In my last postings, I discussed compliance with federal
securities laws and finding an exemption to registration with the Securities
and Exchange Commission when you want to raise money by selling equity in your
company.
In this posting, I'll discuss compliance with state securities laws.
Federal Exemptions
versus State Exemptions to Securities Registration
I want to stress that companies selling equity must ensure
compliance with both federal and state law. While state securities laws mirror federal
securities laws, there are variations in federal and state laws and in the laws
among different states. Just because you
have an exemption at the federal level to registration with the SEC doesn’t
always mean you have an exemption to registration with the state securities
bureau of the relevant state.
In this
series, I have already discussed the Regulation D safe harbors. If you meet all
the requirements of Rule 504, 505, or 506, you are in a “safe harbor” and can
be certain your offering qualifies as private under federal law. If you rely on Rule 506, you do not need to
find any additional state exemptions. That is because Rule 506 preempts state law meaning that all the states
must accept Rule 506 as your exemption to state securities registration.
However, even when relying on Rule 506 for your federal exemption, most states
still require you to file a copy of the Form D notice filing (and pay the
corresponding notice filing fee).
Regulation
D, Rule 504 and Regulation D, Rule 505 do not preempt state law. Hence, if you rely on either of these rules
at the federal level, you must find a compatible exemption in the securities
laws of each of the states in which you are selling equity.
State Limited
Offering Exemptions
Frequently,
you find these exemptions in the state’s limited offering exemption. Classifying an exemption as limited is
another way of saying that the exemption is private and not offered to a large
number of people. In addition to capping
the number of purchasers or offerees, reliance on most state limited offering
exemptions carries other conditions. Conditions
for the state limited offering exemptions are often parallel to those of Regulation
D. Requirements for reliance on a
state’s limited offering exemption generally include the following:
- No
commission or remuneration can be paid in connection with the offering to
anyone except a dealer who is licensed in the applicable state.
- You
may not use general solicitation or advertising to find investors.
- Each
purchaser must be purchasing shares for his/her own account and not for resale.
- The
issuing company must have a pre-existing relationship with each of the
purchasers.
Examples of Specific Exemptions to State Securities
Registration
The exact conditions for the limited offering exemption and
other securities exemptions vary by state, sometimes significantly. For example, here are exemptions to
securities registration on which one might rely if selling equity to investors
residing in the District of Columbia or Pennsylvania.
Pennsylvania. Section
203(d) of the Pennsylvania Securities Act provides an exemption for offerings
with no more than twenty-five purchasers in Pennsylvania. The exemption requires a
notice filing PRIOR to the first sale in Pennsylvania. The notice filing fee is $150 if the amount of the offering in Pennsylvania is less
than $1,000,000; $400 if the amount is more than $1,000,000.
District of ColumbiaRule. Rule 1943 from the District of Columbia Department of Insurance and Securities Regulation offers an exemption to securities
registration for offerings in which offers are made to no more than ten
residents of the District of Columbia during any twelve consecutive months. A
notice filing is required PRIOR to
making any offers to DC residents. The
notice filing fee is $100.
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