Washington Blue Sky Laws for Syndication

Navigating the complex landscape of securities regulations is a critical task for anyone involved in raising capital, particularly in real estate syndication. Whether you are a real estate developer, private equity fund manager, or business owner, understanding the intricacies of both federal and state laws is essential. Washington’s Blue Sky Laws add another layer of regulation that must be carefully considered alongside federal exemptions like those provided under Regulation D.

This article aims to demystify Washington’s Blue Sky Laws and their relationship with SEC Regulation D exemptions, specifically Rule 506(b) and Rule 506(c). We will explore why you might choose a federal exemption over state laws, detail the notification rules for filings in Washington, and outline the specific exemptions and procedures under Washington law. Additionally, we’ll address common concerns, such as the necessity of working with a Washington-licensed attorney and the limitations of relying on out-of-state legal counsel.

By the end of this article, you will have a clearer understanding of how to navigate these regulations effectively, ensuring compliance and protecting your investments. Whether you are structuring a multifamily deal in Seattle or a development project in Spokane, this guide will provide valuable insights to help you make informed decisions.

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

State Blue Sky Laws are designed to protect investors from fraud and to ensure transparency in securities offerings within a state. These laws require securities offerings to be registered with the state or to qualify for an exemption. However, when it comes to Regulation D Rule 506(b) or Rule 506(c) offerings, these state laws are largely preempted by federal law, specifically under 15 U.S. Code § 77r(b)(4)(F). This means that for most purposes, Regulation D offerings are not subject to the state-level registration and review processes that typically apply under Blue Sky Laws.

Preemption by Federal Law

Regulation D provides exemptions from federal registration requirements for certain private placements, allowing issuers to raise capital without the need for a public offering. Rule 506(b) and Rule 506(c) are the most commonly used exemptions under 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 investors, provided certain conditions are met. However, general solicitation and advertising are prohibited.
• Rule 506(c): Permits general solicitation and advertising but requires that all investors are accredited and that the issuer takes reasonable steps to verify their accredited status.

Under 15 U.S. Code § 77r(b)(4)(F), securities offered under Rule 506(b) or Rule 506(c) are considered “covered securities,” which means that state securities laws requiring registration or qualification are preempted. States can still require issuers to file notices and pay fees, but they cannot impose substantive requirements on these offerings.

Intrastate Offerings

There is an exception to this preemption for offerings that are entirely intrastate in nature. 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 comply with that state’s Blue Sky Laws instead of utilizing a federal exemption under Regulation D. This is known as an intrastate offering and is often governed by specific state-level exemptions designed to facilitate local investments.

Intrastate offerings can be advantageous for sponsors who are raising capital solely within one state and prefer the regulatory environment of their home state. However, these offerings must comply strictly with the state’s Blue Sky Laws, which can vary significantly from one state to another.

In summary, while Regulation D Rule 506(b) and Rule 506(c) offerings are predominantly governed by federal law and preempt state Blue Sky Laws, sponsors conducting purely intrastate offerings may opt to follow state regulations. Understanding the interplay between state Blue Sky Laws and federal Regulation D exemptions is crucial for sponsors to ensure compliance and make informed decisions about their capital-raising strategies. This balance allows for both investor protection at the state level and streamlined capital formation processes at the federal level.

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

Choosing between Regulation D Rule 506(b) or Rule 506(c) and a state’s Blue Sky Laws is a critical decision for sponsors and issuers raising capital. The decision often hinges on the scope of the offering and the location of the investors and the sponsor. Here are several key reasons why a sponsor might opt for a federal Regulation D exemption over state Blue Sky Laws.

Broad Reach and Flexibility

1. Cross-State Offerings:
Regulation D exemptions, particularly Rule 506(b) and Rule 506(c), are designed for offerings that may involve investors across multiple states. If any investor or the sponsor is located outside of the state, the offering cannot be confined to the state’s Blue Sky Laws. Utilizing Rule 506(b) or Rule 506(c) allows the sponsor to legally include out-of-state investors without violating securities regulations.

