Blue Skies Smiling at Me:
Exemptions to Registration

Fund investment has historically been a source of potential fraud. As a result, it remains subject to various promulgated federal and state regulations to ensure transparency and disclosure in the pre-investment process. Among these regulations are Blue Sky laws – state laws enacted to shield investors from securities fraud and protect them from ventures whose schemes have no reason to be successful other than by hope or luck. Texas Blue Sky laws generally require the issuers of securities to provide investors with comprehensive and accurate information about the securities being offered, including the risks associated with the investment. Because Blue Sky laws are significant anti-fraud regulations, both the issuer and the investor must understand the compliance requirements. Additionally, it is important to know when an exemption may apply.  

Identifying and Obtaining Exemptions

The Texas Securities Act (“TSA”) provides some exemptions to these Blue Sky regulations, which, when applicable, allow funds to bypass the registration requirement mandated by the TSA. Specific exemptions that a fund can claim are described in detail in Section 5 of the TSA. Critically, the party claiming the exemption under this section has the burden of proving that the exemption applies and that all conditions for its maintenance are met. If an exemption is properly claimed and maintained, the registration provisions of the TSA do not apply to the fund. However, the fund remains subject to other applicable provisions of the TSA, including its anti-fraud requirements.

Fund Compliance and Due Diligence

Prior to formation, the fund should determine what exemptions are available through an eligibility analysis and prepare the necessary documentation regarding reporting status, notice filings, financial requirements, and investor profiles. This includes filing a Form D with the Securities and Exchange Commission (“SEC”) for offerings relying on Regulation D exemptions, which must be completed within 15 days of the first sale of securities. Additionally, the fund must file state-specific Blue Sky notices where required, ensuring compliance with state securities laws. Additionally, the fund should establish a robust record retention policy to ensure ongoing compliance with regulatory requirements. This includes maintaining organized and accessible records of offering materials, investor communications, subscription agreements, and exemption filings. Staying vigilant with these filings is essential to avoid penalties and maintain compliance with both federal and state regulations.

The failure to file a Form D or “Blue Sky Notice” can be a disastrous decision for any fund, which will carry with it both penalties and possible securities prosecution. Moreover, this lack of compliance can jeopardize the fund’s operations and even damage its reputation. By identifying the specific exemptions that are applicable for each fund, the issuer and its principals can help to protect their interests and avoid the additional cost and expense of both compliance and responding to enforcement action. The team at RR&A has a wealth of experience in fund formation and continues to stay well-versed on changes to securities laws and regulatory compliance. With RR&A’s expertise and proactive approach, you can confidently navigate the complexities of fund formation and securities regulation, ensuring your fund operates on a solid and compliant foundation.

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Andrew Clinton

Andrew is a Shareholder at R. Reese & Associates and leads the Land & Title and Renewable & Energy Transition teams. To learn more about Andrew, visit his attorney page.

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Rachel Lamphier
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