• Blue Sky Filing Exemption Tip for the New York Business Raising Capital and Everyone Else
  • December 13, 2012 | Author: Kaiser Wahab
  • Law Firm: Wahab & Medenica LLC - New York Office
  • Tip:  When making blue sky filings, look for the exemption path of least resistance.

    Any business (technology, film, hedge fund) that is raising capital through a regulation D private offering (e.g., an LLC is selling units representing company equity to investors) has to contend with the dreaded “blue sky” filing. Typically these are notifications to the individual states that the offering company is soliciting people in that state for investment.  “Dreaded” because if a company is soliciting investors from ten different states, that can potentially translate into eleven filings (one for each state plus a federal regulation D filing). And with ten state filings, there can also be ten sets of filing fees.

    What’s a business in need of financing to do?  First and foremost, it should consult with its business/corporate/securities attorney to determine if its offering can qualify for an exemption in any given state.  An exemption may allow the offering company to forego any filings, at best, and at worst, may result in a smaller fee and less complicated filing.  So it’s key to find the best exemption in that state for your particular offering.

    What are the bases for exemptions that all ventures should look out for?

    1. Limited number of people (some states allow an exemption if the solicitations or sales in that state are kept below a certain maximum threshold of people)
    2. Accredited investors only (some states allow an exemption if solicitations or sales in that state are only made to accredited investors)
    3. Etc. (nearly every state has its own unique menu of exemptions that require certain criteria to be established.  A breakdown of each one is well beyond the scope of this post).

    Picking the Path of Least Resistance Example:

    A New York based technology firm (TechCo) with a custom software solution for municipal fund managers needs to raise one million dollars. They definitely will have the bulk of their investors in NY.  However, they have ONE investor in PA, who happens to be a family member.

    Ordinarily, if that one investor was not a family member, but an accredited investor only, TechCo may have had to comply with Section 203(d) of the PA securities law, which among other things requires the filing of a form, the submission of a fee, AND a mechanism allowing the accredited investor to rescind (back out of) the investment within 2 days.  That rescission language is a nasty looking block of text along the lines of this:

    FOR PENNSYLVANIA INVESTORS ONLY:  Each person who accepts an offer to purchase securities exempted from registration by Section 203(d), directly from the issuer or affiliate of this issuer, shall  have the right to withdraw his or her acceptance without incurring any liability to the seller, underwriter (if any), or any other person within two (2) business days from the date of receipt by the issuer of his or her written binding contract of purchase or, in the case of a transaction in which there is no binding contract of purchase, within two (2) business days after he/she makes the initial payment for the securities being offered. If you have accepted an offer to purchase these securities made pursuant to a prospectus which contains a notice explaining your right to withdraw your acceptance pursuant to Section 207 (m) of the Pennsylvania Securities Act of 1972 (70 p.S. § 1-207(m)), you may elect, within two (2) business days after the first time you have received this notice and a prospectus to withdraw from your purchase agreement and receive a full refund of all monies paid by you. Your withdrawal will be without any further liability to any person. To accomplish this withdrawal, you need only send a letter or telegram to the issuer (or underwriter if one is listed on the front page of the prospectus) indicating your intention to withdraw.  Such letter or telegram should be sent and postmarked prior to the end of the aforementioned second business day. If you are sending a letter, it is prudent to send it by certified mail, return receipt requested, to ensure that it is received and also evidence the time when it was mailed. Should you make this request orally, you should ask written confirmation that your request has been received.

    However, since we are talking about a family member, TechCo can rely on Pennsylvania’s “self executing” exemption that calls for no fee and no filing.  And that is certainly far more desirable than that above.  Moral of the story:  Find the path of least resistance to fit your offering goals.

    Some states have prepared plain English breakdowns of its own securities rules for businesses raising capital.    Other states, of course, are not so user friendly.