Virginia Blue Sky Laws for Syndication

Navigating the complexities of securities laws is a critical aspect of raising capital through syndication, particularly in real estate syndication. Understanding both federal regulations and state-specific requirements is essential for ensuring compliance and protecting investor interests. This article provides a comprehensive guide to Virginia’s Blue Sky Laws, detailing their relationship with the SEC’s Regulation D, the specific exemptions available, and the procedural steps necessary to comply with state regulations. Whether you are a real estate developer, private equity fund manager, or business professional looking to leverage Regulation D for your capital-raising efforts, this guide will equip you with the knowledge needed to make informed decisions and avoid potential legal pitfalls. By exploring topics such as the necessity of a Virginia-licensed attorney and the intricacies of state notification rules, we aim to clarify the often complex landscape of securities regulation in Virginia.

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 and ensure transparency in securities offerings, but they operate at different levels and have distinct areas of authority. Understanding how these two sets of regulations interact is crucial for anyone involved in syndication, particularly for real estate syndication.

Federal Preemption under Regulation D

Regulation D, established by the SEC, provides exemptions from the registration requirements of the Securities Act of 1933, making it easier for companies to raise capital. The two most commonly used exemptions under Regulation D are Rule 506(b) and Rule 506(c). These rules allow issuers to offer and sell securities without registering with the SEC, provided they meet specific criteria.

Importantly, Regulation D Rule 506(b) and Rule 506(c) offerings are federally preempted from state Blue Sky Laws under 15 U.S. Code § 77r(b)(4)(F). This means that states cannot impose their registration requirements on these offerings, significantly simplifying the process for issuers. However, states can still require notice filings and charge fees for these offerings, and they retain the authority to enforce anti-fraud provisions.

Intrastate Offerings under State Blue Sky Laws

While federal law preempts state regulation of Rule 506(b) and Rule 506(c) offerings, there are scenarios where state Blue Sky Laws become particularly relevant. If an offering is made where 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.

An intrastate offering must comply with the specific securities regulations of the state in which it is conducted. This can include registration requirements, disclosure obligations, and other regulatory provisions designed to protect in-state investors. Sponsors choosing this route must ensure they are thoroughly familiar with their state’s Blue Sky Laws and comply with all applicable requirements.

Practical Considerations

For many issuers, especially those involved in real estate syndication, using Regulation D’s federal exemptions can be more advantageous due to the streamlined process and the broad ability to solicit accredited investors nationwide under Rule 506(c). However, there are situations where an intrastate offering under state Blue Sky Laws might be preferable or necessary, such as when the investment is localized and all parties involved are within one state.

In these cases, consulting with a syndication attorney who is knowledgeable about both federal securities regulations and state Blue Sky Laws is essential. They can provide guidance on the best approach for your specific situation, ensuring compliance and helping to avoid potential legal pitfalls.

In conclusion, while Regulation D provides powerful tools for capital raising with federal preemption of state laws, understanding the role and applicability of state Blue Sky Laws remains important, especially for intrastate offerings. By leveraging the right legal frameworks and expertise, issuers can navigate these regulatory landscapes effectively and achieve their capital-raising goals.

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

When raising capital through syndication, particularly in real estate syndication, choosing the right regulatory framework is crucial. Regulation D Rule 506(b) and Rule 506(c) offer significant advantages over state Blue Sky Laws, making them the preferred choice for many sponsors and investors. Here’s why:

Federal Preemption and Simplification

One of the primary reasons to choose Regulation D Rule 506(b) or Rule 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 preemption means that sponsors do not need to navigate the potentially complex and varied securities regulations of multiple states, simplifying the offering process significantly.

Broader Investor Base

Regulation D allows for a broader base of potential investors. Rule 506(b) permits up to 35 non-accredited investors, provided they are financially sophisticated, and an unlimited number of accredited investors. Rule 506(c) takes it a step further by allowing issuers to engage in general solicitation and advertising, provided all investors are accredited. This federal framework opens up opportunities to raise capital from investors across the country, rather than being limited to those within a single state.

