators are aware of the offering and can monitor for compliance with securities laws.
• Avoid Legal Issues: Prevents potential legal complications that could arise from failing to notify the state appropriately.
• Build Investor Trust: Demonstrates to investors that the issuer is adhering to all regulatory requirements, fostering confidence in the offering.

Navigating the notification rules and terms for a Regulation D Rule 506(b) or Rule 506(c) offering requires careful attention to detail and timely action. By understanding and adhering to the state-specific filing requirements, including submitting the necessary forms and fees through the NASAA Electronic Filing Depository (EFD), issuers can ensure compliance and focus on successfully raising capital for their projects. For tailored guidance and to ensure all regulatory requirements are met, consulting with a knowledgeable syndication attorney is highly recommended.

What are South Carolina’s Blue Sky Laws?

South Carolina’s Blue Sky Laws are designed to regulate the securities industry within the state, ensuring transparency, fairness, and protection for investors. These laws encompass a range of regulations, from securities registration requirements to exemptions and waivers. Key sections include 35-1-201, which outlines exempt securities, and 35-1-301, which mandates the registration of securities. Provisions such as 35-1-503 and 35-1-506 focus on evidentiary burdens and misrepresentations concerning registration or exemptions. Additionally, Section 41-44-60 establishes the Palmetto Seed Capital Corporation to support high-growth businesses. These regulations are crucial for maintaining the integrity of South Carolina’s financial markets.

SC ST § 35-1-201 Exempt securities

Section 35-1-201 of the 2017 South Carolina Code of Laws outlines specific types of securities that are exempt from the requirements of Sections 35-1-301 through 35-1-306 and 35-1-504. These exempt securities include those issued, insured, or guaranteed by governmental entities, certain banking and insurance institutions, public utilities, and non-profit organizations. Additionally, certain federal covered securities and securities related to cooperatives are also exempt. The law aims to provide clarity on which securities are not subject to stringent regulatory requirements.

SC ST § 35-1-203 Additional exemptions and waivers

Section 35-1-203 of the 2013 South Carolina Code of Laws allows for additional exemptions and waivers under the South Carolina Uniform Securities Act of 2005. It grants the authority to adopt rules or issue orders that can exempt specific securities, transactions, or offers, as well as classes of these, from the requirements of Sections 35-1-301 to 35-1-306 and 35-1-504. Moreover, it provides the ability to waive, wholly or partially, any conditions for exemptions or offers as specified in Sections 35-1-201 and 35-1-202.

SC ST § 35-1-204 Denial, suspension, revocation, condition, or limitation of exemptions

Section 35-1-204 of the 2020 South Carolina Code of Laws provides the regulatory framework for denying, suspending, revoking, conditioning, or limiting exemptions for certain securities transactions. This section applies except for federal covered securities. Orders can be issued under specific procedures outlined in Sections 35-1-306(d) and 35-1-604, and are only effective prospectively. Individuals are protected from violations if they were unaware of the order despite exercising reasonable care.

SC ST § 35-1-301 Securities registration requirement

Section 35-1-301 of the 2013 South Carolina Code of Laws mandates that it is unlawful to offer or sell a security in the state unless the security is a federal covered security, is exempt from registration under Sections 35-1-201 through 35-1-203, or is registered under this chapter. This provision ensures that securities offered or sold in South Carolina meet specific regulatory requirements, thereby protecting investors and maintaining market integrity.

SC ST § 35-1-503 Evidentiary burden

Section 35-1-503 of the 2017 South Carolina Code of Laws deals with the evidentiary burden in legal proceedings related to securities. In civil actions or administrative proceedings, the party claiming an exemption, exception, preemption, or exclusion must prove its applicability. In criminal proceedings, the party claiming such an exemption or exception must present evidence supporting their claim. This law ensures that parties bear the responsibility for substantiating their claims to exemptions or exceptions under the securities regulations.

SC ST § 35-1-506 Misrepresentations concerning registration or exemption

Section 35-1-506 of the 2017 South Carolina Code of Laws prohibits making false or misleading statements about the registration or exemption status of securities. Specifically, the law clarifies that the filing or registration of a security or an exemption does not imply endorsement or verification by the Securities Commissioner. Any representation to a client, customer, or potential client that contradicts this understanding is unlawful. This ensures transparency and honesty in securities transactions.

SC ST § 35-1-608 Uniformity and cooperation with other agencies

Section 35-1-608 of the 2017 South Carolina Code of Laws focuses on promoting uniformity and cooperation in securities regulation. The Securities Commissioner is authorized to collaborate with various regulatory bodies, both domestic and international, to enhance the consistency and effectiveness of securities regulations. This includes sharing information, coordinating examinations and hearings, developing uniform forms, and creating common procedures. The law aims to protect investors while minimizing regulatory burdens on businesses.

