Interactive Survey of State Blue Sky Filing Requirements Facilitates Rule 506, Regulation A+ Securities ComplianceMarch 4, 2021 – Alerts
In the throes of the Great Depression, Congress passed the Securities Act of 1933, requiring every interstate offer or sale of securities to be registered with the newly created United States Securities and Exchange Commission (SEC). However, Congress exempted certain transactions from the registration requirements under Section 4 of the act. This exemption resulted in various states creating their own filing requirements regarding securities offerings. These filing requirements are sometimes referred to as “Blue Sky” Filings. To collect all the states’ disparate requirements in one place, we have produced an interactive 50-State Survey of State Blue Sky Filing Requirements.
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Section 4(a)(2) of the Securities Act exempts from registration transactions that are offered by a securities issuer and do not involve a public offering. Rule 506 of Regulation D of the Securities Act is considered a “safe harbor” for the private offering exemption of Section 4(a)(2). Companies using the Rule 506 exemption can raise an unlimited amount of money, but the securities offered must be “restricted” from re-sale for at least six months or a year to remain exempt from registration.
Under Rule 506(b), a company knows it is within the Section 4(a)(2) exemption by meeting certain requirements, such as:
- The company cannot use general solicitation or advertising to market the securities;
- The company may sell its securities to an unlimited number of “accredited investors” (with a specified income or net worth) and up to 35 other purchasers. All non-accredited investors, either alone or with a purchaser representative, must be sophisticated — that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment;
- Companies must decide what information to give to accredited investors, so long as it does not violate the anti-fraud prohibitions of the federal securities laws (i.e. does not contain false or misleading statements). Companies must give non-accredited investors disclosure documents that are generally the same as those used in registered offerings, and if a company provides information to accredited investors, it must make this information available to non-accredited investors as well;
- The company must be available to answer questions by prospective purchasers;
Under Rule 506(c), a company can use general solicitation and advertising to market the securities and still fall within the Section 4(a)(2) registration if:
- The investors in the offering are all accredited investors; and
- The company takes reasonable steps to verify that the investors are accredited investors, which could include reviewing documentation, such as W-2s, tax returns, bank and brokerage statements, credit reports and the like.
While companies using the Rule 506 exemption do not have to register their securities and usually do not have to file reports with the SEC, they must electronically file what is known as a “Form D” after they first sell their securities. Form D is a brief notice that includes the names and addresses of the company’s promoters and executives, and the date of first sale in the offering but contains little other information about the company. Form D notices must be filed online via the SEC’s EDGAR system within 15 days of the first sale of securities in the offering. There is no filing fee.
Regulation A provides a separate exemption from registration for smaller public offerings of up to $20 million over a 12-month period (Tier 1) or up to $50 million over a 12-month period (Tier 2).
Certain basic requirements apply both Tier 1 and Tier 2 offerings, including company eligibility requirements, bad actor disqualification provisions, disclosure and other matters. Tier 2 offerings are subject to additional mandates, such as limits on the amount a non-accredited investor may invest, audited financial statements and the need to file regular reports. Issuers in Tier 2 offerings are not required to register or qualify their offerings with state regulators.
In addition to federal law, each state has its own “Blue Sky” laws. Offerings under Rule 506 are also exempt from state registration; however, every state requires the filing of Form D notices. Issuers must pay special attention to each state’s requirements. Florida and New York, for example, have unique requirements that distinguish them from a scheme that is otherwise broadly uniform across the country.
Every state but Florida requires issuers to file the Form D with its secretary of state or treasury within 15 days of the first sale. Florida does not require filing, but does have certain other disclosure requirements.
The vast majority of states charge Form D filing fees under $500, but such fees can exceed $1,000 in a few states, especially if filed late. Timeliness is critical. A late filing will not only incur penalty fees, but could void the entire exemption (in Nebraska, for example). Many states scale the fee by the size or length in time of the offering, with a cap.
In one fifth of the states, the exemption lasts for one year (four in New York) but can be extended for an additional fee. In all other states, the exemption is perpetual.
States have separate registration requirements for agents of issuers of Regulation A+ Tier 2 offerings.
Fox Rothschild’s Securities Industry Group has published this new 50-state-plus-one survey to help issuers navigate the Blue Sky laws for Rule 506 and Regulation A+ Tier 2 exemptions. We have attorneys across the country ready to guide clients through this important but often overlooked process.
If you are interested in receiving access to the survey, or have questions about Blue Sky Laws, please contact Ernest Badway at [email protected].