Tennessee Blue Sky Laws for Syndication

Navigating the complex landscape of securities laws is crucial for anyone involved in raising capital, particularly through syndications and private placements. For real estate developers, private equity fund managers, and business professionals, understanding both federal regulations and state-specific requirements is essential to ensure compliance and successful capital raising. Tennessee’s Blue Sky Laws play a significant role in this regulatory environment, providing a framework designed to protect investors from fraud and promote transparency in securities offerings.

This comprehensive guide delves into Tennessee’s Blue Sky Laws and their intersection with the SEC’s Regulation D, specifically focusing on Rule 506(b) and Rule 506(c) offerings. We will explore why these federal exemptions are often preferred, the notification rules for complying with Tennessee’s requirements, and the various exemptions under state law. Additionally, we will discuss the procedural steps for securing these exemptions and address common questions about the necessity of engaging a Tennessee-licensed attorney.

Whether you are involved in real estate syndication, managing a private equity fund, or planning a business expansion, this article provides the insights and practical advice needed to navigate Tennessee’s regulatory landscape effectively. By understanding the nuances of both federal and state regulations, you can confidently structure your offerings to meet legal requirements and attract investors, ensuring the success of your capital-raising endeavors.

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 are both designed to protect investors, but they operate at different levels of government and have different scopes of application. Understanding the relationship between these two sets of regulations is crucial for those involved in syndication, particularly real estate syndication, and other private placements.

Under federal law, specifically 15 U.S. Code § 77r(b)(4)(F), Regulation D Rule 506(b) and Rule 506(c) offerings are preempted from state Blue Sky Laws. This means that when an issuer complies with Regulation D, they are exempt from the state-level registration and qualification requirements typically mandated by Blue Sky Laws. However, even though these offerings are exempt from state registration, issuers must still comply with certain state notification and fee requirements.

Regulation D 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 but sophisticated investors, provided there is no general solicitation or advertising. Rule 506(c), on the other hand, permits general solicitation and advertising, but all investors must be accredited, and the issuer must take reasonable steps to verify their accredited status.

Despite this federal preemption, there are instances where state Blue Sky Laws may still come into play. For example, if an offering is structured such that the sponsor, all investors, and the assets are all located within a single state, the sponsor may choose to conduct the offering under the state’s Blue Sky Laws as an intrastate offering. This can be advantageous in certain situations where local regulations may be more favorable or better suited to the specific circumstances of the offering.

In an intrastate offering, the issuer relies on the exemption provided by state law rather than Regulation D. This type of offering is often simpler and may involve less stringent filing requirements, but it limits the ability to attract investors from outside the state. For those involved in real estate syndication, considering an intrastate offering might be beneficial if the project is localized and the investor base is primarily within the same state.

Overall, while Regulation D Rule 506(b) and Rule 506(c) provide a streamlined federal framework that preempts state registration requirements, understanding and navigating state Blue Sky Laws is still essential. Issuers must ensure compliance with state notification rules and fees and consider the potential advantages of intrastate offerings where applicable. Working with a knowledgeable syndication attorney can help navigate these complexities and ensure full compliance with both federal and state securities laws.

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 significant advantages for issuers looking to raise capital through syndication, particularly in real estate syndication. These advantages stem from the broader and more flexible framework provided by Regulation D, which can accommodate a wider range of investors and reduce compliance complexity.

1. Federal Preemption and Simplified Compliance

One of the main reasons to opt for Regulation D Rule 506(b) or 506(c) is the federal preemption of state Blue Sky Laws. Under 15 U.S. Code § 77r(b)(4)(F), offerings made under these rules are exempt from state registration requirements. This federal preemption means that issuers do not need to navigate the varied and often complex registration processes of multiple states. Instead, they can rely on a single set of federal regulations, simplifying the overall compliance process.

2. Access to a Broader Pool of Investors

Rule 506(b) allows for an unlimited number of accredited investors and up to 35 non-accredited but sophisticated investors. This flexibility can be crucial for raising significant amounts of capital. Additionally, Rule 506(c) permits general solicitation and advertising, enabling issuers to reach a larger audience of accredited investors. This ability to cast a wider net is particularly beneficial for real estate syndications and other large-scale projects.

