West Virginia Blue Sky Laws for Syndication

Navigating the intricate landscape of securities regulations is essential for any real estate developer, private equity fund manager, or business professional involved in raising capital through syndication. In the United States, both federal and state laws play pivotal roles in governing these transactions. West Virginia’s Blue Sky Laws are designed to protect investors within the state, adding an additional layer of regulatory compliance that must be carefully managed.

For those looking to leverage the federal exemptions provided by Regulation D, understanding how these intersect with state-specific regulations is crucial. Regulation D’s Rule 506(b) and Rule 506(c) offer significant advantages by preempting state laws, simplifying the process of interstate offerings. However, the nuances of state exemptions, notification procedures, and the role of local legal counsel cannot be overlooked.

In this comprehensive guide, we will explore the key aspects of West Virginia’s Blue Sky Laws, the interplay between state and federal regulations, and practical steps for ensuring compliance. Whether you are considering a purely local intrastate offering or a broader interstate syndication, this article provides the essential information needed to navigate West Virginia’s regulatory landscape effectively.

From understanding the general principles of Blue Sky Laws and their relationship with the SEC’s Regulation D, to detailed procedures for claiming exemptions and the necessity of local legal counsel, this guide is designed to equip you with the knowledge and tools to make informed decisions. Let’s delve into the specifics of West Virginia’s securities regulations and discover how to successfully raise capital while maintaining full compliance with both state and federal laws.

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

Understanding the relationship between a state’s Blue Sky Laws and the SEC’s Regulation D is crucial for anyone looking to raise capital through syndication. Blue Sky Laws are state-level securities regulations designed to protect investors from fraud. Each state has its own set of these laws, which can create a complex regulatory environment for issuers. However, the SEC’s Regulation D offers federal exemptions that preempt state laws under certain conditions, simplifying the process for syndicators.

Preemption Under Regulation D

Regulation D, specifically Rule 506(b) and Rule 506(c), provides exemptions from state securities registration requirements. Under 15 U.S. Code § 77r(b)(4)(F), these offerings are considered “covered securities,” meaning they are exempt from state Blue Sky Laws registration and qualification requirements. This preemption allows issuers to avoid the patchwork of state regulations and instead comply with a unified federal standard.

Rule 506(b) and Rule 506(c)

• Rule 506(b): This rule allows issuers to raise an unlimited amount of capital from an unlimited number of accredited investors and up to 35 non-accredited investors, provided that no general solicitation or advertising is used. This makes it a popular choice for real estate syndications that seek a diverse group of investors without broad public advertising.
• Rule 506(c): Under this rule, issuers can use general solicitation and advertising to market their securities, but all purchasers must be accredited investors, and the issuer must take reasonable steps to verify their accredited status. This rule is beneficial for sponsors looking to reach a wider audience while ensuring investor eligibility.

Intrastate Offerings

While Regulation D preempts state Blue Sky Laws for Rule 506(b) and Rule 506(c) offerings, there is an exception for intrastate offerings. If an offering is conducted where the sponsor, all investors, and the assets are located within the same state, the sponsor might opt to comply with the state’s Blue Sky Laws instead. This approach is typically referred to as an intrastate offering.

Intrastate offerings can be advantageous in certain scenarios, especially when the sponsor has strong local connections and prefers the familiarity of state regulations. However, these offerings are subject to the specific requirements and limitations of the state’s Blue Sky Laws and may not offer the same flexibility as federal exemptions.

In summary, while state Blue Sky Laws play a critical role in investor protection, Regulation D provides valuable federal exemptions that streamline the process of raising capital through syndication. By utilizing Rule 506(b) or Rule 506(c), sponsors can benefit from preemption of state laws, reducing regulatory burdens and expanding their potential investor base. However, for purely local projects, considering an intrastate offering under state Blue Sky Laws might be a viable alternative. Understanding these nuances helps syndicators make informed decisions and navigate the regulatory landscape effectively.