Avoiding Securities Law Problems

When an offering is conducted under state Blue Sky Laws as an intrastate offering, it is crucial that all parties involved—sponsors, investors, and the assets—are located within the state. However, if it is discovered that an investor is actually domiciled outside the state, the offering no longer qualifies as intrastate. This misstep can lead to significant securities law problems, including potential enforcement actions and penalties for failing to comply with the appropriate registration requirements.

Choosing Regulation D Rule 506(b) or Rule 506(c) eliminates this risk, as the federal exemptions apply regardless of the investors’ locations. This provides greater flexibility and security for sponsors, ensuring compliance with securities laws without the need for constant verification of investors’ domiciles.

Streamlined Compliance

Compliance under Regulation D is generally more straightforward than navigating multiple state Blue Sky Laws. While states may require notice filings and fees, the overall process is more unified and predictable under federal regulations. This can reduce legal costs and administrative burdens, allowing sponsors to focus on their investment strategies and operations.

Professional Guidance and Resources

Utilizing Regulation D also provides access to a wealth of professional guidance and resources. Syndication attorneys with experience in federal securities laws can offer invaluable assistance in structuring offerings, preparing the necessary documentation such as the private placement memorandum (PPM), and ensuring ongoing compliance. This expertise can help sponsors avoid common pitfalls and successfully navigate the regulatory landscape.

In conclusion, while state Blue Sky Laws have their place, the advantages of Regulation D Rule 506(b) and Rule 506(c) make them the preferred choice for many capital-raising efforts. These federal exemptions offer broader reach, streamlined compliance, and reduced legal risks, making them a powerful tool for sponsors looking to attract a diverse pool of investors and achieve their funding goals.

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, while federal preemption of state Blue Sky Laws waives state registration requirements, issuers must still comply with state notice filing requirements. These notifications ensure state securities regulators are informed of the offering, maintaining transparency and legal adherence. Here’s what you need to know about notifying the state of a Regulation D offering in Virginia:

Filing Fee

The state of Virginia imposes a fixed filing fee for Regulation D Rule 506(b) or Rule 506(c) offerings. This fee covers the administrative costs of processing the notice filings. As of the latest guidelines, the filing fee is $250.

New Notice Filing

For each new Regulation D offering, issuers must submit a notice filing through the NASAA Electronic Filing Depository (EFD) system. The EFD is an online system designed to streamline the filing process for issuers and state regulators. The system can be accessed at NASAA EFD.

Issuers are required to file a completed Form D electronically via the SEC’s EDGAR system and then submit a copy through the EFD system along with the $250 filing fee. Form D includes information about the issuer, the offering, the types of securities being offered, use of proceeds, offering expenses, and the number of investors. Ensuring the accuracy and completeness of this form is crucial for maintaining compliance.

Timing of the Filing

The notice filing should be made in a timely manner. For Rule 506(b) offerings, the filing must be made within 15 calendar days after the first sale of securities in the offering. The same 15-day timeline applies for Rule 506(c) offerings. Adhering to this timeline is crucial to avoid potential compliance issues.

Late Fees

Virginia does not impose a late fee for notice filings submitted past the deadline. However, timely filing is strongly recommended to ensure compliance and maintain good standing with state regulators. Late filings can attract scrutiny and may lead to inquiries or additional requirements from the state securities commission.

Amendments to Form D

If there are any material changes to the information provided in the original Form D, issuers must file an amendment through the EFD system. Material changes can include changes in the offering amount, the total number of investors, or significant changes in the use of proceeds. The amendment must be filed promptly to ensure state regulators have the most up-to-date information about the offering.

While Regulation D Rule 506(b) and Rule 506(c) offerings benefit from federal preemption of state registration requirements, issuers must not overlook the importance of state notice filings. In Virginia, this involves submitting Form D through the NASAA EFD system along with a $250 filing fee within the stipulated timeframe. By understanding and adhering to these notification rules, issuers can ensure compliance, avoid unnecessary complications, and focus on successfully raising capital through their offerings.

What are Virginia’s Blue Sky Laws?

