Archive for the ‘Blue Sky Laws and State Securities’ Category

Securities and Rule 144A

July 10th, 2014 By Virtual Paralegal Services

144A is a SEC rule that allows (within specified circumstances) qualified institutional investors to trade unregistered securities on the NASDAQ Portal Market for investment purposes – but not for resale to the general public. The purpose of 144A is to enable a more efficient and liquid resale market for unregistered securities. This makes it easier for:

  • Private companies to raise money in US capital markets
  • Institutional investors to trade restricted non-registered securities

While section 5 of the Securities Act of 1933 requires all offers and security sales to be registered, it allows for exemptions. The US Securities and Exchange Commission states that Rule 144A provides the exemption, permitting the resale of restricted securities (securities acquired in unregistered, private sales from the issuing company or from an affiliate of the issuer) if specified conditions are met, including:

  • Holding period: the issuer must have held the securities for one year – if the issuing company was subject to the reporting requirements of the 1934 Act, the required holding period is reduced to six months.
  • Current Public Information: The issuing company must provide the public with sufficient information regarding the nature of the business. They must also provide a complete list of all officers and directors and an up-to-date financial statement.
  • Trading Volume Formula: the amount of equity securities which can be sold in a given 3-month period are bound by the 1% measurement guideline.
  • Ordinary brokerage transactions:

 – Affiliates must conduct sales as routine trading transactions
 – Brokers and sellers may not solicit orders to purchase securities
 – Brokers are limited to standard commission

  • Filing Proposed Sale Notice with the SEC: A notice must be filed using Form 144

 – For sales of 5,000+ shares to totaling $50,000+ w/in a three-month period
 – Securities must be sold within three months of filing the notice
 – If sales are not completed, an amendment notice must be filed

  • The legend has been removed:

 – Only transfer agents can remove legends
 – Transfer agent must obtain the issuer’s consent
 – If a dispute over the removal of a legend arises, said dispute is covered by state law, rather than federal

Rule 144A also allows for general solicitation and reduced publicity restrictions, freeing the issuer from compliance with rule 135c under the securities act. The new rule permits offering participants to communicate with prospective investors in Rule 144A offerings with no limit as to the method of communication or the number or type of investors (QIBs or non-QIBs) contacted using the following methods:

  • Mass emails
  • Advertisements
  • Cold calls
  • Articles, Interviews, and other communications

All of the above can be distributed via printed materials, television and radio broadcasts, or online. They, however, remain subject to anti-fraud provisions under federal security laws. In addition, there must be reasonable evidence that all sales are made to qualified institutional buyers.

Virtual Paralegal Services provides senior securities paralegal support to law firms and businesses across the United States. Contact us to learn how we can assist you.

Bookmark and Share

Blue Sky and the Prospectus

June 26th, 2014 By Virtual Paralegal Services

The registration of securities under the Securities Act of 1933 was designed to provide potential investors with full and fair disclosure of all material information relating to the issuance of securities, including such information as the principal purposes for which the offering’s proceeds will be used. Individual states have also enacted “blue sky” laws to protect investors against securities fraud by requiring sellers to register the securities they are offering and to provide financial details.

Unless exempt, a registration for all public offerings, which is signed by the issuers executive officers, financial and accounting officers, and a majority of its board of directors, is submitted in triplicate to the SEC along with the required filing fee and a prospectus.

A legitimate prospectus will have the SEC’s no approval clause on the front page, which indicates that the SEC does not give an opinion of the security’s merit or promises the adequacy of the information in the prospectus. The role of the SEC is simply to protect against misleading information and to assure the registration of a new issue is completed.

The prospectus does not offer investment advice; it does not indicate that the SEC approved the issue or verified the information. It simply means the company has filed all the paperwork needed to go ahead with the issue. The prospectus contains the following required information.

• Name under which the issuer is doing business
• State or sovereign nation under which the issuer is organized
• Statement of purpose of the issuer’s business; its general nature
• Copies of the articles of incorporation
• Copy of underwriting agreement, including the underwriter’s commissions and discounts
• The location of the headquarters plus the names and addresses of:
o All directors
o The chief executive, financial and accounting officers
o The underwriters
o All persons owning 10% or more of the company

Financial information:
• A statement of the issuer’s capitalization, including the authorized and outstanding amount of stock
• Specific amount of shares held by the senior officers, directors and underwriters
• Estimated proceeds from offering the securities and its proposed use
• The public offering price of the security – if not established, then the method which will be used to determine the price
• Financial statements, including earning statements from the past three years
• The balance sheet as of a date not more than 90 days prior to the date of the registration statement filing
• An income statement showing profits or loss
A twenty-day cooling-off period follows the SEC’s reception of the registration statement. During this time, the issuer may send prospective investors a preliminary prospectus, known as a red herring. (A copy of the red herring must be included in the information sent to the SEC.) It is wise to note, however, that the purpose of the red herring is simply to give the issuer of the new securities an indication of interest from the potential investors. While it presents the essential facts of the new issue and may even include an expected price range, it contains neither the actual price nor the effective date. No sales are legal before the effective date and only the preliminary/red herring prospectus may be sent to prospective investors.

