State securities legend requirements in Rule 506 private placement memos

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.

Citation

Gale, A.D. (2007), "State securities legend requirements in Rule 506 private placement memos", Journal of Investment Compliance, Vol. 8 No. 4, pp. 44-50. https://doi.org/10.1108/15285810710839543