3. Avoiding Potential Legal Issues

When an offering is conducted solely under state Blue Sky Laws as an intrastate offering, all aspects of the offering—including the sponsor, investors, and assets—must be within the state. If any investor or the sponsor is found to be domiciled outside the state, the offering no longer qualifies as intrastate, leading to potential securities law violations. Such discoveries can result in significant legal and financial repercussions, including penalties and the need to comply retroactively with federal regulations.

4. Streamlined Process for Multiple States

For projects that involve investors from multiple states, adhering to state Blue Sky Laws would require compliance with each state’s specific regulations. This can be time-consuming and costly. Regulation D offers a streamlined process where a single federal filing (Form D) and compliance with a consistent set of rules suffices, regardless of the number of states involved. This efficiency reduces administrative burdens and accelerates the capital-raising process.

5. Enhanced Credibility and Investor Confidence

Operating under Regulation D Rule 506(b) or 506(c) can enhance the credibility of the offering. Investors often have greater confidence in federally regulated offerings due to the stringent requirements and oversight associated with Regulation D. This can make it easier to attract and secure investments, providing a competitive edge in the marketplace.

Choosing Regulation D Rule 506(b) or 506(c) over state Blue Sky Laws is often the preferable route for issuers seeking to raise capital through syndication. The federal preemption, broader investor reach, simplified compliance, and reduced legal risks provide compelling reasons to utilize these regulations. For real estate syndicators and other professionals involved in private placements, leveraging the advantages of Regulation D can facilitate successful and compliant capital-raising endeavors. Consulting with a knowledgeable syndication attorney is crucial to navigate these regulations effectively and ensure all legal requirements are met.

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 certain state notification requirements to maintain their exemptions from state Blue Sky Laws. For offerings involving Tennessee residents, the state mandates specific filing procedures and fees to ensure compliance with its securities regulations. Here are the key notification rules and terms for notifying Tennessee about your Regulation D offering:

1. Filing Fee

Tennessee requires a fixed filing fee for all new notice filings related to Regulation D offerings. This fee is designed to cover the administrative costs associated with processing the notice and maintaining regulatory oversight. For both Rule 506(b) and Rule 506(c) offerings, the fixed filing fee is:

• New Notice Filing Fee: $500

This fee must be submitted along with the required notice filing to ensure the offering is properly registered with the state.

2. Form D Filing

To notify Tennessee about a Regulation D offering, issuers must file a Form D. This form provides the Tennessee Securities Division with essential details about the offering, including information about the issuer, the type of securities being offered, and the terms of the offering. The process involves the following steps:

• Submit Form D to the SEC: Within 15 days of the first sale of securities, issuers must file Form D electronically with the Securities and Exchange Commission (SEC).
• File Form D with Tennessee: A copy of the Form D filed with the SEC must also be submitted to the Tennessee Securities Division within the same 15-day period. This filing includes the $500 fixed filing fee.

3. Electronic Filing Depository (EFD) System

Notices to the state of Tennessee must be sent through the NASAA Electronic Filing Depository (EFD) system. This online platform streamlines the filing process and ensures that all necessary documentation and fees are submitted efficiently. The steps include:

• Access the EFD System: Visit the NASAA Electronic Filing Depository (EFD) at https://www.efdnasaa.org.
• Submit Form D: Follow the instructions to submit the Form D electronically, including the $500 filing fee.
• Confirmation: Ensure that you receive confirmation of the filing to maintain records of compliance.

4. Timeliness

Ensuring timely filing of Form D with both the SEC and the Tennessee Securities Division through the EFD system is critical. The notice must be submitted within 15 days of the first sale of securities to Tennessee residents. Timely compliance helps issuers maintain their exemption under Regulation D and avoid any regulatory complications.

5. Late Filing Fees

Tennessee does not impose a late fee for late filings of Form D. However, it is crucial for issuers to adhere to the 15-day filing deadline to ensure compliance and avoid potential issues with state securities regulators. While there is no financial penalty for late filings, late submission could lead to delays or complications in the offering process.

