In addition to the federal law discussed above, each state has its own statutes and regulations (“blue sky” laws), governing the offer and sale of securities in or from such states or to residents of such states. In many states, filings must be made to qualify for an exemption from registration. While the majority of states have adopted in some form the revised Uniform Securities Act of 1956, and several states have adopted in some form the revised Uniform Securities Act of 1985 (collectively the “Uniform Securities Act”), the particular laws of each state differ, and compliance with a state’s blue sky laws must be determined before any offer is made into, from or to a resident of such state.
Most states have not formally determined, by statute or regulation, whether an investment partnership is counted as one client of the adviser or whether the state will look through the partnership to determine how many of its residents are investors and also clients for the adviser. Several states have informally advised that they will not look through an investment partnership and have informally taken the position that, in the absence of contrary interpretation of their statutes or regulations, Rule 203(b)(3)-1 under the Advisers Act would apply. Others, however, may take a contrary position and look through an investment partnership to determine who is a client of the general partner. The issue should be reviewed on a state-by-state basis.
State regulation of the fee arrangements vary from state to state. Several states have statutory or regulatory provisions, which prohibit, as a fraudulent practice, the acceptance of the performance-based fees as compensation by any investment adviser. Both registered and unregistered investment advisers are subject to these provisions. The restriction is generally modified to allow compensation based on the total value of a fund averaged over a definite period of time. Other states qualify their restrictions on acceptance of performance-based fees by investment advisers, either by statute or by regulation. These qualifications generally serve to bring the state law into compliance with Rule 205-3 of the Advisers Act, by reference or by describing the conditions to Rule 205-3. In general, the conditions to qualify acceptance of performance-based fees are based on the “eligible client” tests of all investors in the investment partnership.
Depending on the version of the Uniform Securities Act adopted, any offer (or, in some states, any sale) made to 10 or fewer (or, in some states, 25 or fewer) persons in the state within any 12 consecutive months, generally excluding institutional investors, will qualify as a private placement exempt from state registration requirements. An “institutional investor” typically includes banks, thrifts, insurance companies, and pension or profit sharing trusts. Again some jurisdictions, entitles such as corporations with a certain level of assets or universities may be considered institutional investors as well. A few states expand their definition of institutional investors to include accredited investors, even those who are natural persons, thereby excluding accredited investors from the numerical limitations of the private placement exemption.
The purchaser must be acquiring an interest in the partnership for investment, and no commission or other remuneration may be paid, directly or indirectly, to any person for soliciting buyers (except generally to locally registered broker-dealers). Although general advertising or solicitation is not expressly prohibited, many states have further prohibited, many states have further conditioned this exemption by including this limitation. Noncompliance with any element of the state exemption may result in the requirement that the investment partnership rescind its sales to investors.
Many states have adopted some form of the Uniform Limited offering Exemption (ULOE), comparable to Regulation D. The UOLE has no limitation on the number of offerees and, like Regulation D, the exemption permits sales to an unlimited number of “accredited investors.” Under the UOLE exemption, the issuer may not make a general solicitation, sales may not be made to more than 35 non-accredited investors and no commissions, finder fees or other remuneration may be paid other than to locally registered broker-dealers. Issuers generally may not rely on ULOE if the issuer is the subject of certain statutory disqualification within five years prior to commencement of the offering. The UEOE is not self-executing; the issuer must file a Form D (or the state’s equivalent form) typically within 15 days after the first sale in the state.