Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

As many know, on September 23, 2013, issuers will be able to make general solicitations, or advertising, when selling securities under Rule 506 of Regulation D.  While we look forward to working with issuers on these offering, we caution issuers to consider state blue sky laws when planning for these offerings.

States, like the federal government, can regulate the offer and sale of securities in their states. It’s good news that years ago Congress passed a law called the ‘‘National Securities Markets Improvement Act of 1996” which basically preempts a state’s ability to separately regulate a Rule 506 offering.  However, states can still impose notice filings and fee requirements in connection with Rule 506 offerings.

For instance, in Minnesota, the state requires the following notice filing under Rule 2876.3020 in connection with a Rule 506 offering:

  • a copy of Form D as promulgated by the Securities and Exchange Commission;
  • a report of the aggregate value of securities included in this offering already sold or offered to be sold to persons located in this state;
  • a consent to service of process complying with Minnesota Statutes, section 80A.88, signed by the issuer not later than 15 days after the first sale of the federal covered security in Minnesota; and
  • a filing fee, which can be as high as $300.

Minnesota has other exemptions that might be applicable, but many prohibit the use of general solicitation, such as Section 80A.46(14).  Others, such as Section 80A.46(13), permit sales to accredited investors without filings, but do not appear to permit offers made to non-accredited investors under a general solicitation.

Failure to comply with the statute can result in a rescission action by purchasers, which means the investors can get their money back, and other adverse consequences.

As a result, issuers need to carefully plan any offering which uses general solicitation to consider filings under state blue sky laws.  One consequence of using general solicitation will be the payment of filing fees and a carefully coordinated filing process. 

For more information, see JOBS Act and Other Securities Law Essentials for Growing Companies.

Check frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.