SC ST § 41-44-60 Palmetto Seed Capital Corporation established

Section 41-44-60 of the 2017 South Carolina Code of Laws establishes the Palmetto Seed Capital Corporation. This corporation is formed to serve as the general partner of the Palmetto Seed Capital Fund Limited Partnership, providing financing to high-growth-oriented businesses in South Carolina. The law details the formation, governance, and operational structure of the corporation, including the appointment of the board of directors by the Governor and the Secretary of Commerce. The corporation aims to support South Carolina businesses with seed capital and promote economic growth.

What are South Carolina’s Securities Laws Exemptions?

South Carolina’s securities laws provide several exemptions from registration requirements, outlined in Section 35-1-201. These exemptions include securities issued by governmental entities, certain foreign governmental entities, financial institutions such as depository and banking institutions, and non-profit membership cooperatives. Other exempt entities include railroads, common carriers, public utilities, public utility holding companies, and insurance companies. Additionally, equipment trust certificates, listed securities, market securities, clearing agency options, and securities issued by non-profit persons are also exempt from registration. These exemptions aim to streamline regulatory processes for specific categories of securities while maintaining investor protections.

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

South Carolina’s procedures for securities law exemptions are designed to ensure clarity and efficiency in the application process. The key steps include:

1. Filing for Exemption: Entities must file the necessary paperwork with the Securities Commissioner to claim an exemption, detailing the specific category under which the exemption is sought.
2. Documentation: Supporting documents must be provided to verify the eligibility of the security for exemption.
3. Review and Approval: The Securities Commissioner reviews the application and documentation to ensure compliance with the state’s regulations.
4. Compliance Requirements: Entities must comply with all conditions of the exemption, and any changes in the status of the security must be reported to maintain the exemption status.
5. Prospective Orders: If exemptions are denied, suspended, or revoked, orders are applied prospectively, meaning future transactions are affected, not past ones.

These procedures help maintain a balance between regulatory oversight and facilitating the operations of exempt entities.

Frequently Asked Questions

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

Whether you need an attorney from South Carolina to put together a Regulation D offering depends largely on the specifics of your offering and whether it falls under federal or state securities regulations. If your offering is structured under Regulation D, particularly Rule 506(b) or Rule 506(c), and is not reliant on South Carolina-specific Blue Sky Laws, then an attorney licensed outside of South Carolina can typically handle most aspects of your offering.

For instance, if you need a real estate syndication attorney to draft a private placement memorandum (PPM) for a multifamily deal in Huntsville, South Carolina, that will be offered to investors in multiple states, a licensed syndication attorney from another state should be able to assist. Such an attorney can handle the preparation of the PPM, set up the syndication entity, and draft the operating agreement. However, this attorney would not be able to provide legal counsel on specific South Carolina securities laws and their implications for your offering.

On the other hand, if your project is more localized, such as a development project in Birmingham, South Carolina, and all your investors are from South Carolina, you may want to rely on South Carolina’s Blue Sky Laws as an exemption from registration. In this case, you would need an attorney licensed in South Carolina. This local attorney would be well-versed in state-specific regulations and could provide the necessary legal guidance to ensure compliance with South Carolina’s Blue Sky Laws.

In summary, for a Regulation D offering spanning multiple states, a syndication attorney from another state can generally manage the legal work, provided there is no need for specific South Carolina legal counsel. However, for offerings relying on South Carolina’s Blue Sky Laws or when all investors and the project are within South Carolina, working with a South Carolina-licensed attorney is essential to ensure full compliance with state laws.

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

While a real estate syndication attorney licensed outside of South Carolina can review your purchase contract, they cannot provide legal advice specific to South Carolina law. For example, Tilden Moschetti, Esq., a syndication attorney with the Moschetti Syndication Law Group, can review the underlying details of your purchase contract for a property in Montgomery, South Carolina. However, he will make it clear that his role is limited to offering business consulting advice, such as discussing the price and broad deal points like the time frame until closing.

Since he is not licensed in South Carolina, Tilden Moschetti cannot provide legal advice on specific terms or conditions of the contract as they pertain to South Carolina law. This means he can help you understand the general structure and implications of your purchase agreement from a business perspective but cannot interpret or advise on how South Carolina’s specific legal requirements and nuances might impact your contract. For detailed legal guidance tailored to South Carolina’s laws, it would be necessary to consult with an attorney licensed in that state.