South Dakota Blue Sky Laws for Syndication

Navigating the complexities of securities regulations can be daunting, especially with the intricate web of federal and state laws. South Dakota’s blue sky laws play a crucial role in protecting investors from fraudulent securities activities by enforcing stringent registration and exemption requirements. This article delves into key aspects of these laws, including exemptions for certain securities, procedural requirements, and the necessity of legal counsel for specific transactions. Whether you’re a real estate syndicator or an investor, understanding these regulations is essential for compliance and successful investment ventures in South Dakota.

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

State Blue Sky Laws play a crucial role in regulating securities within individual states, but their relationship with the SEC’s Regulation D can significantly affect how these laws are applied to certain offerings. Regulation D, particularly Rules 506(b) and 506(c), offers federal exemptions that preempt state Blue Sky Laws under 15 U.S. Code § 77r(b)(4)(F). This means that for securities offerings that comply with Regulation D, the more complex state-level registration requirements are superseded by federal regulations.

Federal Preemption under Regulation D

When an issuer conducts an offering under Rule 506(b) or Rule 506(c) of Regulation D, these offerings are exempt from state registration requirements. This preemption simplifies the compliance process by allowing issuers to follow a uniform set of federal guidelines instead of navigating varying state laws. However, this preemption does not mean that state laws are entirely irrelevant. Issuers still have to comply with state notice filing requirements, which typically involve submitting Form D to each state’s securities regulator where the offering is made and paying the associated filing fees.

Rule 506(b):

• Allows issuers to raise an unlimited amount of capital without registering the securities, provided they do not use general solicitation or advertising.
• Permits sales to an unlimited number of accredited investors and up to 35 non-accredited but sophisticated investors.
• Preempts state Blue Sky Laws, though notice filings with states are still required.

Rule 506(c):

• Permits general solicitation and advertising, provided that all purchasers are accredited investors and the issuer takes reasonable steps to verify their accredited status.
• Similar to Rule 506(b), it preempts state Blue Sky Laws, requiring only notice filings with the states involved.

Intrastate Offerings

In certain scenarios, sponsors may choose to operate under a state’s Blue Sky Laws instead of Regulation D. If an offering is confined within a single state—meaning the sponsor, all investors, and the assets are located in that state—it may qualify as an intrastate offering. Intrastate offerings rely on the specific Blue Sky Laws of the state, which can offer different or potentially more favorable terms than federal exemptions. However, the complexity and requirements of state registration may vary, making federal Regulation D exemptions generally more attractive for multi-state or larger offerings.

Key Considerations:

• State Notice Filing Requirements: Even with federal preemption, issuers must still comply with state notice filings, submitting Form D and any required fees.
• Intrastate Offerings: These offerings, confined within a single state, can utilize state Blue Sky Laws, potentially avoiding federal regulation under certain conditions.

By leveraging the preemption provided by Regulation D, issuers can streamline the regulatory process, focusing on compliance with federal standards while still addressing state-level requirements through notice filings. This balance allows for efficient capital raising while ensuring investor protection and regulatory oversight.

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

Choosing Regulation D, specifically Rule 506(b) or Rule 506(c), over state-specific Blue Sky Laws offers significant advantages, especially when considering the complexities and potential pitfalls associated with intrastate offerings.

Federal Preemption and Uniformity

One of the primary benefits of utilizing Regulation D exemptions is the preemption of state Blue Sky Laws. This federal preemption under 15 U.S. Code § 77r(b)(4)(F) allows issuers to bypass the varied and often cumbersome state registration requirements. Instead, issuers can follow a standardized set of federal regulations, simplifying the compliance process across multiple states. This is particularly beneficial for real estate syndication and other private placements involving investors from different states.

Rule 506(b):

• Unlimited Capital Raising: Issuers can raise an unlimited amount of money without registering the securities.
• Investor Flexibility: Allows for an unlimited number of accredited investors and up to 35 non-accredited but sophisticated investors.
• No General Solicitation: While general solicitation and advertising are not allowed, the exemption still offers considerable flexibility and reduced regulatory burden.

Rule 506(c):

• General Solicitation Permitted: Issuers can advertise and solicit investments publicly, provided that all purchasers are accredited investors.
• Accredited Investor Verification: Requires issuers to take reasonable steps to verify the accredited status of investors, enhancing investor protection while expanding the potential investor base.

Avoiding Securities Law Problems

Intrastate offerings, while potentially beneficial under certain state Blue Sky Laws, come with significant risks. One major concern is the domicile of investors. If an investor or the sponsor is located outside of the state, the offering cannot qualify as an intrastate offering. Furthermore, the discovery that an investor is domiciled outside of the state after the fact can create severe securities law problems. Such a scenario would disqualify the offering from being considered intrastate, potentially resulting in regulatory action and penalties for failing to comply with federal securities laws.

By choosing Rule 506(b) or Rule 506(c), issuers mitigate these risks by adhering to a federal framework that accommodates interstate offerings. This approach provides a clear, consistent set of rules that are easier to manage and comply with, regardless of the geographic locations of the sponsor and investors.

