Blue Sky Filings Made Easy?

One of the reasons that explains why Rule 506 offerings have been so popular as a means of conducting a private placement is because they are exempt from state regulation.  In 1996, the National Securities Markets Improvement Act stated that securities offered under Rule 506 of Regulation D qualify as "covered securities" under Section 18(b)(4) of the Securities Act.  Consequently, securities sold under Rule 506 enjoy a exemption from the registration requirements of state-level securities laws (blue sky laws).

But states can still ask the issuers to make notice filings and pay filing fees with respect to Rule 506 private placements if any of the investors are their residents.  Most states make it easy for the issuers: they ask for a copy of Form D and a fee that typically ranges around $100-$300.  Some states take it a lot further.  I think New York State blue sky compliance requirements merit a separate blog post (to come).

On December 15, 2014, the North American Securities Administrators Association (NASAA) launched an Electronic Filing Depository system, EFD, that allows issuers to submit Form D and applicable fees to different states at once.  It also allows the public to view blue sky filings made by any issuer in any state that participates in the EFD.  Here is NASAA's training video.  The system provides an electronic receipt as proof of compliance and allows issuers to monitor the progress of states' review of the filing and respond to any deficiencies that may arise.  

Of course, when it comes to blue sky compliance, things cannot be made that simple that fast.  First, not all states participate.  As of now, 41 states and territories participate (New York is not one of them).  Some state regulators want filings to be made only through the EFD, other states accept only hard copies, and yet the third group accepts either.  To confirm what the state regulators expect, attorneys can contact the relevant state regulator using this contact information.  Second, some states may ask for additional documentation (such as consent to service of process or a copy of the offering memorandum) that would need to be sent to them separately.  Third, there is a $150 system use fee for each offering.  The fee covers the issuer's initial Form D filing and all amendment and renewal filings made through the EFD for that offering.

Still, as a lawyer who diligently spends hours (if not days) figuring out each state's blue sky requirements for each private placement I work on, I am thankful for the EFD. Even if it is not perfect, and even if there is a fee to use it, it will save time and will actually increase blue sky compliance.   

This article is not a legal advice, and was written for general informational purposes only.  If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga.  Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of business, corporate, securities, and intellectual property law.