The Devil is in the Details Part 8: Blue Sky Filings – Picking Your State

Hardin Compliance Consulting LLC

When making a private fund offering, many private fund managers know they have to file a Form D with the SEC to avoid registering their securities under Regulation D. However, state-specific blue-sky filing requirements also apply and are not so straightforward.

Each state has its own set of securities laws, referred to as “blue sky laws,” to protect residents against securities fraud. Although federal law generally pre-empts the ability of states to regulate the offer and sale of most securities, states retain the power to impose notice and filing requirements on offerings within their borders. Most states require that issuers file a Form D, a consent to service of process, and pay a filing fee within 15 days of the first sale in the state. Fund managers need to look at the jurisdiction where the purchaser accepted the offer, to determine which state’s blue sky laws apply.

With an individual, this analysis is simple. The fund manager makes an offer by sending a private placement memorandum to the individual at his or her residence, and the investor accepts by wiring funds to the fund’s bank account. In this situation, the blue-sky laws of the investor’s residence would apply.

But it is not always clear where an investor, like a corporation or trust, receives or accepts an offer. Some fund managers mistakenly assume that the blue sky laws of the entity’s state of incorporation apply. However, state blue sky laws typically view an entity’s principal place of business as where the offer has been accepted. Determining the entity’s principal place of business can be tricky, but is generally the location where officers direct, control, and coordinate the company’s activities. Usually this activity takes place at a company’s headquarters, but not always.

Trusts have proven to be an especially difficult issue for firms in determining which state’s blue sky regulations apply. Oftentimes it depends on the how the trust was initially set up. For example, is the trust revocable or irrevocable? Firms run into trouble when deciding if they should file in the grantor’s state of residence or look through to where the beneficiaries are located. Another complication arises when there is more than one beneficiary to the trust. More than one beneficiary could mean more than one blue sky filing!

The last thing a private fund wants to do is file in the wrong state and realize its mistake after the 15-day filing window has passed. Not filing in the correct state initially could lead to late fees or worse.

Photo Credits: Photo by Carmine Savarese on Unsplash

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Hardin Compliance Consulting LLC

Hardin Compliance Consulting LLC on:

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