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

Choosing between federal exemptions under Regulation D and state Blue Sky Laws can significantly impact the success and compliance of a syndication. While state Blue Sky Laws offer a regulatory framework for intrastate offerings, Regulation D’s Rule 506(b) and Rule 506(c) provide several advantages that often make them the preferred choice for sponsors and syndicators.

Interstate Offerings and Investor Domicile

One of the primary reasons to choose Regulation D over state Blue Sky Laws is the flexibility it offers for interstate offerings. If any investor or the sponsor is located outside the state, the offering cannot rely solely on the state’s Blue Sky Laws and must comply with federal regulations. This is because Blue Sky Laws are designed for intrastate transactions, where all parties and assets are within the same state.

Even if a sponsor initially believes that all investors are in-state, there is a risk that an investor might actually be domiciled outside the state. If this is discovered after the fact, the offering could face significant securities law issues for failing to comply with the appropriate federal regulations. Such a discovery can lead to penalties, rescission offers to investors, and potential legal action, complicating the syndication process and jeopardizing the project’s success.

Advantages of Rule 506(b)

Rule 506(b) of Regulation D allows for the raising of an unlimited amount of capital from an unlimited number of accredited investors and up to 35 non-accredited investors. Here are the key advantages:

• Broad Investor Base: By allowing up to 35 non-accredited investors, Rule 506(b) enables sponsors to include a wider range of participants, which can be particularly beneficial for smaller or community-focused projects.
• No General Solicitation: While this might seem like a limitation, the prohibition on general solicitation means that the offering is typically conducted within a more controlled environment, reducing the risk of attracting unqualified investors.
• Federal Preemption: Rule 506(b) offerings are exempt from state registration requirements, providing a streamlined process and avoiding the complexity of navigating multiple state regulations.

Advantages of Rule 506(c)

Rule 506(c) offers a different set of benefits, particularly for those looking to broadly market their offering:

• General Solicitation and Advertising: Rule 506(c) permits general solicitation and advertising, allowing sponsors to reach a larger audience. This can be a significant advantage for raising capital quickly and efficiently.
• Accredited Investors Only: By requiring all investors to be accredited, Rule 506(c) ensures a level of sophistication and financial capability among participants, which can reduce risk for both the sponsor and the investors.
• Verification of Accredited Status: The requirement to take reasonable steps to verify the accredited status of investors adds a layer of protection and compliance assurance, fostering a more secure investment environment.

Avoiding Securities Law Problems

Choosing Regulation D’s exemptions helps mitigate the risk of inadvertently violating securities laws. For instance, if an investor’s out-of-state domicile is discovered after an offering has been structured under state Blue Sky Laws, the entire offering could be compromised. Regulation D’s Rule 506(b) and Rule 506(c) preempt state laws, providing a consistent federal framework that accommodates investors from multiple states without additional state registration requirements.

In conclusion, while state Blue Sky Laws can be useful for purely intrastate offerings, Regulation D’s Rule 506(b) and Rule 506(c) offer significant advantages for most syndications. These federal exemptions provide flexibility, a broader investor base, and a streamlined compliance process, reducing the risk of legal issues related to interstate offerings. By leveraging these exemptions, sponsors can effectively navigate the complexities of securities regulations and focus on successfully raising capital for their projects.

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), it is essential to comply with both federal and state notification requirements. While Regulation D preempts state Blue Sky Laws in terms of registration, sponsors are still required to file notices and pay fees to the state where the offering takes place. Here’s what you need to know about the notification rules and terms for West Virginia.

Filing Requirements

For both Rule 506(b) and Rule 506(c) offerings, sponsors must file a notice with the West Virginia Securities Commission. This filing ensures that the state is informed of the securities being offered and maintains oversight, even though the offering is federally exempt from state registration.

Filing Fee

• Fixed Fee: West Virginia requires a fixed filing fee of $100 for submitting the notice. This fee is applicable for both initial filings and any amendments to the notice.
• Late Filing Fee: If the notice is not filed within 15 days after the first sale of securities, a late fee of $50 will be imposed. It is crucial to adhere to this timeline to avoid additional costs and potential compliance issues.