Key Benefits of Choosing Regulation D:

• Simplified Compliance: Federal preemption reduces the regulatory burden, making it easier to comply with securities laws across multiple states.
• Flexibility in Capital Raising: Both Rule 506(b) and 506(c) offer substantial flexibility in terms of investor qualifications and solicitation methods.
• Risk Mitigation: Reduces the risk of securities law violations related to investor domicile and interstate transactions.
• Broader Investor Base: Rule 506(c) allows for public advertising, expanding the potential pool of accredited investors and enhancing fundraising opportunities.

In summary, the streamlined process, flexibility, and reduced legal risks associated with Regulation D make Rule 506(b) and Rule 506(c) highly attractive options for issuers. These rules provide a clear and efficient path for raising capital while ensuring compliance with federal securities regulations, avoiding the complexities and potential issues tied to state-specific Blue Sky Laws.

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 both federal and state notification requirements. While federal preemption simplifies the regulatory landscape, state notice filings remain a critical component of compliance. Here’s a detailed look at the notification rules and terms for notifying the state of South Dakota about a Regulation D Rule 506(b) or Rule 506(c) offering:

Filing Form D with the SEC and State

• Form D Filing: Issuers must file Form D with the SEC within 15 days after the first sale of securities in the offering. This form provides essential details about the issuer, the offering, and the types of securities being sold.
• State Submission: A copy of Form D must also be submitted to the South Dakota Division of Securities. This state-level filing ensures that South Dakota regulators are informed about the securities being offered within their jurisdiction.

Filing Fee and Deadlines

• New Notice Filing Fee: The filing fee for notifying South Dakota about a Regulation D offering is fixed at $250. This fee applies whether the filing is made on time or late.
• Late Filing Fee: If the filing is made more than 15 days after the date of the first sale, a late fee of $275 is imposed. This fee is in addition to the standard $250 filing fee, bringing the total cost for late filings to $525.

Required Information

When submitting the Form D and paying the filing fee to South Dakota, issuers must ensure that the following information is accurately provided:

• Issuer Details: Name, address, and contact information of the issuer.
• Offering Information: Description of the securities being offered, the total amount of securities, and the intended use of proceeds.
• Sales Data: Information on the first sale date and the states in which sales are expected to occur.
• Investor Information: Number and type of investors, including the distinction between accredited and non-accredited investors under Rule 506(b) or the verification process for accredited investors under Rule 506(c).

Timeliness and Compliance

To avoid penalties and ensure compliance:

• Submit Form D on Time: File Form D with the SEC and submit the state notice filing within 15 days of the first sale of securities.
• Pay the Filing Fees Promptly: Ensure that the $250 filing fee is included with the state submission. If filing late, be prepared to pay the additional $275 late fee.
• Maintain Documentation: Keep thorough records of all filings and fee payments. This documentation is crucial for proving compliance in the event of an audit or regulatory inquiry.

Adhering to the notification rules and terms for Regulation D offerings under Rule 506(b) or Rule 506(c) is essential for legal compliance and smooth operation. By promptly filing Form D with the SEC and the South Dakota Division of Securities and paying the required fees, issuers can ensure they meet state regulatory requirements and avoid costly late fees. These steps, though administrative, are vital for maintaining the integrity and legality of the offering process.

What are South Dakota’s Blue Sky Laws?

South Dakota’s blue sky laws are designed to protect investors from fraudulent securities activities through stringent regulations and enforcement mechanisms. Key provisions include:

1. Exempt Securities (§ 47-31B-201): Certain securities are exempt from registration, such as those issued by governments and nonprofit organizations.
2. Additional Exemptions (§ 47-31B-203): Rules for additional exemptions and waivers, including a $200 filing fee.
3. Denial and Revocation (§ 47-31B-204): Procedures for denying, suspending, or revoking exemptions.
4. Registration Requirement (§ 47-31B-301): Prohibition of selling unregistered securities unless exempt.
5. Evidentiary Burden (§ 47-31B-503): The burden of proof for exemptions lies with the claimant.
6. Misrepresentations (§ 47-31B-506): It is illegal to misrepresent the implications of securities registration.
7. Uniformity and Cooperation (§ 47-31B-608): Emphasis on collaboration with other regulatory bodies to ensure effective securities regulation.

These laws collectively aim to safeguard the interests of investors while promoting a transparent and fair securities market in South Dakota.

SD ST § 47-31B-201 Exempt securities

South Dakota Codified Law § 47-31B-201 (2017) outlines exemptions from certain securities regulations for specific types of securities. These include securities issued or guaranteed by government entities, both domestic and foreign, as well as those issued by banks, insurance companies, and certain cooperative corporations. Additional exemptions apply to securities associated with nonprofit organizations, public utilities, and securities covered by federal law. The law ensures that these exempt securities do not need to comply with certain registration and filing requirements specified in §§ 47-31B-301 to 47-31B-306 and 47-31B-504.