Complying with Tennessee’s notification rules for Regulation D offerings under Rule 506(b) or Rule 506(c) involves submitting a Form D through the NASAA Electronic Filing Depository (EFD) system and paying a fixed $500 filing fee within 15 days of the first sale of securities. While Tennessee does not impose late fees for delayed filings, timely compliance is essential to maintain the offering’s exemption status and avoid any regulatory hurdles. Working with a knowledgeable syndication attorney can help ensure that all filing requirements are met accurately and promptly, facilitating a smooth and compliant capital-raising process.

What are Tennessee’s Blue Sky Laws?

Blue sky laws are state regulations designed to protect investors from securities fraud by requiring sellers of new issues to register their offerings and provide financial details. Tennessee has a robust framework of blue sky laws, detailed in several key statutes.

For instance, Tennessee Code § 45-3-116 exempts certain associations from state securities laws, while § 48-1-103 lists specific exemptions from registration requirements. Section 48-1-104 enforces the necessity of securities registration and imposes civil penalties for violations. Additionally, § 48-1-114 prohibits misleading statements about the registration or exemption status of securities.

These laws ensure transparency, protect investors, and maintain market integrity in Tennessee’s financial landscape.

TN ST § 45-3-116 Exemptions; securities laws

Tennessee Code § 45-3-116 (2019) provides that all associations governed by Chapter 3, including federal associations and their directors, officers, agents, or employees, as well as their deposit accounts and capital stock, are exempt from state laws that require supervision, registration, or regulation related to the sale, issuance, or offering of securities. This exemption means these financial entities do not need approval from state officials to handle these securities-related activities.

TN ST § 48-1-103 Exemption from registration and filing of sales in advertising literature

Tennessee Code § 48-1-103 (2019) outlines exemptions from securities registration requirements under the Tennessee Securities Act of 1980. It lists specific types of securities and transactions that are exempt, such as securities issued by governments, banks, and certain non-profit organizations. It also includes exemptions for specific transactions, like sales to institutional investors or certain intra-state offerings. These exemptions aim to simplify the regulatory process for certain securities and transactions, reducing the burden on issuers and investors while maintaining investor protections.

TN ST § 48-1-104 Sales unlawful unless registered, exempt, or covered

Tennessee Code § 48-1-104 (2014) mandates that it is illegal to sell any security within the state unless it is registered, exempted under § 48-1-103, or classified as a covered security. The commissioner can impose civil penalties of up to $10,000 per violation after providing notice and an opportunity for a hearing under the Uniform Administrative Procedures Act. This law ensures that securities transactions are properly regulated to protect investors.

TN ST § 48-1-114 Filing of application for registration, registration statement, or notice filing, or exemption does not constitute approval by commissioner

Tennessee Code § 48-1-114 (2021) addresses unlawful representations regarding securities registration or exemption. It specifies that the filing of an application or notice, or the registration or exemption of a security, does not imply that the commissioner has verified or endorsed the truth, completeness, or quality of the securities or the entities involved. Any statement suggesting that the commissioner has approved or recommended a security or its issuer is considered unlawful.

What are Tennessee’s Securities Laws Exemptions?

Tennessee’s securities laws, governed by the Tennessee Securities Act of 1980, provide several exemptions from registration requirements. These exemptions are designed to facilitate certain types of transactions and entities by relieving them from the burden of full registration, provided they meet specific criteria. Understanding these exemptions is crucial for issuers looking to comply with state regulations while leveraging the benefits of federal exemptions like Regulation D. Here are the primary exemptions under Tennessee’s securities laws:

1. Governmental Entities and Certain Foreign Governments

Securities issued by governmental entities within the United States, including states, counties, and municipalities, are exempt. This exemption also extends to securities issued by certain foreign governments, including Canada, making it easier for these entities to offer securities without extensive state-level registration.

2. Financial Institutions

Securities issued by financial institutions such as banks, savings institutions, trust companies, savings and loan associations, credit unions, and industrial banks are exempt. This exemption also covers thrift certificates, bank or savings and loan holding companies, and other similar financial entities. These institutions are heavily regulated and deemed to present lower risk, justifying the exemption from additional state scrutiny.