Notification Process

1. Prepare Form D: The first step in notifying the state about a Regulation D offering is to prepare and file Form D with the SEC. This form includes detailed information about the offering, the issuer, and the investors.
2. File Form D through NASAA EFD: After filing with the SEC, a copy of Form D must be submitted to the West Virginia Securities Commission through the NASAA Electronic Filing Depository (EFD). This online system streamlines the process and ensures proper submission to the state.
   • NASAA Electronic Filing Depository
3. Pay the Filing Fee: Along with Form D, the $100 filing fee must be paid through the NASAA EFD system. Ensure that the payment is processed promptly to complete the filing requirement.
4. Monitor the Filing Timeline: It is essential to file the notice within 15 days of the first sale of securities to avoid the $50 late fee. Keeping track of this deadline helps maintain compliance and avoid unnecessary penalties.

Importance of Compliance

Adhering to the notification rules and terms for Regulation D offerings is crucial for several reasons:

• Regulatory Compliance: Filing the necessary notices ensures that the offering complies with both federal and state regulations, reducing the risk of legal complications.
• Investor Confidence: Proper filing and compliance demonstrate a commitment to transparency and regulatory adherence, which can enhance investor confidence and trust.
• Avoiding Penalties: Timely filing helps avoid late fees and potential scrutiny from state regulators, ensuring a smoother and more efficient capital-raising process.

In summary, notifying the state about a Regulation D Rule 506(b) or Rule 506(c) offering involves submitting Form D to the West Virginia Securities Commission through the NASAA Electronic Filing Depository and paying a $100 filing fee. It is essential to complete this filing within 15 days of the first sale to avoid a $50 late fee. By following these steps and maintaining compliance with state notification requirements, sponsors can effectively manage their offerings and minimize the risk of regulatory issues.

What are West Virginia’s Blue Sky Laws?

Navigating the complex world of securities regulation can be daunting, particularly when it comes to understanding individual state laws, often referred to as Blue Sky Laws. In West Virginia, these laws play a crucial role in protecting investors and ensuring the integrity of the securities market. This article delves into several key provisions of West Virginia’s Blue Sky Laws, specifically focusing on the registration requirements for securities, broker-dealers, agents, and investment advisers as outlined in West Virginia Code §32-3-301, §32-4-402, and §32-4-405. These regulations mandate stringent compliance standards for anyone wishing to engage in securities transactions within the state, emphasizing the need for proper registration and adherence to regulatory guidelines. By exploring these sections, we aim to provide a comprehensive understanding of how these laws function to maintain transparency, protect investors, and uphold the integrity of West Virginia’s financial markets.

WV ST § 32-3-301 Registration requirement

West Virginia Code §32-3-301 addresses the registration requirements for securities in the state. According to this section, it is unlawful for any person to offer or sell any security in West Virginia unless the security is registered under the West Virginia Uniform Securities Act, the security or transaction is exempted under the Act, or it is a federally covered security. This provision ensures that all securities offered or sold within the state are subject to regulatory scrutiny to protect investors from fraudulent practices. The law mandates that issuers, brokers, and dealers comply with state registration requirements unless they qualify for specific exemptions, reinforcing the importance of transparency and investor protection in the securities market.

WV ST § 32-4-402 Exemptions

West Virginia Code §32-4-402 outlines the regulations for broker-dealers and agents operating within the state. Under this section, it is unlawful for any person to transact business in West Virginia as a broker-dealer or agent unless they are registered with the state or exempt from registration. The law also stipulates that broker-dealers must ensure their agents are properly registered. This provision is designed to maintain the integrity of the securities market by ensuring that only qualified and registered individuals engage in securities transactions. It emphasizes the importance of regulatory compliance to protect investors from unqualified or unscrupulous practitioners, thereby promoting a fair and transparent securities marketplace.