Virginia’s Blue Sky Laws are a critical component of the state’s regulatory framework, designed to protect investors and maintain the integrity of the securities market. These laws encompass various statutes that govern the offering and sale of securities, the registration and conduct of brokers and dealers, and the operations of investment advisors. Key provisions such as Virginia Code § 13.1-507, § 13.1-514, § 13.1-514.1, § 13.1-514.2, and § 13.1-525 outline the requirements and exemptions for securities registration, the registration of securities professionals, the regulation of investment advisor contracts, and the enforcement powers of the Virginia State Corporation Commission. By understanding these rules, businesses and investors can navigate the regulatory landscape more effectively, ensuring compliance and fostering a fair and transparent market. In this article, we will delve into the specifics of these statutes, highlighting their importance in safeguarding investor interests and promoting market confidence.

VA ST § 13.1-507 Registration requirement; exemptions

Virginia Code § 13.1-507 outlines the exemption provisions for certain securities transactions from registration requirements under Virginia’s securities laws. Specifically, it exempts transactions that are already registered under the Securities Act of 1933, those involving sales to institutional investors, and transactions that the Virginia State Corporation Commission determines do not require registration to protect investors. This provision is crucial for businesses seeking to raise capital, as it allows them to avoid the cumbersome and costly registration process for qualifying transactions. This aligns with the SEC’s Regulation D exemptions, facilitating smoother capital formation for issuers.

VA ST § 13.1-514 Exemptions

Virginia Code § 13.1-514 establishes the criteria and procedures for the registration of securities and the persons involved in securities transactions. This section mandates that securities offered or sold within Virginia must be registered unless they fall under specific exemptions. It also requires brokers, dealers, and agents engaging in securities transactions to register with the Virginia State Corporation Commission. This regulation ensures that all parties involved in the securities market operate under a framework that promotes transparency and investor protection. By imposing these registration requirements, Virginia aims to safeguard investors from fraudulent practices and ensure that only qualified entities participate in the securities market.

VA ST § 13.1-514.1 Exemption of certain securities by order of Commission

Virginia Code § 13.1-514.1 addresses the regulation and registration of investment advisors and their representatives within the state. This section stipulates that investment advisors must register with the Virginia State Corporation Commission, providing essential information about their business practices, qualifications, and financial condition. It also requires that investment advisor representatives, who provide advice to clients, register to ensure they meet the necessary professional standards. This regulation aims to protect investors by ensuring that those offering investment advice are qualified and operate transparently. By enforcing these registration requirements, Virginia seeks to maintain a high standard of integrity and professionalism within the investment advisory industry, thereby enhancing investor confidence and market stability.

VA ST § 13.1-514.2 Primacy of Virginia law to be maintained

Virginia Code § 13.1-514.2 pertains to the regulation of investment advisor contracts. This section mandates that any contract between an investment advisor and their client must clearly outline the terms of the advisory services, including the compensation to be received. It prohibits performance-based fees unless specific conditions are met, ensuring that fees are not contingent on the investment’s success, thereby protecting clients from potential conflicts of interest. Additionally, it requires that clients be informed of any material changes to the contract. By enforcing these provisions, Virginia aims to safeguard investors by promoting transparency and fairness in investment advisory relationships, ensuring that clients receive unbiased advice and understand the costs associated with the services provided.

VA ST § 13.1-525 Official interpretations
Virginia Code § 13.1-525 deals with the powers and duties of the Virginia State Corporation Commission in administering and enforcing securities laws. This section grants the Commission the authority to create rules, conduct investigations, issue subpoenas, and take legal action to enforce compliance with the state’s securities regulations. It also empowers the Commission to review and approve or deny applications for securities registration and the registration of brokers, dealers, and investment advisors. By vesting these powers in the Commission, Virginia ensures robust oversight and regulation of the securities market, promoting investor protection and maintaining market integrity. This section is fundamental in enabling the Commission to act decisively against fraudulent activities and other violations, thereby fostering a trustworthy investment environment in the state.

