NYAG enforcement order serves as a reminder for intrastate offerings

May 1, 2020 | By Patrick T. McCloskey

On April 27, 2020 the Office of the New York Attorney General (NYAG) announced that it had obtained a temporary restraining order (TRO) enjoining a New York corporation and its founder from violating Article 23-A of the New York General Business Law (GBL), commonly known as the Martin Act.

The complaint supporting the TRO application alleges that Kean Wind Turbines, Inc., headquartered in Williamsville, New York (Kean Wind), and its founder defrauded over 400 residents of Western New York into investing over $3.5 million since 2013. The allegations included violations of two separate registration filing requirements contained in the GBL. Not only was Kean Wind alleged to have violated Section 359-e of the GBL for failing to register as a dealer in its own securities,1 but, since the securities were allegedly offered and sold exclusively to New York State residents, the complaint also alleged a violation of Section 359-ff of the GBL, which, absent an exemption, requires the advance filing and clearance of a prospectus with the NYAG, and the delivery such prospectus to each prospective purchaser prior to or at the time of any offer.2

The NYAG’s enforcement order against Kean Wind should serve as a reminder that intrastate offerings in New York that are exempt from federal registration under Section 3(a)(11) of the Securities Act of 1933, as amended (the 1933 Act), are governed by GBL § 359-ff and the related regulations contained in Title 13 Part 80 of the New York Codes, Rules and Regulations (NYCRR). The disclosure requirements for an intrastate prospectus are set forth in 13 NYCRR § 80.2, and they include profit and loss statements and balance sheets prepared in accordance with GAAP, which statements must be audited unless an exemption is granted.3

The prospectus is lawful for use from the 15th day after filing unless the NYAG notifies the issuer of disclosure deficiencies prior thereto.4 Alternatively, the issuer can elect to submit the prospectus to the NYAG in advance and request a prefiling conference.5

Unlike registration filings under GBL § 359-e and exemption applications under GBL § 359-f, which are filed with the NYAG’s Investor Protection Bureau, a prospectus for an intrastate offering under GBL § 359-ff is filed with the NYAG’s Real Estate Finance Bureau on a Form Intrastate-1.6  The filing fee is one-half of one percent of the total offering price (0.005x), subject to a maximum filing fee of $1,500.7

Intrastate offerings to less than 10 persons and certain other specified offerings8 are automatically exempt from the GBL § 359-ff requirements, and issuers can apply for an exemption for certain other offerings.9

Unless exempted by the NYAG upon application, private companies that sell securities in an intrastate offering pursuant to a prospectus delivered in accordance with GBL § 359-ff[1] must deliver an annual report to the applicable securityholders within four months of the end of the year of the sale.10

GBL § 359-ff does not apply to offerings for which a registration statement has been filed and become effective under the 1933 Act,11 nor does it apply to companies with a class of securities registered under the Securities and Exchange Act of 1934, as amended.12

In addition, GBL § 359-ff does not apply to an offering that is exempt from federal registration for reasons other than Section 3(a)(11) of the 1933 Act,13 the statutory federal exemption for intrastate offerings.

Two exemptive rules have been promulgated by the U.S. Securities and Exchange Commission (SEC) related to intrastate offerings. Rule 147 is a safe harbor for the Section 3(a)(11) exemption, while Rule 147A is an exemption that was adopted by the SEC, not as a safe harbor for Section 3(a)(11), but as a separate intrastate exemption pursuant to the SEC’s general exemptive authority under Section 28 of the 1933 Act.14 One of the primary differences between these exemptive rules is that, under Rule 147, offers and sales may only be made to in-state residents, while Rule 147A allows offers to out-of-state residents, so long as sales are limited to in-state residents.15 Accordingly, Rule 147A provides issuers with the flexibility to promote the offering generally, such as through an unrestricted website, so long as sales are limited to in-state residents.

Any issuer conducting an intrastate offering in New York in reliance on Rule 147 will, absent an exemption as described above, need to comply with the prospectus filing and delivery requirements contained in GBL § 359-ff.

However, for issuers conducting an intrastate offering in New York in reliance on Rule 147A, arguments exist that GBL § 359-ff is not triggered.

GBL § 359-ff[5](c) provides, in pertinent part, “[t]his section shall not be applicable to offerings or sales of securities . . . with respect to which a registration statement is not required to be filed under [the 1933 Act] or the rules and regulations thereunder for reasons other than the exemption contained in Section 3(a)(11) of said act . . .”16 Since Rule 147A is not a safe harbor for the Section 3(a)(11) exemption, but rather a separate intrastate exemption that does not require the filing of a federal registration statement, GBL § 359-ff arguably does not apply. Similarly, since GBL § 359-ff, by definition, applies to “an issue offered and sold only to persons resident in this state”,17 making the offering materials available to out-of-state residents through an unrestricted website would arguably render GBL § 359-ff inapplicable. Notwithstanding these arguments, given the potential risk of an NYAG enforcement action,18 an issuer relying on Rule 147A under these circumstances should consult with its own legal counsel as to the applicability of GBL § 359-ff.

As mentioned above and as evidenced by the NYAG’s enforcement action against Kean Wind, the applicability of GBL § 359-ff to a securities offering is separate and distinct from the applicability of GBL § 359-e to the issuer.19

This blog post is for general informational purposes only and does not constitute legal advice. No one should rely on the information in this blog post without seeking appropriate legal, accounting, tax or other appropriate advice from an attorney, accountant or other professional properly licensed in the applicable jurisdiction(s).


1As stated in prior posts, an issuer offering securities within or from New York must register as a dealer unless (i) such issuer excepted from the definition of “dealer” in Section 359-e[1](a) of the GBL or (ii) the applicable securities or the applicable offering is exempt under Section 359-f[2] of the GBL.