WV ST § 32-4-405 Unlawful representations concerning registration, exemption or notice filing

West Virginia Code §32-4-405 details the requirements and conditions for registration by broker-dealers, agents, investment advisers, and investment adviser representatives. This section mandates that the registrations must be renewed annually and sets forth the procedures for renewal, including fee payments and submission of necessary information. It also provides guidelines for the denial, suspension, or revocation of registration if the applicant or registrant has violated any provisions of the West Virginia Uniform Securities Act or any rule or order issued under it. The law ensures that individuals and entities involved in securities transactions maintain ongoing compliance with regulatory standards, thereby safeguarding the interests of investors and maintaining the integrity of the financial markets.

What are West Virginia’s Securities Laws Exemptions?

West Virginia’s securities laws provide a range of exemptions that facilitate certain types of securities offerings without the need for full registration. These exemptions are designed to streamline the regulatory process for specific entities and types of transactions, making it easier for them to raise capital within the state. Here’s an overview of the key exemptions under West Virginia Code Chapter 32, Article 4, Section 402.

Governmental Entities

• Domestic Governmental Entities: Securities issued by governmental entities within the United States, including federal, state, and municipal governments, are exempt from registration. This ensures that government-related securities can be offered without the burden of state registration.
• Certain Foreign Governments: Securities issued by foreign governments, including Canada, are also exempt, recognizing the stability and regulatory frameworks of these issuers.

Financial Institutions

• Banks and Savings Institutions: Securities issued by banks, savings institutions, trust companies, savings and loan associations, building and loan associations, credit unions, and industrial loan associations are exempt. These financial institutions are subject to rigorous federal and state regulations, which justify the exemption.
• Financial Institution Holding Companies: Securities issued by holding companies of financial institutions also fall under this exemption, reflecting their indirect regulation through their subsidiaries.

Agricultural or Foreign Cooperative Associations

• Cooperative Associations: Securities issued by agricultural or foreign cooperative associations are exempt. These entities, which often operate on a mutual or cooperative basis, are given exemptions to support their operational models and community-oriented purposes.

Other Entities

• Railroads and Common Carriers: Securities issued by railroads and other common carriers are exempt due to their regulation by other federal agencies, such as the Federal Railroad Administration.
• Public Utilities and Holding Companies: Public utilities and their holding companies are also exempt. These entities are typically regulated by state public utility commissions, which provides an additional layer of oversight.
• Insurance Companies: Securities issued by insurance companies are exempt, recognizing the stringent regulatory requirements these companies must meet under state insurance laws.

Listed Stock Exchange Securities

• Stock Exchange Listings: Securities listed on recognized stock exchanges are exempt from state registration. This includes securities listed on major exchanges such as the NYSE and NASDAQ, as these exchanges have comprehensive listing standards and ongoing disclosure requirements.

Non-Profit Organizations

• Non-Profit Persons: Securities issued by non-profit organizations are exempt. This exemption supports the activities of charitable, educational, religious, and other non-profit entities by reducing regulatory burdens.

Commercial Paper and Employee Benefit Plans

• Current Transaction Commercial Paper: Commercial paper, which represents short-term unsecured promissory notes, is exempt if it arises out of a current transaction and is intended for prompt payment.
• Employee Benefit Plans: Securities offered in connection with an employee benefit plan are exempt, facilitating the issuance of stock options, retirement plans, and other employee benefits without additional regulatory hurdles.

West Virginia’s securities laws provide a comprehensive set of exemptions that cater to various entities and transaction types. By understanding and leveraging these exemptions, issuers can efficiently navigate the regulatory landscape, ensuring compliance while minimizing administrative burdens. Whether dealing with governmental entities, financial institutions, cooperatives, or employee benefit plans, these exemptions play a crucial role in facilitating capital formation within the state.

What are West Virginia’s Procedures for Securities Law Exemptions?

Navigating the procedures for obtaining securities law exemptions in West Virginia is crucial for issuers who want to streamline their compliance process. The state provides specific steps and documentation requirements to ensure that exemptions are properly applied and recognized. Here’s a detailed guide to the procedures for securities law exemptions under West Virginia Code Chapter 32.