3. Cooperative Marketing Associations

Cooperative marketing associations, which are organized under state law and engaged in marketing agricultural products, are exempt from securities registration requirements. This facilitates the ability of these cooperatives to raise funds and operate efficiently within the agricultural sector.

4. Other Entities

Several other entities benefit from exemptions under Tennessee’s securities laws, including:

• Railroads and common carriers
• Public utilities and their holding companies

These entities are typically subject to other forms of regulatory oversight, reducing the need for additional securities regulation at the state level.

5. Listed Stock Exchange Securities

Securities listed on a recognized stock exchange are exempt from state registration requirements. This exemption reflects the rigorous listing standards and continuous disclosure obligations imposed by stock exchanges, ensuring a high level of transparency and investor protection.

6. Non-Profit Persons

Non-profit organizations, including religious, educational, benevolent, fraternal, charitable, social, athletic, and reformatory institutions, are exempt from securities registration. These entities are typically focused on public good rather than profit, justifying the exemption.

7. Promissory Notes and Other Debt Securities

Certain promissory notes, drafts, bills of exchange, and bankers’ acceptances are exempt from state registration requirements. This exemption applies to short-term debt securities that meet specific conditions, facilitating easier access to short-term capital.

8. Exchanged Securities

Securities exchanged in certain conditions, where no commission or other remuneration is paid for the solicitation of such exchange, are exempt. This often applies to mergers, reorganizations, or other similar transactions where existing securities are exchanged for new ones without additional sales efforts.

9. Securities Meeting Specific Conditions

Certain securities that meet predefined conditions set forth by Tennessee’s securities regulations are also exempt. These conditions are designed to ensure that the securities present a lower risk to investors and do not require the full protection provided by registration.

Tennessee’s securities laws provide a comprehensive set of exemptions that facilitate the issuance of securities by various entities and under different conditions. These exemptions reduce the regulatory burden for issuers such as governmental entities, financial institutions, cooperative marketing associations, and non-profits. Understanding and leveraging these exemptions can significantly simplify the process of raising capital within Tennessee while ensuring compliance with state and federal regulations. For those involved in syndication and real estate syndication, consulting with a knowledgeable syndication attorney can help navigate these exemptions effectively and optimize their capital-raising strategies.

What are Tennessee’s Procedures for Securities Law Exemptions?

Navigating Tennessee’s procedures for securities law exemptions requires a clear understanding of the filing requirements, documentation, and specific steps needed to ensure compliance. These procedures are designed to facilitate the process for issuers who qualify for exemptions, making it easier to raise capital while adhering to state regulations. Here are the key steps and considerations for availing Tennessee’s securities law exemptions:

1. Determine Eligibility for Exemption

Before initiating any filings, issuers must determine whether their securities offering qualifies for an exemption under Tennessee law. This involves assessing the nature of the offering and the characteristics of the securities and the issuer. Key exemptions include those for governmental entities, financial institutions, cooperative marketing associations, and other specific entities and transactions as outlined in Tennessee Code Section 45-3-116.

2. Preparation of Required Documentation

Issuers must prepare the necessary documentation to support their claim for exemption. This typically includes:

• Description of the Securities: Detailed information about the securities being offered.
• Issuer Information: Background information about the issuing entity, including organizational documents and financial statements.
• Transaction Details: Specifics of the offering, including the terms and conditions of the sale.

3. Filing Notice with the Tennessee Securities Division

For most exemptions, particularly those involving private placements under Regulation D:

• Form D Filing: Issuers must file a Form D with the SEC within 15 days of the first sale of securities.
• Electronic Filing via EFD: Submit a copy of the Form D, along with any required documentation, to the Tennessee Securities Division through the NASAA Electronic Filing Depository (EFD) system. This online platform streamlines the submission process, ensuring that all filings are handled efficiently.

4. Payment of Filing Fees

Issuers must pay the applicable filing fee when submitting their notice. For Regulation D offerings under Rule 506(b) or 506(c):

• New Notice Filing Fee: $500
  This fee covers the administrative costs of processing the filing and maintaining regulatory oversight.

5. Compliance with Timeliness Requirements

Timely submission of the Form D and payment of the filing fee is crucial. The notice must be filed within 15 days of the first sale of securities to Tennessee residents to maintain compliance and avoid potential regulatory issues. While Tennessee does not impose late fees, adhering to this deadline is essential for maintaining the exemption status.