Contact Virtual Paralegal Services for assistance with writing your prospectus.

Bookmark and Share

Securities and Blue Sky

May 14th, 2014 By Virtual Paralegal Services

While the SEC directly, and through its oversight of the NASD and the various Exchanges, is the main enforcer of the nation`s securities laws, each individual state has its own securities laws and rules known as “Blue Sky Laws.” These regulate the offer and sale of securities and the registration and reporting requirements for broker-dealers, individual stockbrokers, and investment advisers doing business or offering services in the state. Blue Sky Laws are designed to stop fraudulent exploitations. Each state has a regulatory agency, which administers the law, typically known as the state Securities Commissioner. A list of state securities commissioners, and their addresses, is available in our Guide to State Securities Regulators.

Recently, federal legislation, designed to eliminate the duplicative nature of the federal and state securities laws, was enacted. This has limited the ability of the states to review, limit, or otherwise restrict the sale of most securities, particularly offerings that are offered on a national basis. There are notices and filing requirements in each state, however, which must be complied with and the legislation did not affect the ability of the state regulators to conduct investigations and respond to fraudulent actions.

Registration of Securities Transactions

With few exceptions, before a security is offered or sold in a state, there must be (unless exempt) a registration covering:
• the transaction
• the brokerage firm
• the stock broker
• issuers selling their own securities

Though most states securities laws are modeled after the Uniform Securities Act of 1956 (“USA”), Blue Sky statutes vary widely and there is very little uniformity among state securities laws. Even when using identical statutory language or regulations covering particular activities or conduct, interpretation may differ dramatically from state to state. However, state Securities Commission staff is available to assist in answering questions regarding particular statutory provisions or regulations.

Fortunately, many types of securities, and many transactions in securities, are exempt from state securities registration requirements. For example, many states provide for transactional exemptions for Regulation D private offerings, provided there is full compliance with SEC Rules 501-503. However, through certain types of offerings or transactions may not require registration, many states require filings or place additional conditions on exemptions available for many different offerings.


To complicate matters further, The National Securities Markets Improvement Act of 1996 (“NSMIA”) was enacted in October 1996 in response to the states’ failure to uniformly regulate certain types of national securities offerings. Among other changes, NSMIA created a class of securities – referred to as “covered securities” – the offer and sale of which (through licensed broker-dealers) are no longer subject to state securities law registration requirements. NSMIA only preempts state securities registration requirements, however, and preserves the right of the states to investigate and prosecute fraud. Therefore, although covered securities are no longer subject to substantive state review, blue-sky action with respect to offerings of covered securities is still necessary.

Brokers, Dealers and Agents

Blue Sky laws regarding broker-dealer and agent (stockbroker) registration are equally convoluted, with each state having different requirements. Though many states have permit the registration filings for broker-dealers and agents to be made through the National Association of Securities Dealer’s Central Registry Depository system (CRD), and utilize the examinations conducted by the NASD for testing purposes, they follow their own particular regulatory procedures for registering broker-dealer firms. Some states require certified or audited financials, (which are not required by the NASD) and nearly every state requires a stockbroker to take and pass the NASD Series 63 exam. In addition, some states have failed to comply fully with federal rulings. For example, NY has used The Martin Act to wage its war against Wall Street, refusing to regulate private offerings.


The myriad of state regulations continues to plague the securities industry, causing untold delays and inadvertent violations by even the most careful brokerage firm. For registered representatives, even a simple matter like changing brokerage firms can result in a loss of business, for the transfer of the registration from one broker-dealer to the next can take days or weeks.

Blue Sky laws are a complicated web of regulations, from 50 different jurisdictions. (in addition to the complex series of SEC rules and regulations, and regulations from the NASD and the various securities exchanges.) It is crucial then, to obtain legal review of a state’s statutes and regulations be reviewed before embarking upon any securities sales activities to determine what is permitted, or not permitted, in that particular state. Experienced Blue Sky counsel should be retained to review the applicable state blue-sky laws and take any action necessary to permit the offering.

Contact Virtual Paralegal Services for help navigating through the various rules and regulations.

Bookmark and Share