Initial Determination

1. Identify the Applicable Exemption: The first step is to determine which exemption applies to your offering. West Virginia offers various exemptions for governmental entities, financial institutions, cooperative associations, non-profit organizations, and others, as outlined in West Virginia Code Chapter 32, Article 4, Section 402.
2. Review the Exemption Criteria: Carefully review the criteria for the chosen exemption. Ensure that your offering meets all the necessary conditions to qualify. This may include specific requirements related to the type of entity, nature of the securities, and the manner of offering.

Documentation and Filing

3. Prepare Required Documentation: Gather all necessary documentation to support your exemption claim. This typically includes organizational documents, financial statements, and descriptions of the securities and offering process.
4. Filing a Notice: While certain exemptions may not require a formal filing with the West Virginia Securities Commission, it is often prudent to file a notice to establish a record of the exemption. This helps in demonstrating compliance if questioned by regulators or investors.
   • Form D Filing: For federal exemptions under Regulation D, issuers must file Form D with the SEC. A copy of this filing should be submitted to the West Virginia Securities Commission through the NASAA Electronic Filing Depository (EFD) system.
   • State-Specific Forms: For state-specific exemptions, issuers might need to complete additional forms provided by the West Virginia Securities Commission.
5. Pay Filing Fees: If applicable, ensure that any required filing fees are paid. While many exemptions do not carry a filing fee, some notices, particularly under federal exemptions, might require a nominal fee.

Verification and Compliance

6. Verification of Exemption: The West Virginia Securities Commission may review the submitted documentation to verify that the exemption criteria are met. This process ensures that the offering adheres to state laws and protects investors.
7. Maintain Records: Maintain comprehensive records of all documents submitted, correspondence with the Securities Commission, and evidence of compliance. This documentation will be vital if there are any future inquiries or audits.

Ongoing Compliance

8. Monitor Compliance Requirements: Some exemptions may have ongoing compliance requirements. For instance, periodic filings or updates might be necessary to maintain the exemption status. Ensure that these requirements are monitored and adhered to throughout the duration of the offering.
9. Stay Informed of Changes: Securities laws and regulations can change. Stay informed about any updates to West Virginia’s securities laws that might affect your exemption status. Regularly consult legal counsel or compliance experts to ensure continued adherence to state requirements.

In summary, obtaining and maintaining a securities law exemption in West Virginia involves several key steps: identifying the appropriate exemption, preparing and filing the necessary documentation, paying any applicable fees, and ensuring ongoing compliance. By following these procedures diligently, issuers can effectively leverage available exemptions to facilitate their capital-raising efforts while adhering to state regulations. This structured approach helps minimize regulatory risks and fosters a compliant and transparent securities offering environment.

Frequently Asked Questions

Do I Need a Syndication Attorney from West Virginia to Put Together a Regulation D Rule 506(b) or Rule 506(c) Offering?

When considering a Regulation D offering under Rule 506(b) or Rule 506(c), the necessity of engaging a syndication attorney licensed in West Virginia largely depends on the specific circumstances of your offering. Here’s a detailed analysis to help you determine when you might need a local attorney and when you can work with a lawyer licensed in another state.

Regulation D Offerings

If your offering falls under Regulation D and does not require compliance with West Virginia-specific Blue Sky Laws, you likely do not need a syndication attorney from West Virginia. Regulation D preempts state securities registration requirements, simplifying the legal landscape for interstate offerings. In this scenario, a syndication attorney licensed in any state can typically provide the necessary legal support.

Example 1:

• You are preparing a private placement memorandum (PPM) for a multifamily deal in Charleston, West Virginia.
• The offering will be made to investors in various states.
• You do not require counsel on questions specifically related to West Virginia laws.

In this case, a licensed syndication lawyer from any state can help you put together the PPM, form the necessary entities, and draft the operating agreement. However, they would not be able to provide specific legal advice on West Virginia’s laws or how they might impact your offering.