What are Virginia’s Securities Laws Exemptions?

Virginia’s securities laws, outlined in the Virginia Securities Act, provide various exemptions from the registration requirements for certain types of securities and transactions. These exemptions are designed to facilitate the issuance of securities in specific contexts where the level of risk to investors is deemed lower or where the nature of the issuer or the transaction warrants an exemption. Understanding these exemptions is crucial for issuers to determine whether their offerings can benefit from reduced regulatory requirements. Here are the key exemptions under Virginia Code § 13.1-514:

Governmental Entities and Certain Foreign Governments

Securities issued by governmental entities, including federal, state, and local governments, as well as certain foreign governments such as Canada, are exempt from registration. These entities are generally considered low-risk due to their governmental backing and regulatory oversight.

Financial Institutions

Exemptions apply to securities issued by a range of financial institutions, including:

• Banks and savings banks
• Trust companies
• Savings and loan associations
• Credit unions
• Industrial loan associations
• Consumer finance companies

These institutions are heavily regulated, which reduces the risk for investors and justifies the exemption from state registration.

Cooperative Associations

Securities issued by cooperative associations are exempt. These associations operate for the mutual benefit of their members and often involve lower levels of risk.

Approved Foreign Issuers

Securities from foreign issuers that are approved by the state of Virginia also qualify for exemption. This typically involves issuers from jurisdictions with comparable regulatory standards, ensuring a level of protection for investors.

Other Entities

Several other entities benefit from exemptions, including:

• Railroads and other common carriers
• Public service companies (e.g., utilities)
• Insurance companies

These entities often have a strong regulatory framework and public oversight, making their securities less risky for investors.

Listed Stock Exchange Securities

Securities listed on approved stock exchanges are exempt from state registration. These securities are subject to rigorous listing requirements and continuous disclosure obligations, providing significant investor protection.

Current Transaction Commercial Paper

Commercial paper, which refers to short-term unsecured promissory notes issued by corporations to finance their operations, is exempt. This type of security is typically issued by well-established companies and involves short maturity periods, reducing the investment risk.

Employee Benefit Plans

Securities issued as part of an employee benefit plan are also exempt. These plans are designed to provide benefits to employees and often involve additional regulatory oversight to protect participants.

Practical Considerations

Understanding these exemptions can help issuers streamline their offerings by taking advantage of reduced regulatory burdens. However, it’s crucial to ensure that all conditions of the exemptions are met to avoid potential legal issues. Consulting with a syndication attorney who is familiar with Virginia’s securities laws can provide valuable guidance in navigating these exemptions and ensuring compliance.

Virginia’s securities laws exemptions provide significant opportunities for issuers to simplify the process of offering securities. By leveraging these exemptions, issuers can reduce administrative costs and focus on their core business operations. However, thorough knowledge and careful adherence to the specific requirements of each exemption are essential to maintain compliance and protect both the issuer and the investors.

What are Virginia’s Procedures for Securities Law Exemptions?

Understanding the procedures for claiming securities law exemptions in Virginia is crucial for issuers looking to navigate the regulatory landscape efficiently. These procedures ensure that issuers can take advantage of exemptions while maintaining compliance with state regulations. Here’s a detailed look at the steps and requirements for securing securities law exemptions in Virginia:

Initial Determination of Eligibility

Before proceeding, issuers must determine if their securities or transactions qualify for an exemption under Virginia Code § 13.1-514. This involves a thorough review of the specific criteria for each exemption category, such as those for governmental entities, financial institutions, cooperative associations, and others.

Filing Requirements

While many exemptions relieve issuers from the need to register their securities, there are still filing requirements that must be adhered to:

1. Notice Filings:

• Some exemptions require issuers to file a notice with the Virginia State Corporation Commission. This notice typically includes basic information about the issuer and the offering, affirming that the issuer is claiming an exemption.
• The notice filing must be submitted electronically through the NASAA Electronic Filing Depository (EFD) system.

