State securities legend requirements in Rule 506 private placement memos

ISSN： 1528-5812

Source： Journal of Investment Compliance, Vol.8, Iss.4, 2007-11, pp. : 44-50

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Abstract

Purpose - The purpose of this paper is to discuss state securities legend requirements for private offerings made pursuant to Rule 506 of Regulation D, with a particular focus on hedge fund and private equity fund issuers. Design/methodology/approach - The paper explains relevant federal and state securities registration laws, including the National Securities Market Improvement Act of 1956 ("NSMIA"), which creates a category of "covered securities" that are partially preempted from certain state securities regulations. Explains that offerings under Rule 506 of Regulation D are "covered securities" under NSMIA, but that an issuer that offers its securities may be considered a broker-dealer under some state broker-dealer laws; those state broker-dealer registration laws may require a state securities legend on offering documents in order to meet a state exemption from registering as a broker-dealer in the state. It also explains state legend requirements under state broker-dealer laws in general and then provides detail on four states whose legends practitioners often include in private placement memos: Florida, Georgia, New Hampshire, and Pennsylvania. Findings - The paper finds that state securities legends, other than Florida's legend, will never be required for a Rule 506 offering, and the inclusion of unnecessary legends, even as a precaution, can result in confusion or possibly claims that the issuer has violated state securities laws or included misleading information. Originality/value - The paper provides practical advice from an experienced securities lawyer.