SEC COMPLIANCE

Blue Sky Filings: What States Still Require After a Raise

By Baruch Mackliff, the Capital Commander · PRBE Capital

Topic: SEC compliance for a private raise

Federal preemption is the most oversold idea in private fundraising. A founder hears that a Rule 506 offering is a covered security, that states may not register or review it, and concludes that the state layer is gone. It is not gone. It is narrowed, and what survived is a set of notice filings, fees and deadlines in every state where an investor lives, administered by regulators who are not obliged to be forgiving about a missed date.

This is what preemption removed, what the states kept, and what it costs to skip the part that survived.

What preemption removed

Before the National Securities Markets Improvement Act, a private raise across several states meant qualifying the offering in each of them. Some states ran merit review, meaning a regulator could decide the deal was unfair to residents and refuse to let it be sold there no matter how complete the disclosure was. That process was slow, expensive and inconsistent across state lines, and it fell hardest on small issuers.

The Act amended the Securities Act to create a class of covered securities that states may not require to be registered or qualified. Securities sold in reliance on Rule 506, under both Rule 506(b) and Rule 506(c), are covered securities. For a Rule 506 offering that means:

• No state registration.
• No merit review. A state regulator does not get to decide whether your terms are fair to its residents.
• No state-imposed disclosure format sitting on top of your offering documents.

That is a genuine and substantial change, and it is a large part of why Rule 506 dominates private fundraising in the United States.

What the states kept

The same statute that preempted registration expressly preserved state authority to do three things, and every one of them still binds you.

• Require a notice filing. A state may require the issuer to file with it the documents filed with the Commission, which in practice means the Form D, together with a consent to service of process.
• Charge a fee. Filing fees survived preemption intact.
• Enforce their antifraud laws. Preemption reaches registration, not fraud. A state securities administrator keeps full authority to investigate and act on a misrepresentation made to one of its residents.

So the right mental model is not that federal law replaced state law. It is that federal law replaced state review and left state notice standing. The paperwork is far lighter than qualification. It is not zero, and it does not wait for you.

The exemption you chose decides whether you get preemption at all

This is the trap that catches people who read about preemption without checking which offerings it covers.

• Rule 506(b) and Rule 506(c). Covered securities. Notice filing and fee only.
• Rule 504. Not covered. A Rule 504 offering remains subject to state registration or qualification in full, in every state where it is offered or sold. That surprises small issuers who picked Rule 504 precisely because it looked like the simpler option.
• Regulation A. Split. Tier 2 offerings are treated as covered securities as to qualified purchasers; Tier 1 is not, and stays subject to state review through a coordinated process.
• Intrastate offerings. A state matter by design, since the whole premise is that the offering never leaves one state.

So the first question in a state analysis is not which states. It is which exemption you are actually relying on. Choosing Rule 506 is, among other things, a decision to buy preemption.

What triggers a filing, and where

The obligation follows the investor, not the issuer. A company headquartered in one state with investors in nine states generally has nine state filings, not one.

The usual test is the state of residence of the purchaser. For an entity investor it is typically the state of its principal place of business. Investments made through a retirement account or a trust need a look at who the beneficial owner is, and that analysis is fact-specific enough that it belongs with counsel rather than with a spreadsheet column.

Some states also key their requirement to where an offer was made, not only where a sale closed. That distinction matters for a Rule 506(c) offering marketed publicly, because a public offer is made everywhere at once. Counsel will tell you which states in your particular set take that position.

How the deadlines differ

There is no single national deadline, and this is where issuers most often assume the federal date has covered them.

Broadly the states fall into three groups.

• A set period after the first sale in that state. The most common pattern, and many states use a window that mirrors the federal one, measured from the first sale to a resident of that state. Note that this is a different date from the federal first sale, and each state can have its own.
• Before the first offer or sale in the state. A smaller group wants the filing in advance. Sell first in one of those states and you have not merely filed late; you sold into a state where the exemption was not yet in place.
• On a renewal or continuing basis. For an offering that runs beyond a year, several states require a renewal or a further filing, and some want a report of the amount actually sold to their residents. These run on their own anniversaries, not on the federal one.

Layered on top of that: some states require a state amendment when the federal notice is amended and some do not; some require a separately executed consent to service of process on their own uniform form while others accept the consent embedded in the federal notice; and a few maintain requirements distinctive enough that practitioners treat them as their own workstream rather than a line on a checklist.

Fees follow the same shape. Most states charge a flat amount. A few scale the fee to the size of the offering. A small number charge nothing at all. Several impose a late fee, and in some of those the late fee is a multiple of the original rather than a surcharge on top of it.

None of this is knowable from memory and none of it is stable from year to year. It is maintained as a matrix, checked at the time of filing, by counsel or by a filing agent who does this work continuously.

The mechanics

Most states now accept the Form D notice filing and the fee through a shared electronic depository operated jointly by the state securities administrators. That system removed a great deal of paper and is the reason a multi-state filing set is a day of work rather than a month of it.