2 See GBL §§ 359-ff[1] & [3].

3 See  13 NYCRR § 80.2(b)(15) (“[t]his section should contain the issuers profit and loss statement for its most recent three fiscal years (or such lesser number of fiscal years during which the issuer has been in existence). If the latest fiscal year ended more than four months prior to the date of the prospectus, a profit and loss statement for a period from the end of such latest fiscal year to a date within four months prior to the date of filing and comparable figures for the same period during the preceding fiscal year should also be provided. In addition, the issuers balance sheet as of the last fiscal year and as of the end of such additional period, if any, should be provided. The balance sheets and profit and loss statements shall be prepared in accordance with generally accepted accounting principles applied on a basis consistent with previous years or periods and shall include an opinion by an independent public accountant as to the fairness of the presentation of [the] issuer’s financial position and results of operations reflected in the financial statements, except where an exemption from said requirement has been granted.”)

4See GBL § 359-ff[1].

5See 13 NYCRR § 80.13.

6An issuer can elect to file a short form prospectus on Form Intrastate-5 for intrastate offerings (i) of less than $40,000, excluding the personal investment of any promoters (see 13 NYCRR § 80.13) or (ii) to a “related group” (defined as “a group where a family or long time business or personal relationship exists between one or more promoters and each and every member of the group”) (see 13 NYCRR §§ 80.5 & 80.1(j)(2)).

7See GBL § 359-ff[6]. See also 13 NYCRR § 80.11

8See 13 NYCRR § 80.9 (“[p]ursuant to section 359-ff, subdivision 3, of the General Business Law of the State of New York, small offerings to a promoter group, small offerings to a related group, as defined in these regulations, offers and sales of any interest or participation in a collective trust fund maintained by a bank which interest or participation is issued in connection with a stock bonus, pension, or profit-sharing plan which meets the requirements for qualification under section 401 of the Internal Revenue Code of 1954, and offerings made to fewer than 10 persons are hereby exempted from the provisions of section 359-ff of the General Business Law. Offerings within the scope of this section are automatically exempted without application.”) See also GBL § 359-ff[3] (“[t]he attorney general is hereby authorized and empowered to exempt by rule, regulation or order any person, security or transaction or any class or classes of persons, securities or transactions from any provision of this section or of any rule or regulation thereunder if the attorney general finds that such action is not inconsistent with the public interest or the protection of investors.”)

9See 13 NYCRR § 80.6 (Offerings to sophisticated investors); 13 NYCRR § 80.7 (Offerings to a promoter group); and 13 NYCRR § 80.8 (Specialized offerings).

10See 13 NYCRR § 80.15(a) (“[w]ithin four months after the close of the fiscal year of all issuers which have made or were required to make a filing with the Department of Law pursuant to the New York Intrastate Financing Act, there shall be submitted to the Department of Law and to all persons then owning securities of the issuer an annual report containing the following: . . .”) See also 13 NYCRR § 80.15(c) (“[t]he above regulation shall not apply to any issuer required to file reports pursuant to Section 13 or 15 of the Securities Exchange Act of 1934, as amended.”) See also 13 NYCRR § 80.15(d) (“[t]he Attorney General may, on application, exempt any entity from full compliance with the annual report requirements of these regulations upon a finding that such action is not inconsistent with the public interest or the protection of investors.”)

11See GBL § 359-ff[5](a).

12See GBL § 359-ff[5](c). In addition, (i) GBL § 359-ff[5](e) provides that the GBL§ 359-ff registration requirements do not apply to certain securities exempt from the dealer registration requirements under GBL §§ 359-e (see GBL §359-f[1](d) (securities issued or guaranteed by a public service or utility corporation, including a railroad corporation); GBL § 359-f[1](l) (securities sold or offered at any judicial, executor’s, administrator’s, guardian’s, or conservator’s sale, or any sale by a receiver or trustee in insolvency or bankruptcy, or at a public sale by auction held at an advertised time or place); and GBL § 359-f[1](m) (sales by or for the account of a pledgee or mortgagee selling or offering for sale or delivery, in the ordinary course of business, to liquidate a bona fide debt, a security pledged in good faith as security for such debt) and (ii) GBL§ 359-ff[5](f) provides that the GBL §359-ff registration requirements do not apply to an insurance or endowment policy or annuity contract or interest or participation therein, if issued by an institution subject to the supervision of the New York superintendent of financial services.

13See GBL § 359-ff[5](b).

14See SEC Release No. 33-10238 (October 26, 2016).

15Rule 147 and Rule 147A both generally require that (i) the issuer’s principal place of business be located within the applicable state; (ii) the issuer be “doing business” in the applicable state (within the meaning of such rules); and (iii) sales be limited to in-state residents or persons who the issuer reasonably believes are in-state residents. Rule 147 is more restrictive than Rule 147A in that Rule 147 also requires that (1) the entire offering be limited to in-state residents and (2) the issuer be organized in the applicable state. These two restrictions are not contained in Rule 147A.

16See GBL § 359-ff[5](b) (italics added).

17See GBL § 359-ff[1] (italics added).

18According to the NYAG’s Memorandum of Law in support of its TRO application against Kean Wind, the violation of GBL § 359-ff was a fraudulent practice and an illegality under the Martin Act (see ¶ I.A.) In addition, GBL § 359-g[2] provides “[a]ny person, partnership, corporation, company, trust or association violating any of the provisions of [the Martin Act] shall be guilty of a misdemeanor, except where otherwise provided herein, punishable by a fine of not more than five hundred dollars, or imprisonment for not more than one year, or both.”)

19See Note 1, supra.