When securities lawyers think about Blue Sky laws, the focus is usually on the original offering. But many securities spend years, or even decades, in the secondary market. A security may be exempt when issued, but that does not necessarily mean every future transfer is exempt as well. Still, for those engaged in secondary-market transactions, there are common exemptions available, including exempt security provisions, institutional investor exemptions, unsolicited broker-dealer transaction exemptions and isolated nonissuer transaction exemptions.
This issue arises most often in transactions involving:
- Transfers of privately placed bonds.
- Sales of direct-purchase or bank-held municipal obligations.
- Institutional portfolio sales.
- Distressed debt acquisitions.
- Secondary transfers of conduit bonds.
In each case, the key question is not whether the bond was exempt at issuance. The question is whether the resale itself qualifies for an available exemption under applicable state securities laws.
One of the more frequently relied upon exemptions is the isolated nonissuer transaction exemption, which generally applies when an investor is simply disposing of an existing investment position rather than participating in a broader distribution of securities. While widely available, the scope and requirements of the exemption vary by state.
For municipal and conduit securities, the analysis is often straightforward because broad exemptions are frequently available. Nevertheless, practitioners should avoid assuming issuer status alone resolves every secondary market question. The relevant exemption may depend on the identity of the buyer and seller, the role of any intermediary and the nature of the transaction itself.
Before completing a secondary market transfer, market participants should ask:
- Who is selling the security?
- Who is purchasing it?
- Is the seller merely disposing of an investment position or participating in a distribution?
- Is an intermediary soliciting the transaction?
- What exemption supports the specific resale?
The most common Blue Sky mistake is assuming that an issuance exemption is a permanent exemption.
The bottom line is that a security may be exempt. The resale may not be. Careful attention to the transaction, not just the security, can help avoid unnecessary regulatory risk.
Harris Beach Murtha’s Public Finance and Economic Development Practice Group assists across the nation with Blue Sky surveys and regulation. For questions regarding Blue Sky Laws or Blue Sky Surveys, please contact attorney Christopher A. Andreucci at 585-419-8606 and candreucci@harrisbeachmurtha.com.
This alert is not a substitute for advice of counsel on specific legal issues.
Harris Beach Murtha’s lawyers and consultants practice from offices throughout Connecticut in Bantam, Hartford, New Haven and Stamford; New York State in Albany, Binghamton, Buffalo, Ithaca, New York City, Niagara Falls, Rochester, Saratoga Springs, Syracuse, Long Island and White Plains; as well as in Boston, Massachusetts, and Newark, New Jersey.