6. Record Keeping and Documentation

Issuers should maintain comprehensive records of all filings, communications, and documentation related to their securities offering. This includes:

• Confirmation Receipts: Keep copies of the filing confirmations received from the SEC and the EFD system.
• Supporting Documents: Store all relevant documents that support the exemption claim, such as investor qualification records and transaction agreements.

7. Ongoing Compliance and Reporting

Depending on the nature of the exemption, issuers may need to comply with ongoing reporting requirements. This can include:

• Annual Reports: In some cases, issuers might need to submit annual reports or updates to the Tennessee Securities Division.
• Material Changes: Notify the Tennessee Securities Division of any material changes in the offering or the issuer’s status.

Tennessee’s procedures for securities law exemptions are designed to facilitate a smooth and compliant capital-raising process for eligible issuers. By determining eligibility, preparing the necessary documentation, filing through the EFD system, paying the required fees, and maintaining timely and accurate records, issuers can effectively leverage these exemptions. For those involved in syndication and real estate syndication, working with a knowledgeable syndication attorney is crucial to navigate these procedures efficiently and ensure full compliance with state and federal regulations.

Frequently Asked Questions

Do I Need an Attorney from Tennessee to Put Together an Offering?

Whether you need an attorney licensed in Tennessee to put together a securities offering depends on the specific nature of the offering and the applicable laws. If your offering is structured under Regulation D and does not rely on Tennessee-specific Blue Sky Laws, then it is likely that you do not need a Tennessee-licensed attorney. For instance, if you are working on a real estate syndication and need a syndication attorney to prepare a private placement memorandum for a multifamily deal in Nashville, Tennessee, which will be offered in multiple states, a syndication lawyer licensed in any state could typically assist you. Such an attorney could handle the preparation of the entity formation, draft the operating agreement, and manage other aspects of the offering that are governed by federal law.

However, it is important to note that while an out-of-state attorney can provide extensive assistance, they cannot offer legal advice on specific Tennessee state laws or how those laws might impact your offering. Therefore, if your offering requires detailed understanding and application of Tennessee securities laws, consultation with a Tennessee-licensed attorney is advisable.

On the other hand, if you are putting together a private placement memorandum for a development project in Memphis, Tennessee, where all the investors are from Tennessee and you plan to use one of Tennessee’s Blue Sky Laws as an exemption to registration, you will need to work with an attorney licensed in Tennessee. This local attorney will have the requisite knowledge of Tennessee’s securities regulations and can provide the necessary legal counsel to ensure your offering complies with state-specific requirements.

In summary, while a general syndication attorney can be instrumental in drafting and structuring a Regulation D offering, the specific involvement of a Tennessee-licensed attorney is crucial when state laws are directly applicable to the offering. Ensuring compliance with both federal and state laws is essential for the success and legality of your securities offering, and having the right legal guidance can help navigate these complexities effectively.

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

Yes, a real estate syndication attorney licensed outside of Tennessee can look over your purchase contract, but their ability to provide legal advice on the specific terms as they pertain to Tennessee law is limited. For instance, Tilden Moschetti, Esq., a syndication attorney with the Moschetti Syndication Law Group, can review your purchase contract for a property in Knoxville, Tennessee. However, he would make it clear that while he can offer business consulting advice—such as discussions on price, overall deal structure, and timing until closing—he cannot provide legal advice on specific terms of the contract since he is not licensed in Tennessee.

This means that while an out-of-state attorney can give you valuable insights into the broader aspects of your deal and help you understand the general implications of the contract, they cannot speak to how Tennessee law specifically affects the contract’s provisions. This limitation is crucial because state laws can have significant impacts on real estate transactions, affecting everything from contract enforceability to specific regulatory compliance.

Therefore, while it can be beneficial to have an experienced syndication attorney review your purchase contract, for specific legal advice related to Tennessee law, it is advisable to consult with an attorney who is licensed in Tennessee. This dual approach ensures that you benefit from the expertise of your syndication attorney while also ensuring compliance with local legal requirements, thereby protecting your interests in the transaction.