The average person thinks of "blue sky" and pictures a clear spring day, the type that would be perfect for a picnic. To a corporate paralegal, however, the term "blue sky" could make one cringe and run for cover, and it’s not because we hate cloudless, sunshiny days. Blue sky takes on a whole new meaning for paralegals whose job it is to research the state securities law filing requirements for each of the 50 states, all in connection with the filing of a single offering of securities by a corporation, partnership or limited liability company.
The protection of purchasers is the fundamental purpose of state blue sky securities laws and the main reason corporate and securities paralegals work on blue sky filings in various states. Each state has a regulatory agency that administers the law, typically known as the state securities commissioner. With few exceptions, every offer or sale of a security must, before it is offered or sold in a state, be registered or exempt from registration under the securities, or blue sky laws, of the state(s) in which the security is offered and sold. State securities laws are commonly known as blue sky laws because of an early judicial opinion, Hall v. Geiger-Jones, 242 U.S. 539, 372 S. Ct. 217, 61 L. Ed. 480 (1917), that described the purpose of the laws as preventing "speculative schemes which have no more basis than so many feet of blue sky."
In 1956, the Uniform Law Commission approved the first Uniform Securities Act (USA). A total of 37 states adopted the uniform law. The commissioners approved a second version of the act in 1985, but only six states adopted the revised version. A third version was approved in 2002. Changes in the 2002 act include a simplified process for registering securities; including electronic filing of documents and the movement toward a more technologically effective system of capital formation and securities regulation; new penalties for violations of the act; and several other changes.
Although most blue sky laws are modeled after the act, blue sky statutes vary widely and there is very little uniformity among state securities laws. Therefore, it is vital that each state’s statutes and regulations be reviewed carefully before embarking upon any securities sales activities in a state to determine what is permitted, or not permitted, in a particular state.
Now you can begin to understand why paralegals have horrified looks on their faces when blue sky is mentioned. The preparation of multiple documents for each state can be daunting depending on the number of states involved. The paralegal has to deal with a registration statement that is constantly changing due to drafting. He or she also has to find the proper citation for each state, calculate the filing fees, coordinate with the firm’s client for execution of documents to be filed, prepare and deliver the checks, and file the documents in each state, which includes following up with each state securities administrator and possible supplemental filings.
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 Rules 501-508 of the Securities Act of 1933. However, though 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 for which exemptions are available.
Assume you cannot find an exemption from registration and need to register in the various states where the securities are being offered and sold. While the attorney drafts the registration statement that is filed on the federal level with the U.S. Securities and Exchange Commission, the paralegal needs to determine what documents need to be filed on the state level for each state where the securities will be offered and sold. Most of the states require a Form U-1, Uniform Application to Register Securities; a Form U-2, Uniform Consent to Service of Process; a Form U-2A, Uniform Corporate Resolution; a copy of the registration statement filed with the SEC; and a filing fee.
The Form U-1 is the state form that gives a synopsis of the registration statement filed on the federal level with the SEC. The only difference is that the Form U-1 is state-specific, while the registration statement focuses on the aggregate offering of securities. A couple of different things you need to provide on the Form U-1 are the citation of the statute that you will use to register in the state where the Form U-1 is being filed and a breakdown of how many securities are being offered and sold in that specific state.
The Form U-2 is the state form that provides the contact information for an officer at the corporation whose securities are being offered. This officer will be sent all notices, lawsuits, etc. that the state securities administrator receives regarding the offering in the specific state. Some states require the Form U-2A to provide backup that the corporation’s board of directors approved the securities offering.
Once these documents are drafted, an attorney should review them for accuracy and completeness. These forms and other state forms can be retrieved from the North American Securities Administrators Association website (www.nasaa.org). The filing fees for each state vary greatly and usually the calculation fee is based on the amount of securities being offered and sold in that specific state versus a flat fee.
A registration statement is automatically effective 20 days after filing, and the issuer may then sell the registered securities to the public. However, if a statement on its face appears incomplete or inaccurate, the SEC may refuse to allow the statement to become effective. Although the SEC rarely exercises these powers, it does not simply give cursory approval to registration statements. The agency frequently issues "letters of comment," also known as "deficiency letters," after reviewing registration documents. The SEC uses this method to require or suggest changes or request additional information.
Shortly after the registration statement is filed initially with the SEC on the federal level, the Form U-1, Form U-2, Form U-2A (if required) and filing fee must be filed in each state based on where the purchasers reside. This task should be performed as soon as the registration statement is filed with the SEC because the state securities administrators may provide additional comments and changes to the registration statement filed with the SEC on the federal level.
With respect to private offerings complying with Rule 506 of Regulation D under the 1933 act, the states can and do require a notice filing versus a registration filing that also is made with the SEC via a Form D, Notice of Exempt Offering of Securities, and a Form U-2. Like the Form U-1, the Form D is a synopsis of the offering. It is a notice filing advising the SEC and the appropriate states of an offer and sale that is limited in the number of purchasers. However, unlike the Form U-1 that is filed only on the state level, the Form D is filed with the SEC as well as each state. One of the requirements for the Form D is that it must be filed with the SEC 15 days after the first sale is made, and it is to be filed in the specific state 15 days after the first sale is made in that specific state. The Form U-2 is only filed on the state level, not the federal level.
As you can see, state blue sky securities laws are not as simple as just filling out a form. A paralegal working in the securities field needs to be able to recognize and understand the issues, research the complexities involved, obtain all relevant factual information and accurately and completely prepare and file the requisite filings within a short period of time. Securities laws can be complicated and confusing, but a paralegal who is able to become a master at this specialty can be a real asset to an attorney with this aspect of corporate law. •
Vivian Luckiewicz is a corporate paralegal with over 20 years of experience in the field. She is also first vice president of The Philadelphia Association of Paralegals.