Maryland Securities Commissioner Expands Access to Maryland’s Limited Offering Exemption (MLOE)

Prepared by Matthew Cascio and Stuart Smith

Fellows of the MSBA-UB Business Law Clerkship Program

At the Suggestion of Members of the MSBA Business Law Section Council

—–

On October 25, 2013, Maryland’s Securities Commissioner ordered a significant expansion of access to Maryland’s Limited Offering Exemption (MLOE) by extending the definition of “local issuer” under the exemption to include limited liability companies (LLCs), partnerships, and other entities.[1] Filings on record with the Maryland Department of Assessments and Taxation indicate a greater expansion in the number of filings from LLCs and other non-traditional business formations than from traditional corporations.[2]  Any offerings by these non-corporate entities, without the aid of the MLOE, would be subject to costly registration and sales and advertising literature requirements.[3] Under the Federal Intrastate Exemption, a local issuer may offer and sell securities subject to the regulation of the state in which the issuer is doing business provided that the issuer offers and sells the securities only within said state.[4]  In effect, the Federal exemption allows states to further exempt local issuers from various securities registration provisions; thereby cutting issuer costs and encouraging business growth within the state.  The MLOE is one such exemption as it excludes local issuers from both the registration and sales and advertising literature requirements under Maryland law.[5]

Adopted initially under an emergency provision in October of 1992, the exemption became permanent in December of that same year.  Since corporations were the predominant issuers of securities at the time, the exemption was originally limited to them.[6]  However, the MLOE included a provision by which the Maryland Securities Commissioner could extend coverage to LLCs, partnerships, or any other entity meeting the definition of a “local issuer.”[7]  Through the order of October 25, 2013, Commissioner Lubin executed the extension by amending the definition of “local issuer.”[8]

Prior to the extension, qualification as a “local issuer” required the entity be organized as a corporation, either under Maryland law or another jurisdiction, in order to utilize the MLOE.  The amended definition makes it possible for LLCs, partnerships, or other entities to take advantage of the MLOE provided they meet certain additional requirements.  Entities seeking an exemption for their offering under the MLOE must:

a)   be organized under the laws of Maryland or another jurisdiction and qualified to do business in Maryland,

b)   have their principle place of business in Maryland,

c)   and in the reasonable belief of the issuer, have 50 or fewer beneficial owners of their securities, both immediately before and after the sale of securities under the MLOE.[9]

This expansion of the types of entities permitted to qualify as “local issuers”, and therefore able to take advantage of the exemptions under the MLOE, allows greater access to securities offerings as an option for acquiring the capital needed for business growth.


 

[1] Local Issuer Exemption Eligible Entities, http://www.oag.state.md.us/Securities/ORDER_AmendmentToMLOE_10_13.pdf (last visited Feb. 17, 2014).

[2] For Fiscal Year 2012, the Maryland Department of Assessments and Taxation reported the number of approved charter documents, limited partnership documents, and financing statements approved for record was 29,967 for LLCs, 692 for limited partnerships, and 10,230 for corporations.  Maryland Department of Assessments and Taxation Sixty-Eight Report 18, http://www.dat.state.md.us/sdatweb/stats/AnnualRpt_2012.pdf (last visited Feb. 20, 2014).

[3] Non-exempt offerings would be subject to the filing requirements of section 11-205 (sales and advertising literature) and section 11-501 (registration).  MD. CODE ANN., CORPS. & ASS’NS §§11-205, 11-501.

[4] Securities Act of 1933, § 3(a)(11) (1933).

[5] MD. CODE ANN., CORPS. & ASS’NS §11-602(9); MD. CODE REGS. 02.02.04.09.

[6] Id.

[7] MD. CODE ANN., CORPS. & ASS’NS, §11-203 & §11-602(9); MD. CODE REGS. 02.02.04.11(A)(2).

[8] Local Issuer Exemption Eligible Entities

[9] Id.