Private Placements in Florida Just Got Easier: Here’s How

Florida recently implemented amendments to its Securities and Investor Protection Act (“Chapter 517”), bringing significant changes to the regulatory framework governing private placements, investment advisors, and exemptions for institutional investors. Effective October 2024, these updates aim to align Florida’s securities laws with federal standards while enhancing protections for investors in the Sunshine State. Here’s a breakdown of the key changes and their implications for issuers, investors, and intermediaries.

Refined Institutional Investor Definition

The amendments redefine “institutional investor” to broaden its scope, mirroring elements of the federal accredited investor criteria under Regulation D. The updated definition now includes entities such as:

• Investment companies registered under the Investment Company Act of 1940
• Employee benefit plans with assets exceeding $5 million
• Governmental entities or political subdivisions authorized to invest public funds

This expanded definition facilitates a more streamlined process for issuers targeting sophisticated investors while maintaining regulatory safeguards.

Changes to Investment Advisor and Associated Persons Definition

The amendments also clarify the definitions of “investment advisor” and “associated persons,” requiring certain professionals to register with the Florida Office of Financial Regulation (OFR) unless they qualify for an exemption. These changes are aimed at improving oversight and ensuring that only qualified individuals provide investment advice to Florida investors.

Notably:

• Investment advisors must now meet stricter registration and disclosure requirements
• The previous 15-client threshold for investment advisor registration has been lowered to six Florida-resident clients in the preceding 12 months
• Associated persons must comply with enhanced examination and qualification standards
• Certain exemptions, including those for federally registered investment advisors, remain in place but require additional documentation

Accredited Investor Exemption (Section 517.061(11))

The amendments introduce an exemption for securities offerings that meet the following conditions:

• Offers or sales are limited to accredited investors
• The issuer must not be an entity with an undefined business operation, lack a business plan, or be engaged in an unspecified merger or acquisition
• All purchasers must acquire the securities for investment purposes and not for resale
• The issuer must electronically file a notice of transaction, a consent to service of process, and a copy of the general announcement within 15 days after the first sale in Florida

Updated Filing and Disclosure Requirements

Issuers relying on private placement exemptions must now adhere to revised filing timelines and enhanced disclosure obligations. The new rules mandate:

• Filing of Form D or a similar notice with the OFR within 15 days of the first sale in Florida
• Additional disclosure of material risks associated with the offering, particularly for novel or high-risk investments

Non-compliance with these requirements may result in administrative penalties, including fines or a prohibition from offering securities in Florida.

Revised Exemption for Private Placements

One of the most notable changes involves the private placement exemption under Chapter 517. The amendments:

• Introduce a $5 million cap on offerings eligible for certain simplified filing exemptions
• Impose a “reasonable belief” standard on issuers to verify investor eligibility, akin to Rule 506(c) of Regulation D
• Require additional documentation for reliance on the exemption, including subscription agreements and investor questionnaires

These changes emphasize investor due diligence and documentation, increasing the burden on issuers but offering enhanced transparency for investors.

Revisions to Section 517.061(10) and Voidability Provisions

The amendments to Section 517.061(10) modify key aspects of transaction voidability and disclosure requirements. Now, in order to be exempt from registration under Section 517.061(10), all of the following conditions must be satisfied:

• Issuers must provide upfront disclosure to purchasers regarding their right to void the transaction within three days after the first tender of consideration
• Purchasers must notify the issuer in writing within the three-day window if they wish to void the transaction
• The legend requirement now applies to all Florida purchasers, whereas previously, it only applied if five or more Florida-based purchasers were involved

Additional changes include:

• Removal of the five-person/buyer carveout, meaning that any Florida-based purchaser can now exercise their right to void a transaction
• Elimination of the “earlier of” construct for notifying the issuer of voiding a purchase, simplifying the process for investors
• A business entity is now counted as a single purchaser unless it was specifically formed to acquire the securities and does not qualify as an accredited investor. In such cases, each beneficial owner of the entity is counted separately
• The exemption under subparagraph (10)(a)(1) no longer requires dealers to be registered solely to receive compensation or commissions for sales, though this is still mandated under Section 517.12, F.S

These revisions significantly impact both issuers and investors by expanding investor protections while clarifying compliance requirements for exemptions. Failure to satisfy any of these conditions could result in loss of exemption and potential liability.

Florida Limited Offering Exemption (Section 517.0611)

Replacing the prior Florida Intrastate Crowdfunding Exemption, this exemption allows for offerings conducted under the federal intrastate offering exemptions in Section 3(a)(11) of the Securities Act, Rule 147, or Rule 147A.

