The Devil is in the Details Part 9: Blue Sky Filings – New York State Rule Changes

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On December 1, 2020, New York Attorney General Letitia James announced updates to the New York state securities laws. Among them are changes to the state’s blue sky filings requirements, which will be of particular interest to funds that rely on Rule 506 under the Securities Act of 1933, the most commonly relied upon exemption for hedge and private equity funds. The new rules are effective as of December 2, 2020.

Prior to these rule changes, New York required issuers to file a state-specific “Form 99,” along with copies of the Form D and Consent to Service of Process, with the Investor Protection Bureau of the Attorney General’s office before selling its securities to New York investors. Many issuers took the position that New York’s Form 99 requirement conflicted with federal law (which requires issuers to file a Form D within 15 days of first sale in a state) and was thus preempted. Additionally, some issuers relying on Rule 506 took the position that the “Martin Act” (i.e., New York Securities Law) only covered the offering of securities “to the public” and since Rule 506 offerings are private, a notice filing was not required.

With these changes, the New York Securities Law is now in line with federal requirements. Namely, Form 99 is no longer required and Form D filings are mandatory, thus confirming the argument of preemption is no longer available. Issuers are required to submit their Form D and consent to service of process to New York within 15 days following the first sale of securities. In an additional change, filings should be made via the North American Association of Securities Administrators (NASAA) Electronic Filing Depository (EFD). The state’s filing fees remain the same, but can now be paid electronically, rather than via certified check.

Issuers who previously relied on the preemption argument will bear the brunt of these changes. As of the date of this blog’s publication, New York has not indicated whether or not they intend to assess late fees for those that did not blue sky file with the state in reliance on that interpretation. However, issuers in this boat should plan to file a Form D in New York going forward. On the filing, issuers should indicate the actual date of first sale to an investor in New York, not the most recent date a New York resident invested in the issuer’s offering.

Photo Credit: Photo by Carmine Savarese on Unsplash

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