2. Avoiding Intrastate Offering Pitfalls:
Intrastate offerings under state Blue Sky Laws are strictly limited to in-state participants. If an investor is discovered to be domiciled outside the state, it no longer qualifies as an intrastate offering. This can create significant legal problems and potentially invalidate the offering, exposing the sponsor to regulatory action and investor lawsuits. Regulation D exemptions mitigate this risk by allowing nationwide investor participation, provided they meet the accredited investor criteria and other requirements.

Simplified Compliance and Preemption of State Laws

3. Federal Preemption:
Regulation D Rule 506(b) and Rule 506(c) offerings preempt state securities registration requirements under 15 U.S. Code § 77r(b)(4)(F). This preemption means that issuers do not need to navigate the varying registration requirements of multiple states, significantly simplifying compliance. While states may still require notice filings and fees, they cannot impose their own substantive regulations on these offerings.

4. Streamlined Process:
Federal Regulation D exemptions offer a more streamlined and predictable regulatory framework compared to the diverse and often complex requirements of state Blue Sky Laws. This reduces the administrative burden on sponsors, allowing them to focus on their capital-raising efforts rather than navigating a patchwork of state regulations.

General Solicitation and Advertising

5. Marketing Flexibility:
Rule 506(c) specifically allows for general solicitation and advertising, provided all investors are accredited, and reasonable steps are taken to verify their accredited status. This can be a significant advantage for sponsors looking to reach a broader audience and raise more substantial amounts of capital. State Blue Sky Laws typically do not allow for such general solicitation, restricting the sponsor’s ability to market the offering.

Investor Confidence and Market Perception

6. Investor Assurance:
Federal Regulation D exemptions are well-known and widely accepted by the investment community. Investors are often more familiar and comfortable with these exemptions, which can enhance their confidence in the offering. This recognition can make it easier to attract and secure investment compared to lesser-known state-specific exemptions.

7. Professional Guidance and Support:
Given the widespread use of Regulation D, there is a wealth of professional expertise available. Syndication attorneys, financial advisors, and compliance experts are often more experienced with federal exemptions, providing sponsors with better guidance and support throughout the process.

While state Blue Sky Laws can offer viable options for purely intrastate offerings, the broader flexibility, simplified compliance, and enhanced marketability of Regulation D Rule 506(b) and Rule 506(c) make them the preferred choice for many sponsors. By opting for a federal exemption, sponsors can avoid the complexities and potential pitfalls of state-specific regulations, ensuring a smoother and more efficient capital-raising process.

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, sponsors must ensure compliance with both federal and state regulations. In Washington, this involves notifying the state about the offering and paying the associated filing fee. Here are the key points you need to know about the notification rules and terms for such offerings in Washington:

Filing Fee and Notice Requirements

1. Filing Fee:
For both Rule 506(b) and Rule 506(c) offerings, Washington imposes a fixed filing fee. The fee for submitting a new notice to the state is $300. This fee must be paid at the time of filing and is non-refundable.

2. New Notice:
Sponsors are required to file a notice with the Washington State Department of Financial Institutions (DFI). This notice informs the state of the offering and provides essential details about the securities being offered. The notice must be submitted through the NASAA Electronic Filing Depository (EFD) system.

Steps for Filing Notice

1. Prepare the Required Documents:
The primary document required is the Form D, which must be filed electronically with the SEC through the EDGAR system. Once the Form D is filed with the SEC, a copy of the form should be submitted to the Washington DFI via the EFD system.

2. Submit the Notice:
The notice, including the Form D and the $300 filing fee, should be sent through the NASAA Electronic Filing Depository (EFD) system. This system streamlines the submission process, allowing for efficient and secure filings. More information and guidance on using the EFD can be found on their FAQ page.

3. Timing of the Filing:
It is crucial to file the notice in a timely manner. Although Washington does not impose a late fee for late filings, submitting the notice as soon as possible ensures compliance and avoids any potential administrative complications.

Compliance and Verification

1. Verification of Accredited Investors:
For Rule 506(c) offerings, sponsors must take reasonable steps to verify that all investors are accredited. While this is primarily a federal requirement, ensuring thorough verification can help maintain compliance with state regulations as well.