To qualify:

• The issuer must be a for-profit business entity
• The issuer’s principal place of business must be in Florida
• The issuer must derive its revenue primarily from operations in Florida

New Florida Invest Local Exemption (Section 517.0612)

This exemption facilitates smaller intrastate offerings under federal exemptions, such as Section 3(a)(11) of the Securities Act, Rule 147, or Rule 147A.

The key requirements are:

• The issuer must be a for-profit business entity registered with the Florida Department of State
• The issuer must have its principal place of business in Florida

For small businesses looking to raise modest amounts of capital, the Invest Local Exemption offers an intrastate fundraising option of up to $500,000. This exemption allows general advertising and solicitation while maintaining investor safeguards. Unlike other exemptions, issuers are not required to engage a registered dealer or intermediary, though they have the option to do so. There is no cap on the number of investors, but non-accredited investors are limited to purchasing up to $10,000 in securities per 12-month period. Accredited investors have no investment restrictions. Issuers must submit a disclosure document in advance to the OFR and all prospective investors. Additionally, funds must be held in escrow until a target investment threshold is reached, and if that threshold is not met within 180 days, all funds must be returned to investors. Notably, this exemption is restricted to for-profit businesses and is not available to “blank-check” companies lacking a defined business model or operational plan.

New Limited Offering Exemptions

Florida has introduced a new Limited Offering Exemption, replacing the previous crowdfunding exemption.

The principal elements of this exemption include:

• Offerings up to $5 million available to an unlimited number of accredited and non-accredited investors
• General advertising and solicitation are permitted, provided all communications comply with anti-fraud provisions
• Non-accredited investors are limited to a $10,000 investment cap per 12-month period
• Disclosure documents, including financial statements, must be submitted to the OFR and made available to investors
• Investor funds must be held in escrow until a target amount is reached, ensuring capital protection for investors

Additionally, Florida has created a micro-offering exemption, allowing intrastate offerings up to $500,000 with simplified compliance requirements. This exemption is aimed at small businesses seeking to raise capital efficiently while maintaining investor safeguards.

SCOR Filing Fee Reduction

Small businesses seeking to raise capital through the Small Company Offering Registration (SCOR) process will benefit from a reduction in filing fees.

The amendment:

• Lowers the SCOR filing fee from $1,000 to $200
• Simplifies the approval process for smaller issuers seeking to raise funds through public offerings in Florida

This change is expected to encourage small business capital formation while maintaining investor protections.

Harmonization With Federal Law

Florida’s updated regulations aim to reduce the patchwork of state and federal compliance requirements. By aligning key provisions with the Securities Act of 1933 and related SEC rules, issuers can benefit from simplified compliance processes for multistate offerings and greater clarity regarding preemption of state laws for certain federally covered securities.

Practical Implications for Market Participants

For issuers, these updates underscore the importance of robust compliance programs.

Legal counsel should:

• Review and update offering materials to meet new disclosure standards
• Ensure timely filings with the OFR to avoid penalties
• Implement thorough investor verification processes to satisfy the “reasonable belief” standard

For investors, the amendments offer increased protections, particularly for those participating in higher-risk private offerings. Enhanced disclosure and documentation requirements provide greater transparency, enabling more informed investment decisions.

Conclusion

The recent amendments to Florida’s Securities and Investor Protection Act reflect a balanced approach to modernizing state securities laws. By aligning with federal standards while reinforcing investor protections, Florida continues to position itself as a hub for capital formation and investment activity. Issuers and intermediaries operating in Florida should act promptly to understand and implement these changes to ensure compliance and take full advantage of the new opportunities these laws present for capital raising and investment growth.

——————————————————————–

This DarrowEverett Insight should not be construed as legal advice or a legal opinion. This Insight is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The contents are intended for general informational purposes only, and you are urged to consult your attorney concerning any particular situation and any specific legal question you may have. Please reach out to us if you need help addressing any of the issues discussed in this Insight, or any other issues or concerns you may have relating to your business. We are ready to help guide you through these challenging times.

This Insight does not constitute written tax advice as described in 31 C.F.R. §10, et seq. and is not intended or written by us to be used and/or relied on as written tax advice for any purpose including, without limitation, the marketing of any transaction addressed herein. Any U.S. federal tax advice rendered by DarrowEverett LLP shall be conspicuously labeled as such, shall include a discussion of all relevant facts and circumstances, as well as of any representations, statements, findings, or agreements (including projections, financial forecasts, or appraisals) upon which we rely, applicable to transactions discussed therein in compliance with 31 C.F.R. §10.37, shall relate the applicable law and authorities to the facts, and shall set forth any applicable limits on the use of such advice.