Is New York’s Form 99 Required When a Rule 506 Offering Has New York Investors?

The vast majority of private companies raising capital use Rule 506 of Regulation D, which, if complied with, ensures the securities being sold are exempt from registration with the Securities and Exchange Commission (SEC) because the offering of these securities does not involve “any public offering.” One of the primary advantages of a Rule 506 offering is that it is considered an offering of “covered securities,” which means that individual states cannot require issuers who meet the conditions of Rule 506 to register their offerings at the state level. By granting covered security status to Rule 506 offerings, Congress greatly reduced the compliance costs of companies raising private capital who would otherwise have to comply with the unique registration or exemption requirements of each state where one of their investors happened to live.

Although states are not permitted to require issuers in Rule 506 offerings to register with state authorities, states can require notice filings substantially similar to the Form D notice filing required to be filed with the SEC within 15 days after the first sale of securities within the state. Some states do not require a filing but most require a copy of Form D, a consent to service of process, and a fee. However, New York takes a different approach.

New York’s state securities statute, also known as the “Martin Act,” is unique among all other state securities statutes in that it generally does not regulate securities offerings but instead requires some issuers to be registered as “dealers” in their own securities. For issuers using Rule 506, in addition to filing a copy of Form D, New York requires Rule 506 issuers to file a state-specific form called “Form 99” with the Investor Protection Bureau of the Attorney General’s office before selling its securities to New York investors. Additionally, whereas most states require a $200-300 fee in connection with the notice filing or no fee at all, New York requires private companies to pay $1,200 if the proposed offering could exceed $500,000. The form is also more complicated than the notice filings required by other states, thus causing the issuer to incur more legal costs.

Given that Congress created the “covered security” status to prevent states from “reconstruct[ing] in a different form the regulatory regime for covered securities that Section 18 has preempted,” many securities law practitioners and the issuers they advise take the position that New York’s Form 99 requirement conflicts with federal law and is thus preempted. In fact, the New York State Bar Association has published a position paper advancing this view. The position paper also made other legal arguments that the Martin Act itself would exclude any offerings that are exempt under Rule 506 because the Martin Act only covers offerings of securities “to the public.” Many securities law practitioners advise their clients that it is acceptable to take the positions advanced in the position paper when you have New York investors; however, the arguments have never been tested in court and the New York Attorney General’s office declined to amend its filing requirements in response to the position paper.

Another big difference between the Martin Act and the securities laws of all of the other states is the inability of investors to bring private lawsuits for securities law violations. In most states, investors can sue the company and its management to enforce its state securities laws. This is one of the reasons advisors to securities issuers encourage strict adherence to state requirements. Disgruntled investors can use lack of compliance to bring a claim for rescission (i.e. receive their money back) against the issuer and its officers, directors, and owners personally. Investors in New York, on the other hand, do not have a private right of action under the Martin Act, so failing to file Form 99 alone would not, in itself, allow investors to bring a claim. Therefore, the risk to a company that fails to adhere to New York’s unique – and arguably invalid – filing requirements is lower.

Under the Martin Act, New York’s Attorney General has the power to conduct investigations, seek injunctive relief (i.e. stop an offering from moving forward) or restitution, or even to criminally indict persons for securities violations. To my knowledge, New York has never brought criminal charges for failing to file a Form 99 in New York, and, in my view, it is extremely unlikely it would do so given the arguments for federal preemption of the Form 99 requirement.

In the end, each issuer must make its own calculation whether it wants to go through the added expense of complying with New York’s filing requirements. There are strong legal arguments that the filing requirements are invalid. Failing to file Form 99 alone should not result in liability to your New York investors. There is also a very low possibility that New York’s Attorney General will bring an enforcement action against you solely for opting not to file the form, although if there are other circumstances placing you on the state’s radar, they may require these filings as part of an ongoing enforcement action. Many issuers decide that the low risk of adverse consequences combined with the strong argument that New York’s filing requirements are preempted by federal law are enough for them to forgo the filings. Others, out of an abundance of caution, take the opposite view and file because even the possibility of having to litigate against the attorney-general outweighs the cost of filing.

Companies considering conducting an offering in New York should make their decision on the best approach for them only after consulting their securities counsel.


© 2018 Alexander J. Davie — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

Alexander J. Davie About Alexander J. Davie

Alexander Davie is a corporate and securities attorney based in Nashville, Tennessee. Businesses of many varieties rely on his counsel and judgment throughout all stages of their growth. In particular, fund managers and investment management professionals seek the expertise Alex gained when he served as general counsel to a private investment fund. Alex also has significant experience and enjoys working with companies and entrepreneurial ventures, especially within the technology industry. As a believer in technology's ability to enrich people's lives and allowing people to connect with each other in new ways, he is passionate about helping tech startups achieve success. He is active in Nashville's startup community as a mentor at the Nashville Entrepreneur Center and participates in numerous other events geared towards making Nashville a nationally ranked location for starting a business.

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