2. Ongoing Compliance:
Maintaining accurate and up-to-date records of the offering and investor qualifications is essential. Sponsors should regularly review their compliance procedures to ensure they meet both federal and state requirements.

No Late Fee for Late Filings

Washington state does not impose a late fee for filings submitted after the offering has commenced. However, this does not absolve sponsors from the obligation to file in a timely manner. Prompt filing demonstrates good faith compliance and helps maintain a smooth regulatory process.

Notifying the state of Washington about a Regulation D Rule 506(b) or Rule 506(c) offering involves a straightforward process of submitting the Form D and paying a fixed $300 filing fee through the NASAA Electronic Filing Depository (EFD) system. While there are no penalties for late filings, timely submission is recommended to ensure full compliance with state securities laws. By adhering to these notification rules and maintaining accurate records, sponsors can efficiently manage their offerings and avoid potential regulatory issues.

What are Washington’s Blue Sky Laws?

Washington’s Blue Sky Laws play a crucial role in regulating the offering and sale of securities within the state, ensuring transparency and protecting investors from fraudulent practices. These laws encompass various statutes that detail the requirements for registering securities, exemptions from registration, the obligations of issuers, and the authority of the Department of Financial Institutions. Key provisions include RCW 21.20.140, which mandates the registration of securities unless specific exemptions apply, and RCW 21.20.310, which outlines scenarios where registration is not required. RCW 21.20.325 addresses the filing requirements for securities offerings under Rule 506 of Regulation D, while RCW 21.20.340 details the comprehensive disclosure necessary for registration by qualification. Additionally, RCW 21.20.360 provides the framework for the suspension and revocation of securities registrations in cases of misconduct, and RCW 21.20.540 ensures that affected parties have the right to seek judicial review of the Director’s orders. Together, these regulations create a robust legal framework designed to foster a fair and efficient securities market in Washington, balancing regulatory oversight with the rights of issuers and investors.

WA ST 21.20.140 Unlawful to offer or sell unregistered securities–Exceptions

RCW 21.20.140 states that it is unlawful to offer or sell any security within or from the state of Washington unless the security is registered, the transaction is exempted under the chapter, or the security is a federally covered security. This law emphasizes the requirement for securities to be registered to ensure investor protection and market integrity. The regulation provides certain exceptions under specific conditions detailed in the chapter, promoting transparency and adherence to legal standards. Failure to comply with this requirement constitutes a violation of the state’s securities laws, potentially leading to legal consequences for involved parties.

WA ST 21.20.310 Securities exempt from registration

RCW 21.20.310 outlines specific exemptions from the registration requirements for securities in Washington. This section details various scenarios where securities may be offered or sold without registration, including isolated non-issuer transactions, sales by a pledgee, and offers directed to a limited number of individuals without public advertisement. Other exemptions include transactions by fiduciaries, certain offers to existing security holders, and sales of securities in specified types of entities like cooperatives. Additionally, the statute provides exemptions for offers not exceeding a particular amount and for sales to accredited investors under certain conditions. These exemptions aim to facilitate certain transactions while maintaining investor protection and market integrity by specifying conditions and limitations under which these exemptions apply.

WA ST 21.20.325 Denial, revocation, condition, of exemptions–Authority–Procedure

RCW 21.20.325 addresses the registration requirements for securities offerings under Rule 506 of Regulation D of the Securities Act of 1933. Specifically, it mandates that issuers relying on Rule 506(b) or Rule 506(c) for an exemption must file a notice with the Washington State Department of Financial Institutions. This notice must include a copy of the Form D filed with the Securities and Exchange Commission (SEC) and the payment of a filing fee. The notice filing must be submitted within 15 days after the first sale of securities in the state. Additionally, the rule stipulates that any amendments to the Form D must also be filed with the state. This regulation ensures that the state remains informed of securities offerings and maintains oversight to protect investors while accommodating the streamlined federal exemption process under Rule 506.

