An Equity Investment or a Sale of Securities? A General Overview of Pennsylvania’s Securities’ Registration Requirements

September 10, 2020 | By Michael A. Thom

You just decided to begin a lucrative career in real estate investment and found the perfect property to acquire. You gather all of your information and head to the bank you have been banking with for the past twenty years and tell them you need a loan. Unfortunately, your bank’s relationship manager, while eager to do the deal, tells you that they can only fund a portion of the acquisition with a loan and that in order to acquire the property you are going to have to come up with hard money to fund the difference. After thinking about it, you say, “No problem, I can bring in some partners to help me come up with the money I need.”

However, before moving forward with the solicitation of equity for your project, it is important to know that the Pennsylvania Securities Act of 1972 (the “Act”) and Title 10 of the Pennsylvania Code (the “Code”) require any offer or sale of a “security” to be registered with the Pennsylvania Department of Banking and Securities (the “Department”), unless that offering or sale qualifies for an exception from registration under the Act or the Code 1. This is important for developers and investors to realize before beginning their equity raise because under the Act, a “security” includes, among other things: (i) limited partnership interests; (ii) limited liability company interests; and (iii) stocks.2 As a result, if a developer or investor raises money in exchange for an interest in their company, the developer or investor will have to register the offering of the interests with the Department unless that specific offering is exempt from registration under the Act. Failure to comply with the registration requirements for an offering or sale of securities could result in civil or criminal penalties being assessed.

The registration process in Pennsylvania is a convoluted process that should not be completed without the consultation of legal counsel experienced on securities’ matters. Under the Act, there are multiple avenues for registration that are dependent on the type of equity raise you are completing as well as any federal statutes and regulations that must be complied with.3 However, each offering or sale registration made with the Department must include a registration statement noting: (i) the amount of securities are being offering in Pennsylvania; (ii) what other states registration statements or applications are being filed in; (iii) any adverse order, judgment or decree entered against the offering, or any withdrawal, with prejudice, of any registration statement or application with respect to the offering; and (iv) the names of any and all underwriters and/or broker-dealers that have been engaged to sell or offer the securities in Pennsylvania.4

While the registration process can be complex, the Department and legislature have codified certain exemptions to the registration requirements for certain security offerings and types of security transactions. Some common types of exemptions include: (i) offers and sales to principals of the company; (ii) sales of securities to no more than two purchasers within a consecutive twelve month period; and (iii) an accredited investor exemption.5 Each potential exemption should be fully vetted prior to the reliance thereof to ensure that the specific offering meets all of the criteria of the exemption. Additionally, although the offering may be exempt from registration, based on the exemption, there may be a requirement to make a notice filing with the Department.

The Department is a great resource for developers interested in learning about issuing securities to raise capital. Not only is the Department responsible for the oversight of financial services transactions, but the Department also is available to provide free, confidential advice to those with questions or concerns about raising capital. However, it is important to note, that even though they are willing to assist, the Department recommends that anyone issuing securities to raise capital in the Pennsylvania engage experienced legal counsel to ensure that all applicable statutes, rules and regulations are complied with.

The failure to comply with Pennsylvania’s registration requirements may cause a serious penalty. For example, anyone who fails to register their offering as required may be required to refund the consideration paid for the security, plus any interest on the consideration to the purchaser of the security.6 Further, the Department also has the ability to bring civil and/or criminal penalties for failure to comply with the registration requirements.

Please note that this blog post provides general information regarding the issuance of securities in Pennsylvania and that anyone issuing securities should also be aware that such issuance is also governed by federal law and regulation. If you are interested in raising capital for your business or entity, we encourage you to reach out to a member of our team so we can provide more specific advice based on the facts and circumstances relating to your issuance. Additionally, any registration or exemption under the Act is based on the specific set of facts related to your equity raise and, as a result, the information on that subject matter contained herein is merely an overview and cannot be applied to your specific set of facts without additional information. Further, an issuance that is exempt from registration requirements in Pennsylvania may or may not be exempt from similar registration requirements under federal law or the laws of other states.


1 The Pennsylvania Securities Act of 1972 and Title 10 of the Pennsylvania Code

2 70 P.S. § 1-102

3 There are two primary sets of federal securities laws governing the sale and offering of securities: (i) the Securities Act of 1933; and (ii) the Securities Exchange Act of 1934.

4 70 P.S. § 1-207

5 10 Pa. Code § 203

6 70 P.S. § 1-502


The information contained in this publication should not be construed as legal advice, is not a substitute for legal counsel, and should not be relied on as such. For legal advice or answers to specific questions, please contact one of our attorneys.

About the Authors

Michael A. Thom

Associate

Mike is an attorney in Obermayer’s Business & Finance Department. He has a transactional practice focusing on banking (public and private financing) and real estate matters, as well as corporate formation and...

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