What it did not remove is the differences. A minority of states still require their own portal, their own form, an original signature, or a paper cheque. The electronic route also does not decide the deadline for you. It accepts what you submit, on whatever date you submit it.

One point about sequencing. Because most state filings are built on the federal notice, the federal filing generally has to exist first. That is another reason the 15-day federal clock is not really a 15-day clock in isolation. It is the gate standing in front of every state deadline behind it.

What it costs to ignore

Start with what does not happen. A missed state notice filing does not cancel your federal exemption. Rule 506 is federal, and a state cannot remove it by administrative action. Anyone telling you a late state filing destroys the round is overstating it.

Now the part that does happen.

• Late fees and penalties. Routine, immediate, and in states that impose a multiple, larger than the fee you were avoiding.
• An administrative order. A state may issue a cease-and-desist or an order barring further offers and sales in that state until the filing is made and the penalty paid. That is a live problem if you intended to keep raising there.
• State-law exposure to purchasers in that state. State securities acts carry their own private remedies, including rescission, and many carry control-person provisions that reach officers and directors personally. How far a state can push that against a covered security is genuinely contested and varies with the statute. What is not contested is that the argument exists and that answering it costs money.
• Antifraud jurisdiction, regardless. Preemption never touched it. A state can act on a misstatement made to one of its residents whether or not any filing was ever made.
• Diligence. Missing state filings are among the most common clean-up items found in a pre-transaction review of a private company's cap table. They are usually fixable by filing late and paying the penalty. They are always visible, and they surface at the point when the company has the least leverage to shrug them off.

Keeping it from becoming a problem

The entire exposure here is administrative, which means it yields completely to process.

• Put a residency field in the subscription tracker and fill it at subscription, not at closing.
• Fix the federal first-sale date when it occurs and file the federal notice inside its window, because the state filings queue behind it.
• Build the state matrix for the states you actually have investors in, with each state's trigger, deadline, fee and renewal requirement, and date the matrix so you know how old it is.
• File as investors come in on a rolling close rather than batching everything at the end, which is how issuers discover too late that one state wanted the filing before the offer.
• Calendar state renewals separately from the federal annual amendment. They are different obligations on different dates.

PRBE Capital runs this as part of closing rather than as clean-up afterwards: the federal notice inside its window, the state set built from the actual investor list rather than from an assumption about where people live, and the renewal dates calendared before anyone moves on to the next round.

This is an explanation of how the state notice layer works alongside a federal exemption, not legal, financial or securities advice. State deadlines, fees, forms and renewal requirements change often and differ in detail from one state to the next, and the requirements that govern your offering are the ones in effect in each state at the time you sell there. A securities lawyer confirms the set and signs off before you rely on it.

Common questions

Do I still have to make state filings if I raise under Rule 506?

Yes. Securities sold under Rule 506 are covered securities, so states may not register or merit-review the offering, but the same statute expressly preserved their authority to require a notice filing, to charge a fee, and to enforce their antifraud laws. Preemption removed state review, not state notice. The filings are lighter than qualification but they still carry deadlines.

What is a Blue Sky notice filing?

It is a filing made with a state securities regulator telling it that securities were sold to one of its residents under a federal exemption. In most cases it consists of the Form D, a consent to service of process, and a fee. It is a notice rather than an application, so no state approves the offering as a result of receiving it.

When are state notice filings due?

It depends on the state, and there is no single national deadline. Most states require the filing within a set period after the first sale to a resident of that state, which is a different date from the federal first sale. A smaller group requires the filing before the first offer or sale in the state, and some states require a renewal for an offering that continues beyond a year.

Which states do I have to file in?

The ones where your investors are, not the one where your company is. The usual test is the purchaser's state of residence, or for an entity investor its principal place of business, so a company with investors in nine states generally has nine filings. Investments through trusts and retirement accounts require a look at the beneficial owner and should go to counsel rather than be guessed at.

Does missing a state filing void my federal exemption?

No. Rule 506 is a federal exemption and a state cannot remove it by administrative action. What a state can do is charge late fees and penalties, issue an order barring further offers and sales there until the filing is made, and pursue antifraud matters that preemption never touched. State securities acts also carry their own private remedies, and how far those reach against a covered security is contested.

Are Rule 504 offerings preempted from state review?

No. Rule 504 securities are not covered securities, so a Rule 504 offering remains subject to state registration or qualification in full, in every state where it is offered or sold. This regularly surprises small issuers who chose Rule 504 because it appeared to be the simpler exemption. Regulation A is split, with Tier 2 treated as covered as to qualified purchasers and Tier 1 not.

What do Blue Sky filings cost?

Fees vary by state and change from year to year. Most states charge a flat amount, a few scale the fee to the size of the offering, and a small number charge nothing. Several impose a late fee, and in some of those the late fee is a multiple of the original rather than a surcharge, which is why the filings are cheaper made on time than reconstructed later.