SD ST § 47-31B-203 Additional exemptions and waivers

South Dakota Codified Law § 47-31B-203 (2017) provides for additional exemptions and waivers related to securities regulations. The law allows the adoption of rules or issuance of orders to exempt specific securities, transactions, or offers from the requirements of §§ 47-31B-301 through 47-31B-306 and 47-31B-504. It also permits waivers of conditions for exemptions or offers under §§ 47-31B-201 and 47-31B-202. A required filing fee for these exemptions is set at $200 unless specified otherwise.

SD ST § 47-31B-204 Denial, suspense on, revocation, condition, or limitation of exemptions

South Dakota Codified Law § 47-31B-204 (2017) empowers the state to deny, suspend, revoke, condition, or limit exemptions for certain securities and transactions, except for federal covered securities. Orders issued under this section must follow procedures outlined in §§ 47-31B-306(d) or 47-31B-604 and are effective prospectively. Individuals are not in violation if they did not know and could not reasonably have known about such orders when making offers, sales, or purchases of securities.

SD ST § 47-31B-301 Securities registration requirement

South Dakota Codified Law § 47-31B-301 (2017) mandates that it is unlawful to offer or sell a security in the state unless the security is a federal covered security, is exempted under §§ 47-31B-201 through 47-31B-203, or is registered under the chapter. This ensures that securities transactions are regulated and compliant with state laws to protect investors and maintain market integrity.

SD ST § 47-31B-503 Evidentiary burden

South Dakota Codified Law § 47-31B-503 (2017) addresses the evidentiary burden in securities-related legal proceedings. In civil actions or administrative proceedings, the individual claiming an exemption, exception, preemption, or exclusion bears the burden of proving their claim. In criminal proceedings, the person must present evidence to support their claim of exemption, exception, preemption, or exclusion. This law ensures that the responsibility of proof lies with the party making the claim in both civil and criminal contexts.

SD ST § 47-31B-506 Misrepresentations concerning registration or exemption

South Dakota Codified Law § 47-31B-506 (2017) states that filing for registration or notice does not imply that the director has verified the truth or completeness of the information. It also clarifies that such filings or registrations do not mean the director endorses the securities or transactions. It is illegal to make representations to clients or prospective clients that contradict this provision.

SD ST § 47-31B-608 Uniformity and cooperation with other agencies

South Dakota Codified Law § 47-31B-608 (2017) emphasizes the importance of uniformity and cooperation among various regulatory and enforcement agencies. It mandates the director to cooperate with other state, federal, and international securities regulators to enhance the consistency of securities regulation. The director is also tasked with considering the effectiveness of investor protection, regulatory uniformity, and minimizing business burdens when developing policies. This cooperation includes sharing records, conducting joint examinations, and coordinating regulations to ensure cohesive securities regulation.

What are South Dakota’s Securities Laws Exemptions?

South Dakota’s securities laws provide specific exemptions from registration requirements under § 47-31B-201. These exemptions include:

• Governmental Entities: Securities issued or guaranteed by the U.S. government, states, municipalities, or certain foreign governments.
• Financial Institutions: Securities issued by depository institutions, such as banks and savings institutions.
• Cooperatives: Non-profit membership cooperatives and specific business-type cooperatives.
• Other Entities: Securities issued by railroads, common carriers, public utilities, utility holding companies, and insurance companies.
• Equipment Trust Certificates: For certain transportation-related securities.
• Listed Market Securities: Securities listed on recognized exchanges and clearing agency options.
• Non-Profit Organizations: Securities issued by non-profit entities for charitable purposes.

These exemptions are designed to streamline the process for certain entities, recognizing their inherent lower risk or public benefit nature.

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

South Dakota’s procedures for securities law exemptions involve specific criteria and processes outlined in § 47-31B-203 and § 47-31B-204. To qualify for an exemption, securities or transactions must meet the conditions set forth by the state. The director has the authority to adopt rules or issue orders granting exemptions, and these must be filed with a $200 fee unless stated otherwise.

If an exemption is challenged, the state can deny, suspend, or revoke it after following due procedural requirements, ensuring compliance and protection for investors. Orders issued are prospective, and parties must be aware of these orders to avoid violations.

Frequently Asked Questions

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

Whether you need a South Dakota attorney depends on the specifics of your offering. If your offering falls under federal Regulation D and not South Dakota-specific Blue Sky Laws, you likely don’t need a South Dakota attorney. For instance, a real estate syndication attorney from another state can help with a private placement memorandum for a multifamily deal offered in various states, without needing specific South Dakota law counsel.

However, if your project is within South Dakota and relies on state-specific exemptions or involves local investors, you’ll need a South Dakota-licensed attorney to ensure compliance with state regulations.

For more detailed guidance, it’s recommended to consult with legal experts who understand the nuances of both federal and state securities laws.

Is it Okay if a Real Estate Syndication Attorney Licensed Outside of South Dakota Looks Over My Purchase Contract?

An out-of-state real estate syndication attorney can review your purchase contract but cannot provide specific legal advice pertaining to South Dakota law. For example, Tilden Moschetti, Esq., from Moschetti Syndication Law Group, may offer business consulting advice on general deal points like price and closing terms, but he cannot advise on specific legal terms as he is not licensed in South Dakota. It is important to seek legal advice from an attorney licensed in South Dakota for matters requiring state-specific legal interpretation.