WA ST 21.20.340 Fees–Disposition

RCW 21.20.340 provides the criteria and process for securities to be registered by qualification in Washington. This method of registration requires a comprehensive disclosure of information to the state, ensuring that potential investors have access to detailed information about the securities offered. The registration statement must include specifics about the issuer’s business, financial condition, and the terms of the offering. It also requires audited financial statements and details about the use of proceeds. Additionally, the regulation mandates ongoing reporting requirements and allows the Director of the Department of Financial Institutions to impose conditions to protect investors. By necessitating thorough disclosure, this statute aims to promote transparency, facilitate informed investment decisions, and uphold market integrity.

WA ST 21.20.360 Filing, registration, statement, exemption not conclusive as to truth or completeness–Unlawful representations

RCW 21.20.360 governs the suspension and revocation of securities registrations in Washington. The Director of the Department of Financial Institutions has the authority to suspend or revoke a security’s registration if it is found that the registration statement was false or misleading, involved fraudulent practices, or if the issuer or its representatives have violated securities laws or regulations. Before taking action, the Director must provide notice and an opportunity for a hearing to the affected parties. This law ensures that the state’s securities market remains fair and trustworthy by allowing regulatory intervention in cases of misconduct or non-compliance, thereby protecting investors from fraudulent or deceptive practices.

WA ST 21.20.540 Exemptions, exceptions, and preemptions–Burden of proof

RCW 21.20.540 addresses the authority and procedures for judicial review of orders issued by the Director of the Department of Financial Institutions concerning securities regulation in Washington. If an individual or entity is aggrieved by an order of the Director, they have the right to seek judicial review in the superior court of the county where they reside or do business, or in Thurston County. The petition for review must be filed within 60 days of the order. The court has the power to affirm, modify, or set aside the Director’s order, based on the evidence presented. This provision ensures a check on the administrative powers of the Director, offering a legal recourse for those affected by regulatory decisions, thereby maintaining a balance between regulatory enforcement and the rights of the regulated parties.

What are Washington’s Securities Laws Exemptions?

Washington’s securities laws provide a range of exemptions to facilitate various types of securities offerings without the need for registration. These exemptions are designed to accommodate specific entities and transactions that are either already regulated or deemed to present lower risk to investors. According to RCW 21.20.310, the following are key exemptions under Washington law:

Governmental Entities and Certain Foreign Governments

Securities issued by governmental entities, including the United States, any state, or any political subdivision, are exempt from registration. Additionally, securities issued by certain foreign governments, such as Canada, also qualify for exemption. These exemptions recognize the inherent oversight and lower risk associated with governmental issuances.

Financial Institutions

Securities issued by financial institutions are exempt. This category includes banks, trust companies, savings and loan associations, building and loan associations, credit unions, and industrial loan associations. Given the stringent regulatory environment these institutions operate under, their securities are considered lower risk, justifying the exemption.

Investment Grade Securities

Securities that are rated as investment grade by a nationally recognized statistical rating organization (NRSRO) are also exempt. This includes debt securities that meet specific creditworthiness criteria, reflecting their reduced risk profile.

Charitable Gift Annuities

Charitable gift annuities issued by nonprofit organizations are exempt from registration requirements. These financial products are used by nonprofits to secure donations while providing donors with an income stream, and they are considered low-risk due to the philanthropic context.

Other Entities

Several other entities benefit from exemptions, including railroads, common carriers, public utilities, holding companies, and insurance companies. These entities are often subject to extensive regulation in their respective industries, providing a level of oversight that justifies the exemption.

Non-Profit Organizations

Non-profit organizations that issue securities are also exempt under Washington law. This exemption supports the fundraising efforts of nonprofits, recognizing their mission-driven activities and the public benefit they provide.

Current Transaction Commercial Paper

Commercial paper issued in current transactions is exempt from registration. This short-term, unsecured debt is typically used by corporations to finance their operations and is considered low risk due to its short duration and the financial standing of the issuers.

Employee Benefit Plans

Securities issued in connection with employee benefit plans are exempt as well. This includes stock options, profit-sharing plans, and other employee incentives that are part of compensation packages, which are seen as lower risk because they are tied to employment and company performance.

