Blue Sky Notice Filings: Do I Need to File?

2 min read

Sep 27, 2022 9:52:48 AM | Assure

Blog_001The question every fund organizer should ask is whether their investment fund must comply with state Blue Sky notice filings. The short answer, is yes. Why? Because almost all investment fund offerings meet the definition of a “security” for purposes of federal and state disclosure and notice requirements.

Among other filings, one of the fundamental considerations for investment fund organizers is whether their investment fund’s offering complies with federal and state securities rules and regulations, particularly with respect to federal Form D filing and state Blue Sky notice filings.

What is a Security?

Security-01Most investment fund offerings qualify as a “security” on the basis that the underlying offering and sale structure constitutes an “investment contract.” An investment contract comes into existence when a person (1) invests money, (2) in a common enterprise, (3) whereby the investor’s reasonable expectation of profit is based solely on the entrepreneurial efforts of others.

Applying this standard, most investment fund offerings are investment contracts because each investor in the fund purchases an interest (typically, an LLC membership interest) in the fund, which in turn itself pools all investor’s funds to purchase an equity interest (i.e. stock, convertible note, membership interest) in an operating company, investment fund, or other security interest. Additionally, fund investors are usually passive and rely exclusively on the investment advice and management efforts of the organizer for an expected return on investment.

Once the organizer determines the fund offering is a security, the next step is to comply with applicable federal and state law. Under federal law, all offerings and sales of securities are required to be (1) registered with the Securities and Exchange Commission (“SEC”) or (2) claim an exemption from registration. An investment fund often relies on the exemption from SEC registration provided by Rule 506 of Regulation D. An investment fund that relies on Rule 506 must file Form D with the SEC and comply with applicable state securities notice filing requirements. Blue Sky notice filings are an integral part of claiming an exemption from registration under federal and state law (for a more detailed analysis and historical review of investment contracts and blue sky regulation see here).

Blue Sky Notice Filings

BlueSky-01Prior to the passage of the National Securities Market Improvements Act of 1996 (“NSMIA”), every issuer of securities was required to comply with both federal and individual state laws with respect to disclosure and qualification of securities offerings.

After the passage of the NSMIA, each state’s Blue Sky laws were preempted for investment funds that have a “national character” (i.e. funds that pool investors from multiple states). A fund’s securities offering is not required to comply with each state’s individual Blue Sky laws except the fee and notice filing requirements because they are “covered securities” under NSMIA. An organizer’s fund offering qualifies as a covered security on the basis that the offering is conducted pursuant to an available registration exemption, often Rule 506 of Regulation D.

As a result, organizers conducting a Rule 506 offering must file federal Form D and comply with applicable state fee and notice filing requirements. Failure to comply with federal and state securities laws may result in civil or criminal penalties including contract recission, enforcement actions, or anti-fraud prosecution. Assure is uniquely situated to provide innovative technological and administrative services to ensure an organizer’s fund meets these requirements.

Glassboard Blue Sky Calculator

GAAP-01Assure’s private equity transaction platform Glassboard provides a state-of-the-art Blue Sky fee calculator that takes into account each states fee schedule and requirements. Glassboard allows organizers to estimate their investment fund’s notice filing expense requirements and ensures that each is accounted for as part of fulfilling the fund’s regulatory obligations.