The United States of America: Blue Sky Filings

Mention of a blue sky might evoke thoughts within readers of fast approaching vacations (with hopefully minimal airport pain) or seemingly never-ending school holidays. Blue sky filings though, for non-United States (U.S.) funds wanting to raise assets in the U.S., may trigger an altogether colder response. The purpose of this short article, produced with the kind assistance of Agile Legal, is to:

• remind those already marketing their offshore fund(s) in the U.S. of their responsibilities
• demystify the filings for those hoping to undertake such marketing.

This article does not cover Form PF, the requirements of which are currently (along with a lengthy list of other matters) potentially subject to changes proposed by the Securities and Exchange Commission (“SEC”).

We also do not cover herein Regulation S (“Reg S”), which concerns offers and sales of securities outside of the U.S.

The requirements

The tag “blue sky filing” derives from the U.S. state securities laws, which can require registration with the SEC. Those advising offshore funds offered in the U.S (but where the manager is based outside of the U.S.) continue to rely on Regulation D (“Reg D”) to avoid such registration with the SEC under the Securities Act of 1933. Reg D offers two exemptions from registration.

• Rule 506(b) of Reg D provides a safe harbour/harbor from registration for securities offerings that do not involve any form of general marketing or solicitation, and may be sold to (i) an unlimited number of “accredited investors” and (ii) up to 35 non-accredited investors.  Issuers conducting an offering pursuant to Rule 506(b) can raise an unlimited amount of money.  Non-accredited investors must be provided offering materials and financial statements, among other things.
• Rule 506(c) of Reg D permits advertising and general solicitation in an offering as long as the investors in the offering are all accredited investors.  Issuers are required to take “reasonable steps” to verify that all investors are accredited.

While Rule 506 of Reg D offerings are exempt from registration under blue sky laws, states can still require issuers (e.g., offshore funds offered to U.S. investors) to file a Form D and pay a filing fee. Reliance on such an exemption requires filing a Form D with the SEC within 15 days of the first sale (or before the first sale in some U.S. states). The filing is made via the Electronic Data Gathering, Analysis and Retrieval (EDGAR) system.  Blue sky compliance in all investor states is also required.

Offshore funds that are not offered to U.S. persons are not subject to blue sky laws. However, once securities have been sold to U.S. persons, the fund is required to comply with blue sky requirements. 

In addition to blue sky filings, and for completeness, Form PF is also required where a manager (meeting an Assets Under Management (“AUM”) threshold) is registered with the SEC. The quantum of AUM dictates how often Form PF must be filed.

What happens in practice?

Some issuers, for fear of failing to register in a particular U.S. state will, often with the help of third-parties, file “protectively”. While this removes the risk of failing to file, it does come with a cost (as fees are typically per state filing). Such costs (while often an expense of the fund) can drag on performance/increase the expense ratio.

It is for the reasons above that we see managers (offering their non-US fund(s) to investors in the US) asking for assistance with a blue sky filing audit, to make sure they’re filling in every state required and no more. Following such an audit, the manager will then (including through outsourcing this action) maintain a compliance chart or tracker. This will record:

• Investor state
• Exemption from registration including the availability of self-executing exemptions where no filing is required
• Required documents and filing fees
• Action taken
• Comments

As a result of the above, issuers can emerge from the process with enhanced compliance and lower costs. 

Please do not hesitate to contact me if you have any questions arising from this article.