Reference

Blue sky: what the states can still make you do

Federal law preempts state review of a Rule 506 offering — 99% of funds rely on it. What survives is a notice filing and a fee, in every state where you sell.

Before 1996, selling securities in fifty states could mean answering to fifty regulators. The National Securities Markets Improvement Act changed that, and the change is why a private fund raise is administratively survivable at all. But it did not abolish the states — it converted them from reviewers into fee collectors, and the distinction matters more than founders expect.

What the statute preempts

Securities sold under Rule 506 are covered securities. That is the whole mechanism: no state may make you register or qualify the offering, and no state may pass judgement on your offering documents.

What survives

Read that carefully, because it is the entire remaining obligation and it is not nothing:

A copy of the Form D. Usually the same document, filed again, in each state where you sold.

A consent to service of process. You are agreeing the state may serve you through its own securities administrator.

A fee. Per state, and the states set them.

And the states keep their fraud authority outright — § 77r(c)(1) preserves jurisdiction “to investigate and bring enforcement actions … with respect to … fraud or deceit.” Preemption is about registration, never about lying to people.

What the filing record shows

That number is the practical argument for 506 over 504 and it is rarely made in those terms. Rule 504’s $10 million ceiling looks generous to a first fund. What it costs you is NSMIA, and the price of losing NSMIA is state-by-state registration rather than state-by-state notice.

The part we cannot answer for you

Which states, when, and how much depends on where your investors are — and Form D does not record that, so no dataset can tell you. Deadlines are usually keyed to the first sale in that state and are not uniform; several run to fifteen days, some differ, and a few states want the filing before the sale rather than after.

Most of this now runs through NASAA’s electronic filing system rather than fifty separate paper processes, which is a genuine improvement. It does not change what is owed, only how it is transmitted.

The failure we see is not exotic. A fund files its federal Form D on time, treats that as the job done, and discovers a year later that three states where it took money were never notified. It is a fixable problem and an avoidable one, and it is entirely a question of remembering that the federal filing is the beginning of the obligation rather than the end of it.