Should You Be Making Blue Sky Filings in New York?

blue sky filingsOne of the oddities of New York securities law is that a core legal requirement imposed by the state was preempted by federal law almost 20 years ago, and yet the requirement remains on the books. The National Securities Markets Improvement Act, or NSMIA, enacted by Congress in 1996, expressly restricts the level of regulation that states can impose on private offerings done in reliance on Rule 506 of Regulation D or Section 4(a)(2) of the Securities Act of 1933. Following NSMIA’s enactment, most states amended their “blue sky” securities regulations accordingly and basically only require the filing with the state of a copy of the federal Form D and the payment of a filing fee, which NSMIA permits. New York, in contrast, still requires a relatively involved form to be filed with the state under the Martin Act, requesting more information than is permitted by NSMIA.

In 2002, the Committee on Securities Regulation of the New York State Bar Association issued a position paper flatly stating that the requirements imposed by the Martin Act for these offerings are preempted by NSMIA. In the following years, many of my fellow corporate and securities attorneys accordingly advised their clients that no New York filing need be made for Rule 506 or Section 4(a)(2) offerings, on the theory that an enforcement action by New York is unlikely and, even if there is one, there would be a solid defense of federal preemption.

However, I’ve had a recent experience with a new client that may call for a reassessment of this approach. I was asked to prepare blue sky filings for a New York real estate developer that was the subject of an enforcement action by the Attorney General for failure to make the filings as required by the Martin Act. (I was not involved with this client in connection with the securities offerings that triggered the action; I was brought in after the Attorney General demanded that the filings be made.) Now, this client could have taken an aggressive approach and challenged the action on preemption grounds, but the client took a practical, cost-benefit approach to the issue and decided it was better just to comply with the filing requirement as requested by the state.

I don’t know if this case is part of a new and concerted effort on the part of the Attorney General to enforce these laws. There are some facts specific to this case that may set it apart – for example, the client allegedly engaged in some active public solicitation and advertising that are not permitted for private offerings of this type, and it may be that these activities put the developer on the state’s radar. Nevertheless, those conducting private offerings in New York might want to consider complying with the Martin Act filing requirements to avoid the later cost and headache of an enforcement action.