Alameda County
Bar Association

If I Can Make It There, I’ll Make It Anywhere – Why Are New York Securities Filings So Cumbersome? 

SkyscrapersIn 1996, the U.S. Congress substantially simplified state-level securities compliance by passing the National Securities Markets Improvement Act, widely known as NSMIA.  NSMIA preempted many regulatory schemes of individual states and provided a standardized national securities exemption for offerings under Rule 506 of Regulation D. A Rule 506/Reg D transaction permits the raising of unlimited funds in a private offering where the offering is made available only to accredited investors.

E-filing in California

NSMIA does allow a state to impose notice filing, consent to service, and fee requirements in a Rule 506 sale of securities to an in-state resident. All states have adopted such rules. California, like most states, has a relatively simple e-filing procedure under Section 25102(f) of the Corporations Code, requiring the filing of minimal information about the issuing corporation and the payment of a small fee within 15 days after the first sale of a security to a California resident.

The Outlier: New York

New York, however, remains an outlier. Its blue sky statute now purports to require the filing of (i) a New York Form 99, (ii) a copy of Form U-2 (consent to service of process), (iii) a copy of the federally-filed Form D, (iv) a copy of any written offering documentation, and (v) a $300 fee. If a client wants to sell into New York under the protective cover of Rule 506/Reg D, the client must assemble and submit all of this information prior to the sale of any security to a New York resident.  There is no 15-days-later rule.

Many securities lawyers believe that the New York requirements overreach the information requirements permitted to individual states under NSMIA. Some advisors suggest that the full sweep of the New York blue sky statute is overly harsh and unenforceable under the federal legislation. Particularly difficult is the timing set out in the New York statute – how is the client to know if there will be sales of securities to a New York resident until an offer has been made? The 15-day wait-and-see approach of most other states accommodates this issue, while New York provides that an issuer must comply in advance, before any sale is completed.

Proceed Cautiously

New York does not appear to be aggressively pursuing noncompliance, perhaps due to doubts about whether its rules are fully enforceable in light of the language of NSMIA. But if a disgruntled investor from New York eventually discovers a failure to comply with applicable blue sky rules, it is possible the issuer would face a claim for rescission due to that failure. The message for clients will be to proceed cautiously when issuing stock or LLC units to an investor from The Empire State.


This article originally appeared in the July 2014 ACBA Business Section Newsletter, prepared by Tom Maier, Futterman Dupree Dodd Croley Maier LLP.