Private placements in Florida after the National Securities Markets Improvement Act of 1996.

• Author: Mihm, Jeff

In October 1996, Congress preempted the ability of the states to substantively regulate private placements of securities conducted in accordance with Rule 506 under the Securities Act of 1933. The effect of this recent law--the National Securities Markets Improvement Act of 1996 (NSMIA)[1]--on private placements in Florida is illustrated by the following hypothetical:

The CEO of your small business client calls with a problem. A couple of years ago, she tells you, seven individuals (all located in Florida and all very wealthy) invested a total of $1.5 million in your client's business in exchange for shares of the corporation's stock. Upon questioning, you learn that no disclosure document or other notice was given to the investors. One of the seven investors is now complaining about the performance of the business. After consulting with his attorney, this investor claims he is entitled to the return of his investment. What, she asks you, should she do?

The answer depends on when the private placement occurred. For an offering occurring prior to the passage of NSMIA, the investor's counsel is right--the complaining investor (indeed, all seven investors) is entitled to rescind the sale of the securities and the return of his or her investment. After NSMIA, however, the result is turned on its head and your client should prevail against a claim to rescind the sale of the securities.

This article examines the state and federal securities laws applicable to this hypothetical. The first part of this article provides a general overview of the Florida Securities and Investor Protection Act (Florida Securities Act) and then describes the exemption for private placements in Florida, including the right of purchasers to rescind sales made pursuant to this exemption. This part also examines an often overlooked aspect of compliance with the Florida Securities Act--the possibility that the issuer or the persons selling the securities on behalf of the issuer may need to be registered as a "dealer" under the Florida Securities Act. The second part of this article reviews NSMIA and its preemptive effect on state regulation of private placements conducted in accordance with the federal safe harbor provided by Rule 506. The final part of this article reviews and answers the above hypothetical and concludes by arguing against any attempt to require an issuer placing its own securities in a Rule 506 offering to be registered as a "dealer" under the Florida Securities Act.

Florida Securities Act--A Primer for the Practitioner

As most practitioners know, every offer and sale of securities must comply with both the federal and state securities laws. On the federal level, this involves the Securities Act of 1933 (Securities Act) as administered by the Securities and Exchange Commission (SEC). In Florida, it involves the Florida Securities Act as administered by the Florida Department of Banking and Finance, Division of Securities and Investor Protection (the Florida Division of Securities).[2]

The statutory scheme of the Florida Securities Act (and most other states' blue sky laws) follows the statutory scheme of the federal laws: The security[3] offered for sale must either be registered with the state or qualify for an exemption from registration.[4] The registration process--both on the federal and state level--can be onerous, costly, and time consuming. In addition, registration of securities in many states, including Florida, is subject to "merit" review by the state regulators.[5] Under merit review, the state may refuse to register an offering upon a determination that the terms of the offering are not "fair, just or equitable."[6] As a result of the time and cost involved in the registration process, the first step in reviewing the application of the Florida Securities Act to a particular offering of securities is to determine whether an exemption from registration exists.

Exemptions from registration of a security offered in Florida fall into two classes--"exempt" securities, based on the nature of security being offered, and "exempt transactions," based on the nature of the transaction in which the security is offered.[7] Examples of exempt securities for which registration is not required include securities issued by certain governments, banks, specified nonprofit organizations, and others.[8] Since the types of exempt securities are exceptional and rarely applicable to the vast majority of offering by for-profit issuers, most issuers must look to the exempt transactions in order to avoid registering the securities to be offered for sale. Exempt transactions take many forms.[9] Some of the more commonly relied upon exempt transactions are for isolated sales by an individual, stock dividends or other distributions to security holders, sales to a sophisticated institution such as a bank, savings institution, insurance company, dealer, investment company, or qualified institutional buyer, sales by a Florida registered dealer, and sales under a stock option or other employee benefit plan.[10]

Private Placement Exemption in Florida

For corporations and other issuers of securities, the exemption[11] for the private placement of securities in Florida (private placement exemption) is likely the most relied upon of the exempt transactions. The private placement exemption allows an issuer to sell its securities to no more than 35 purchasers in any 12-month period without the need to register the securities with the Florida Division of Securities. The 35 purchaser limit does not include accredited investors,[12] purchasers who invest more than $100,000, or...