Blue sky laws and filings for hedge funds

The term “blue sky laws” refers, generically, to any of the securities laws of the individual states.  Each state has a set of laws on its books dealing with securities.  These laws have many similarities to the securities laws at the federal level (the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940 and the Investment Advisers Act of 1940); in fact, many of the state blue sky laws are based on the laws at the federal level.  The state blue sky laws are enforced by the state securities administrator which is the state’s enforcement agency – it serves a similar function as the SEC does at the federal level.  Additionally, the state securities administrator may work in conjunction with the SEC in certain matters.

There are two distinct instances when, in virtually all of the states, blue sky laws become applicable to hedge fund managers (even unregistered hedge fund managers).

Blue Sky Anti-Fraud Authority

The first instance is when the state administrator pursues an action (i.e. request information, etc.) against a hedge fund manager (even if the hedge fund manager is unregistered) pursuant to its anti-fraud authority.  While each state’s anti-fraud statutes will differ, they are all drafted very broadly to give the state administrator wide lattitude for going after potential hedge fund frauds.  However, under this authority, the state administrator can also go after honest hedge fund managers.  While uncommon, it may happen in certain instances.  If it does, you should contact an experienced attorney immediately.  For most all unregistered hedge fund managers, this should not be something to worry about.

Blue Sky Filing Requirements

The second and more common instance when blue sky laws are implicated is when a fund will need to make a “blue sky filing.” As a general statement, a hedge fund will need to make a “blue sky filing” in each state where one of its investors resides.  The filing will generally need to be made within 15 days of the date of the investment into the hedge fund and the investment manager will need to pay a fee which will usually range anywhere from $75-$300 or more.  (Please note: for investors from New York a manager will need to make the blue sky filing prior to an initial investment into the fund.  The New York filing fee is going to be approzimately $1,400.)

To make a blue sky filing, you will first need to provide your hedge fund attorney or your compliance consultant with a few items of information including:

1. state where the investor resides
2. amount of the investment (including the amount of all previous investments)
3. the minimum investment amount (can be found in the hedge fund offering documents)
4. the management fee (can be found in the hedge fund offering documents)

After recieving this information your lawyer will complete a Form D and a Form U-2 and will help coordinate the filing of these documents with the appropriate state administrator.  The lawyer will also send a copy of Form D to the SEC for filing.  Form D filings are searchable through the SEC Edgar search engine.

Blue Sky Questions

Question: Does the fund or the management company pay the blue sky filing fees?

Answer: Most all offering documents which I have seen specifically name blue sky filing fees as an expense of the fund.  However, if this is not specifically named as a fund expense in your fund’s offering documents, it will likely still be a fund expense as most fund’s have a general catch-all for expenses like these.  If you have any specific questions, it is best to get clarity from your attorney.

Question: Does a manager have to pay the blue sky filing fee to each state on a yearly basis?

Answer: This is a good question.  As with many blue sky questions, it will depend on the specific state.  Some states only require a one-time filing fee, other states require that the filing fee be paid on an annual basis.  New York is a combination of these two as its filing fee is good for four years.  Your attorney or compliance professional should be able to discuss this with you on a state by state basis.

9 thoughts on “Blue sky laws and filings for hedge funds

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  3. Jovy Therese

    Hi – does the state securities commissioner need to approve GAAPs used by a hedge fund for instance IFRS or US GAAP. or is it automatically required for a Delaware registered fund to report under US GAAP despite the offering documents stating IFRS as the GAAP to be used?

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