1. Form D Filing:

• For offerings conducted under Regulation D Rule 506(b) or Rule 506(c), issuers must file Form D with the SEC. A copy of this form, along with the required state notice filing fee, must also be submitted through the EFD system to notify the state of Virginia.
• The filing fee for these notices in Virginia is $250, and it must be paid at the time of filing.

Documentation and Record Keeping

Issuers claiming an exemption must maintain detailed records supporting their eligibility for the exemption. This includes:

• Documentation of the nature and terms of the offering.
• Information verifying that all conditions of the exemption are met, such as investor qualifications and transaction details.
• Copies of all filed notices and correspondence with state regulators.

Compliance with Anti-Fraud Provisions

Even if an offering is exempt from registration, issuers must still comply with Virginia’s anti-fraud provisions. This includes ensuring that all communications and disclosures related to the offering are accurate and not misleading. Providing false or incomplete information can lead to severe penalties, including legal action by state regulators.

Timely Filings and Amendments

It is essential to make all required filings in a timely manner. For Regulation D offerings, the initial notice must be filed within 15 calendar days after the first sale of securities. If there are any material changes to the offering or the information provided in the initial filing, issuers must file an amendment promptly through the EFD system.

Consultation with a Syndication Attorney

Navigating the procedures for securities law exemptions can be complex. Engaging a syndication attorney with expertise in Virginia’s securities laws can provide invaluable assistance. An attorney can help ensure that all filing requirements are met, documentation is thorough, and compliance with all applicable laws is maintained.

Virginia’s procedures for claiming securities law exemptions involve several critical steps, including determining eligibility, filing required notices, maintaining documentation, and adhering to anti-fraud provisions. By understanding and following these procedures, issuers can efficiently utilize exemptions to facilitate their securities offerings while ensuring full compliance with state regulations. Consulting with a knowledgeable syndication attorney can further streamline the process and help avoid potential legal pitfalls.

Frequently Asked Questions

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

Whether you need an attorney specifically from Virginia to put together your offering depends on the nature of the offering and the jurisdictions involved. If your offering is conducted under Regulation D and not subject to Virginia-specific Blue Sky Laws, then it is likely that you do not need an attorney licensed in Virginia.

For instance, if you are preparing a private placement memorandum (PPM) for a multifamily real estate syndication in Virginia Beach that will be offered to investors in multiple states, and you do not need specific counsel on Virginia laws, a licensed syndication attorney from any state would likely be able to assist you. This attorney could draft the PPM, form the entity, and write the operating agreement, provided that they do not advise on Virginia-specific legal issues.

However, if your offering is more localized, such as a development project in Chesapeake, Virginia, where all investors are from Virginia, and you plan to use one of Virginia’s Blue Sky Laws as an exemption from registration, you would need to work with an attorney licensed in Virginia. This is because Virginia-specific exemptions require in-depth knowledge of state regulations and compliance requirements, which only a Virginia-licensed attorney can provide.

In summary, the necessity of a Virginia-licensed attorney hinges on whether your offering requires adherence to Virginia’s state-specific securities laws. For multi-state offerings under Regulation D, a syndication attorney from another state may suffice. However, for intrastate offerings relying on Virginia’s Blue Sky Laws, local legal expertise is essential to ensure compliance and avoid legal issues.

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

A real estate syndication attorney licensed outside of Virginia can certainly review your purchase contract, but there are limitations on the advice they can provide regarding Virginia-specific legal issues. For instance, Tilden Moschetti, Esq., a syndication attorney with the Moschetti Syndication Law Group, can review the contract underlying your purchase agreement in Arlington, Virginia. However, he must clearly state that while he can offer business consulting advice—such as discussions on price and broad deal points like the length of time until closing—he cannot provide legal advice on any specific terms of the contract, as he is not licensed to practice in Virginia.

This distinction is crucial because legal advice on the specifics of a contract can involve nuanced interpretations of state law, which require a deep understanding of local legal requirements and precedents. Therefore, while an out-of-state syndication attorney can offer valuable general insights and business advice, you would need to consult with a Virginia-licensed attorney for legal advice specific to Virginia laws to ensure full compliance and protection of your interests in the contract.