Assure Transition; A guide to moving forward.
Learn more

Do I Need to File Blue Sky Notice Filings?

Monday, September 11, 2023
Written by Venture360 - Finance Team
All Things SPV
Do I Need to File Blue Sky Notice Filings?

Every fund organizer should inquire whether their investment fund necessitates adherence to state Blue Sky notice filings. In a nutshell, the answer is yes. But why? Because almost all investment fund offerings fall under the classification of a "security" concerning federal and state disclosure and notification obligations.

For investment fund organizers, among other considerations, one of the key factors to ponder is whether their investment fund's offering aligns with federal and state securities rules and regulations, particularly in regard to federal Form D filing and state Blue Sky notice filings.

What Exactly Is a Security?

Many investment fund offerings qualify as a "security" based on the underlying structure of the offering and sales, constituting an "investment contract." An investment contract is formed when an individual: (1) invests money, (2) in a common enterprise, (3) with the expectation of profit primarily derived from the entrepreneurial endeavors of others.

Applying this criterion, most investment fund offerings are considered investment contracts because each fund investor acquires an interest (typically an LLC membership interest) in the fund. The fund, in turn, aggregates all the investors' funds to acquire an equity interest (e.g., stock, convertible note, membership interest) in an operational company, investment fund, or another security interest. Moreover, fund investors are typically passive, relying exclusively on the organizer's investment guidance and managerial efforts for anticipated returns.

Once the organizer establishes that the fund offering qualifies as a security, the next step is to adhere to relevant federal and state laws. Under federal law, all securities offerings and sales must either (1) be registered with the Securities and Exchange Commission ("SEC") or (2) claim an exemption from registration. Investment funds often rely on the exemption from SEC registration provided by Rule 506 of Regulation D. For an investment fund using Rule 506, filing Form D with the SEC and complying with pertinent state securities notice filing requirements are mandatory steps. Blue Sky notice filings are an integral component of securing an exemption from registration under both federal and state law.

Blue Sky Notice Filings

Before the enactment of the National Securities Market Improvements Act of 1996 ("NSMIA"), every issuer of securities had to adhere to both federal and individual state laws regarding the disclosure and qualification of securities offerings.

Following the passage of NSMIA, the Blue Sky laws of each state were precluded for investment funds with a "national character" (i.e., funds that pool investors from multiple states). A fund's securities offering is not obligated to conform to the individual Blue Sky laws of each state, except for fee and notice filing requirements, as these offerings are considered "covered securities" under NSMIA. An organizer's fund offering qualifies as a covered security because it is executed in accordance with an available registration exemption, often Rule 506 of Regulation D.

Consequently, organizers conducting a Rule 506 offering must submit federal Form D and comply with relevant state fee and notice filing requisites. Noncompliance with federal and state securities laws may lead to civil or criminal penalties, including contract rescission, enforcement actions, or prosecution for fraudulent activities. Venture360 stands out as a provider of innovative technological and administrative services, ensuring that an organizer's fund meets these obligations.