These exemptions under Washington’s securities laws provide flexibility for a variety of issuers and transactions, facilitating capital formation while maintaining investor protection. By delineating clear categories for exemption, the state ensures that lower-risk securities can be offered without the full burden of registration, promoting economic activity and supporting diverse sectors.

What are Washington’s Procedures for Securities Law Exemptions?

Washington state provides specific procedures for entities seeking exemptions under its securities laws. These procedures ensure that even exempt offerings are subject to a degree of oversight, maintaining transparency and investor protection. The process varies depending on the type of entity and the nature of the exemption sought.

For securities issued in connection with an employee benefit plan, the procedure typically requires the issuer to provide written notice to the Washington State Department of Financial Institutions (DFI). This notice must include a copy of the employee benefit plan under which the securities are being offered. This step ensures that the DFI is informed of the issuance and can verify that it falls within the scope of the exemption.

Non-profit organizations also have specific procedural requirements to meet for their securities offerings to be exempt. The procedure includes filing a notice with the DFI that outlines the terms of the offering. Along with this notice, non-profits must pay a filing fee of $50. Once the notice is filed, there is a 10-day review period during which the DFI examines the submission to ensure it meets the necessary criteria for exemption. This review period allows the state to maintain oversight while facilitating the fundraising efforts of non-profit entities.

These procedures for securities law exemptions in Washington are designed to balance regulatory oversight with the need to support various sectors and entities in their capital-raising activities. By requiring notices and fees, the state ensures transparency and accountability, while the streamlined processes and clear criteria for exemptions help issuers comply with the law efficiently.

Frequently Asked Questions

Do I Need an Attorney from Washington then to Put Together an Offering?

The necessity of hiring an attorney licensed in Washington for putting together a securities offering depends largely on the specifics of the offering and the applicable laws. If the offering is conducted under federal Regulation D rather than one of Washington’s specific Blue Sky Laws, then it is often not necessary to have an attorney from Washington.

For instance, if you are organizing a real estate syndication and need a syndication attorney to prepare a private placement memorandum (PPM) for a multifamily deal in Seattle, Washington, that will be marketed to investors across multiple states, you may not need a Washington-licensed attorney. A syndication attorney licensed in another state can assist with drafting the PPM, forming the entity, and writing the operating agreement. However, this attorney would not be able to provide legal advice on specific Washington state laws and how they might impact your offering.

Conversely, if you are planning a private placement memorandum for a development project in Spokane, Washington, with all investors based in Washington, and you intend to rely on one of Washington’s Blue Sky Laws exemptions, then you would need to work with an attorney licensed in Washington. In such cases, an attorney familiar with Washington’s securities laws can ensure compliance with state-specific regulations, file the necessary notices, and navigate any particular requirements of Washington’s Blue Sky exemptions.

In summary, while a non-Washington attorney can often handle the federal aspects of a Regulation D offering, if your project is closely tied to Washington’s state laws and relies on state-specific exemptions, consulting with a Washington-licensed attorney is essential. This ensures that all legal nuances are appropriately addressed, minimizing risk and ensuring compliance.

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

It is permissible for a real estate syndication attorney licensed outside of Washington to review your purchase contract; however, they cannot provide legal advice specific to Washington state laws. For example, Tilden Moschetti, Esq., a syndication attorney with the Moschetti Syndication Law Group, can review the underlying terms of your purchase contract for a property in Tacoma, Washington. He can offer business consulting advice, such as discussing the price, evaluating broad deal points, and advising on the timeline until closing.

However, because he is not licensed in Washington, he cannot give you legal advice on any specific terms of the contract that pertain to Washington state law. This includes interpretations of local real estate statutes, compliance with Washington-specific regulations, or any legal nuances that might affect the enforceability or obligations under the contract.

For detailed legal advice on Washington law, it is crucial to consult with an attorney who is licensed in Washington. They can provide the necessary legal counsel to ensure that your purchase contract complies with all relevant state laws and protects your interests appropriately.