Intrastate Offerings and Blue Sky Law Exemptions

If your offering is primarily within West Virginia and you plan to utilize one of the state-specific Blue Sky Law exemptions, it becomes crucial to work with a local attorney. This is because state-specific exemptions require a thorough understanding of local regulations and compliance requirements, which an out-of-state attorney may not possess.

Example 2:

• You are preparing a PPM for a development project in Huntington, West Virginia.
• All of your investors are from West Virginia.
• You intend to use one of West Virginia’s Blue Sky Law exemptions as an exception to registration.

In this situation, engaging a syndication attorney licensed in West Virginia is necessary. They can provide the expertise required to navigate state-specific regulations, ensure compliance with local securities laws, and offer tailored legal advice that aligns with West Virginia’s legal landscape.

In summary, whether you need a syndication attorney from West Virginia depends on the nature of your offering:

• Interstate Offerings under Regulation D: If your offering involves investors from multiple states and is governed by Regulation D, a syndication attorney licensed in any state can typically handle your legal needs. They can draft the PPM, form entities, and create operating agreements without needing specific knowledge of West Virginia laws.
• Intrastate Offerings and State-Specific Exemptions: If your offering is focused within West Virginia and relies on state-specific Blue Sky Law exemptions, you will need a local attorney. They will have the necessary knowledge of West Virginia’s securities regulations and can ensure that your offering complies with all relevant state laws.

By understanding these distinctions, you can make informed decisions about legal representation, ensuring that your offering is both compliant and effective in raising the desired capital.

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

When dealing with a real estate syndication in West Virginia, you might consider having your syndication attorney, licensed in another state, review your purchase contract. While they can certainly review the contract and provide some insights, there are important limitations to keep in mind regarding the legal advice they can offer.

Review and General Advice

A syndication attorney licensed outside of West Virginia, such as Tilden Moschetti, Esq., from the Moschetti Syndication Law Group, can look over your purchase contract for a property in Morgantown, West Virginia. Here are some ways they can assist:

• Business Consulting Advice: They can offer advice on general business aspects of the contract. This includes discussing the purchase price, assessing the overall deal structure, and advising on broad deal points such as the timeline until closing. This type of advice focuses on the business implications and strategic considerations of the purchase.
• General Contract Review: They can review the contract to ensure it aligns with common industry practices and standards. They might identify potential areas of concern or suggest typical provisions that should be included in the contract for better clarity and protection.

Legal Advice Limitations

However, there are significant restrictions on the legal advice that an out-of-state attorney can provide regarding West Virginia-specific aspects of the contract:

• State-Specific Legal Terms: An attorney not licensed in West Virginia cannot advise on specific legal terms and conditions of the contract as they pertain to West Virginia law. This includes interpreting West Virginia statutes, regulations, or legal precedents that may impact the contract.
• Compliance with West Virginia Laws: They cannot provide guidance on whether the contract complies with West Virginia real estate laws, zoning regulations, or other local legal requirements. Ensuring compliance with state-specific legal standards is crucial and requires the expertise of a locally licensed attorney.

Best Practices

To ensure you receive comprehensive and compliant legal advice, consider the following best practices:

• Local Legal Counsel: Engage a real estate attorney licensed in West Virginia to review the purchase contract. They can provide detailed legal advice on state-specific terms and ensure that the contract adheres to all relevant local laws and regulations.
• Collaborative Approach: Have your out-of-state syndication attorney work in conjunction with a local West Virginia attorney. This collaborative approach can combine the strategic business insights of your syndication attorney with the localized legal expertise of a West Virginia attorney, providing you with a well-rounded perspective.

While a real estate syndication attorney licensed outside of West Virginia can review your purchase contract and offer general business advice, they are limited in providing state-specific legal advice. For comprehensive legal guidance that ensures compliance with West Virginia laws, it is essential to involve a local attorney. This approach ensures that all aspects of your transaction are legally sound and strategically advantageous.