Do Blue Sky Laws Apply to Regulation A Resales and Secondary Trading?

A sometimes overlooked aspect of Regulation A+ is the impact of state blue sky laws on liquidity and resales also known as secondary sales. State blue sky laws are applicable to resales by purchasers in Regulation A Offerings and vary from state to state. From a practical perspective, a company raising capital should consider liquidity for investors and the rules that apply to secondary trading.

The trading of securities of issuers listed on National Securities Exchanges like the NASDAQ Stock Market and the New York Stock Exchange (“NYSE”) are exempt from State blue sky laws that govern secondary trading; however, companies on the OTC Markets must comply with state blue sky laws for both their Regulation A+ offering and resales by the purchasers in the offering.

Tier 1 v Tier 2 – Regulation A State Blue Sky Compliance

Regulation A+ includes two offering tiers, each with different characteristics and requirements. Each Regulation A+ tier is treated differently under State blue sky laws.

Tier 1 of Regulation A+ provides an exemption for securities offerings of up to $20 million in a 12-month period, while Tier 2  provides an exemption for securities offerings of up to $50 million in a 12-month period. It should be noted that an issuer offering $20 million or less of securities can elect to proceed under either Tier 1 or  Tier 2 of Regulation A+.

Issuers conducting Regulation A+ Tier 1 offerings must comply with the specific rules and regulations of each state where the Company plans to offer and sell securities. Companies may use the North American Securities Administrators Association (“NASAA”)  review program for Regulation A+ Tier 1 offerings. Under the NASAA coordinated review program, Tier 1 issuers may email their Regulation A offering materials to the administrator of the review program. Upon approval, the Tier 1 offering will be compliant with the state blue sky laws in the states that participate in the program.

Securities offered under Regulation A+ Tier 2 are “covered securities” under the National Securities Markets Improvement Act of 1996  (“NSMIA”) and are exempt from state registration and qualification requirements. In Regulation A Tier 2 A offerings, individual states may only require the issuer to provide a copy of the Form D filed with the Securities and Exchange Commission and pay filing fees

Affiliate v Non-Affiliate Resales in Regulation A+ Offerings

Resales by affiliates and non-affiliates in Regulation A offerings are treated differently. Secondary sales made by affiliates of the issuer cannot be more than 30% of the total dollar amount of the Regulation A+ offering being qualified. After the expiration of the first year, secondary sales by non-affiliates are permitted up to the maximum offering amount allowed by either Tier 1 or Tier 2 of Regulation A+.

Secondary Trading in Regulation A+ Offerings

Even though an issuer may be in compliance with State blue sky requirements applicable to its Regulation A+ Offering, the issuer must comply with state laws that regulate secondary trading so that the purchasers in Regulation A+ offerings can resell their shares should they desire to do so.  State blue sky compliance becomes more complicated for issuers conducting both Tier 1 and Tier 2 offerings after securities are issued and shareholders seek to sell of their shares.

Manual Exemption for Resales

Currently, 38 states recognize the Manual Exemption for secondary trading of securities sold in Regulation A+ Offerings. To avail oneself to the exemption, the issuer and the security must be listed in a securities manual recognized by the specific state. The securities manual must include: the names of the issuer and its officers and directors, the issuer’s balance sheet; and a profit and loss statement for either the fiscal year preceding the balance sheet or for the most recent fiscal year of operations.

Unsolicited Brokerage Transactions

Purchasers in Regulation A+ Offerings may also rely on the exemption for unsolicited brokerage transactions which exempts a non-issuer transaction by or through a broker-dealer effecting an unsolicited order or offer to purchase a security.  The Unsolicited Brokerage Transaction exemption is not available for an unsolicited transaction by or through the issuer directly.

Issuers conducting Regulation A Offerings should consider the following factors impacting liquidity and resales:

• Secondary sales in Tier 1 Regulation A Offerings are limited to $6 million in a 1 month period.
• Secondary sales in a Tier 2 Regulation A Offering, at the time of the Regulation A offering and 12 months thereafter cannot exceed 30 percent of the aggregate offering price of the offering.
• The shares sold in a Regulation A + Offering are freely tradable by non-affiliates upon qualification by the SEC.
• The issuer’s sponsoring market maker may immediately file a Form 211 with the Financial Industry Regulatory Authority (“FINRA”) to initiate quotation of the issuer’s shares upon qualification by the SEC of the Regulation A+ offering.
• OTC MarketsOTCQX and OTCQB eligibility are dependent on the Form 211
• Upon clearance of the Form 211by FINRA, the sponsoring market maker will quote the issuer’s shares for first 30 days.
• State blue sky laws relating to secondary trading are applicable to secondary trading of securities sold in Regulation A Offerings & issuers should ensure an exemption is available.

This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates Law Group, P.A provides ongoing corporate and securities counsel to private companies and public companies listed and publicly traded on the Frankfurt Stock Exchange, London Stock Exchange, NASDAQ Stock Market, the NYSE MKT and OTC Markets. For two decades the Firm has served private and public companies and other market participants in SEC reporting requirements, corporate law matters, securities law and going public matters. The firm’s practice areas include, but are not limited to, forensic law and investigations, SEC investigations and SEC defense, corporate law matters, compliance with the Securities Act of 1933 securities offer and sale and registration statement requirements, including Regulation A/ Regulation A+ , private placement offerings under Regulation D including Rule 504 and Rule 506 and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, Form F-1, Form S-8 and Form S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including Form 8-A and Form 10 registration statements, reporting on Forms 10-Q, Form 10-K and Form 8-K, Form 6-K and SEC Schedule 14C Information and SEC Schedule 14A Proxy Statements; Regulation A / Regulation A+ offerings; all forms of going public transactions; mergers and acquisitions; applications to and compliance with the corporate governance requirements of national securities exchanges including NASDAQ and NYSE MKT and foreign listings; crowdfunding; corporate; and general contract and business transactions. The firm provides preparation of corporate documents and other transaction documents such as share purchase and exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The firm prepares the necessary documentation and assists in completing the requirements of federal and state securities laws such as FINRA and DTC for Rule 15c2-11 / Form 211 trading applications, corporate name changes, reverse and forward splits, changes of domicile and other transactions. The firm represents clients in London, Dubai, India, Germany, India, France, Israel, Canada and throughout the U.S.