New technology tools have enabled online processing of alternative investments. However, a fundamental question when using such tools is whether or not they comply with federal and state regulations. Primarily, industry participants are concerned with whether electronic signatures can serve to form a valid contract for the sale of securities.
ESIGN and UETA
On a federal level, the Electronic Signatures in Global and National Commerce Act (ESIGN) states that electronic signatures are allowed in interstate commerce. However, as ESIGN regulates where federal law applies, contracts are often also governed by the laws of the states in which the transactions take place. This may be particularly true for real estate agreements or real estate-related securities.
That is where the Uniform Electronic Transactions Act (UETA) comes into play. UETA is a state-level uniform law that gives legal recognition to electronic signatures, records, and contracts. So far, 47 states have adopted UETA, with the remaining three states—Illinois, New York, and Washington—having adopted other laws that recognize electronic signatures.
Thanks to these two laws, there is near-universal acceptance of electronic signatures on a state and federal level for general contracts. However, securities contracts, in particular, have a number of additional regulations that apply to any given transaction. Luckily, the SEC and FINRA’s requirements for electronic signatures are essentially the same as those required under the ESIGN act.
ESIGN, UETA, and the parallel regulatory framework should give a level of comfort to industry participants wishing to utilize electronic signature technology to streamline their alternative investment transactions. Still, participants may wrestle with some ambiguity regarding sales practice considerations in conducting securities business online or electronically.
NASSA Statement of Policy
The North American Securities Administrators Association (NASAA), an organization designed to protect investors, has presented a framework for more clarity in its securities-specific statement of policy.
The NASAA policy acts like a uniform law in that state legislatures must adopt it before it has any effect. Currently, at least 14 states have adopted NASAA’s statement of policy formally or designated that the state accepts the policy. Those involved with issuing alternative securities should continue to keep abreast of what states adopt the NASAA policy. An up-to-date map of state adoption can be found here:
NASAA requires that an electronic signature must meet both ESIGN and UETA requirements. The bulk of the statement of policy requirements focus on electronic presentation of offering and subscription documents to investors. For example, the policy requires that those presenting these documents electronically ensure subscribers must scroll through the entire document and obtain consent to conduct business electronically. There are data breach provisions as well. Some of the requirements are prescriptive, whereas others are vague as to how they should be implemented.
When adopted by each state, the NASAA statement of policy reaffirms pre-existing electronic signature requirements while also adding a layer of certainty and investor protection for electronic securities transactions. By meeting NASAA requirements, sponsors and advisors can feel more comfortable that they can safely execute electronic contracts and signatures for investors in states that have adopted the policy. Like any uniform law, it is important to understand the context of how the state adopts the policy and whether there are amendments. In Virginia, for example, the statement of policy only seems to apply to registered securities and may not be required in the case of exempt securities offerings.
NASAA is available to provide clarity on electronic signatures and presentation of offering or subscription documents for alternative investments in some states. However, in practice, sponsors should be able to safely utilize electronic signatures nationwide as long as they continue to monitor and implement federal and state law in states where the statement of policy does not apply, as well as SEC and FINRA regulations and guidance.
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