Proposed Preemption of State Blue Sky Laws Could Benefit Non-Traded REITs

On May 19, 2026, the Securities and Exchange Commission (“SEC”) issued a proposing release titled “Registered Offering Reform” that, among other sweeping changes to the registered offering process, would preempt state securities law registration and qualification requirements (commonly referred to as “Blue Sky” laws) for all registered offerings under the Securities Act of 1933 (“Securities Act”). If adopted as proposed, non-traded real estate investment trusts (“REITs”) that register their offerings with the SEC would benefit from “covered security” status, eliminating the costs and administrative burden of complying with the registration, qualification, and merit review requirements of the individual states in which they offer and sell securities.

Background: Non-Traded REITs and Blue Sky Laws

Under current law, Section 18(a) of the Securities Act provides that states may not require registration or qualification of “covered securities.” Securities listed or approved for listing on a national securities exchange are “covered securities,” as are securities issued by registered investment companies. Because non-traded REITs do not list their securities on a national securities exchange, and because they are not registered investment companies, the securities they offer and sell in registered offerings are not currently deemed “covered securities.” As a result, non-traded REITs that register their offerings on Form S-11 must also comply with the Blue Sky registration and qualification requirements of each state in which they offer or sell securities.

State Blue Sky laws impose varying frameworks that are often based on one or more model acts. In the case of non-traded REITs, a number of states follow the North American Securities Administrators Association Statement of Policy Regarding Real Estate Investment Trusts (the “NASAA REIT Guidelines”). The NASAA REIT Guidelines set forth a number of restrictions and limitations applicable to non-traded REITs that are subject to state Blue Sky qualification and registration requirements, including with respect to investor suitability, investment and leverage restrictions, advisor compensation and fees, stockholder rights, related party transactions, and disclosure and marketing. However, the NASAA REIT Guidelines do not have the effect of law, and state adoption varies. Accordingly, sponsors of non-traded REITs have historically had to incur substantial costs associated with understanding and complying with Blue Sky registration and qualification requirements in all of the states in which they wish to sell securities.

Overview of the Proposed Rule Change

As noted above, Section 18(a) of the Securities Act provides that states may not require registration or qualification of “covered securities.” Section 18(b)(3) of the Securities Act provides that a security meets the definition of a “covered security” if the security is offered or sold to “qualified purchasers,” as defined by the SEC by rule. The SEC is proposing to use this statutory authority to define “qualified purchaser” to mean “any person to whom securities are offered or sold pursuant to an offering registered under the Securities Act.” By defining the term in this manner, all securities offered and sold in connection with a registered offering would become “covered securities,” thereby preempting state Blue Sky registration and qualification requirements for such offerings.

The proposed definition is broadly applicable and is not limited to particular types of issuers, securities, or registration forms. The SEC states that it is intended to “enhance efficiency, reduce compliance costs, and promote capital formation by reducing redundant regulatory oversight, thereby simplifying the process for conducting registered offerings of unlisted securities.”

The SEC further points out that Section 18(c) of the Securities Act would continue to preserve certain state authority. States would retain jurisdiction to investigate and bring enforcement actions with respect to fraud or deceit or unlawful conduct by brokers or dealers. States would also retain the ability to require notice filings (together with annual or periodic reports of the value of securities sold or offered to be sold to persons located in the state), solely for notice purposes and the assessment of fees. Finally, states would retain the power to suspend the offer or sale of securities within the state as a result of a failure to submit required filings or fees.

How Non-Traded REITs Would Benefit

The proposed preemption would have significant practical benefits for non-traded REITs that currently register their offerings on Form S-11. Because registered offerings are often national in nature and non-traded REITs typically offer securities to investors in multiple states, these issuers currently bear the costs of complying with the Blue Sky laws of numerous states. As the SEC points out, these costs are “likely to be unduly burdensome in the context of a registered offering in light of the national nature of registered offerings and the investor protections that the Federal securities laws provide for such offerings.” The SEC argues that the proposed preemption would eliminate the burdens of multiple state-level reviews for the same registered offering, reduce issuers’ time and compliance costs, and accelerate the offering process. Non-traded REITs could also broaden their search for investors across multiple states without the costs associated with state-level registration and qualification, thereby accessing a larger investor pool at a lower cost. In addition, preempting state-level requirements could benefit investors in registered offerings if issuers’ cost savings are ultimately passed on to them in the form of improved offering terms.

If adopted, the proposed preemption would allow non-traded REITs to avoid having to file state administrative forms and other paperwork necessary for compliance with state Blue Sky laws and adhering to Blue Sky disclosure standards. While the SEC says that it does not have data to estimate the costs of complying with state Blue Sky requirements for federally registered offerings of unlisted securities, in a prior rulemaking the SEC received an estimate that, for offerings made in reliance on the Regulation A exemption, an issuer seeking state securities law registration in 50 states would incur $50,000 to $70,000 in filing fees and $80,000 to $100,000 in legal fees. Note that these figures were received in connection with a rulemaking that occurred over ten years ago.

Next Steps

The proposed rule may be viewed in its entirety on the SEC’s website. Comments on the proposed rule may be submitted to the SEC on or before the 60th day following the date on which the proposed rule is published in the Federal Register. Among other things, the SEC specifically asks commenters to describe and quantify the costs and burdens of complying with state Blue Sky registration and qualification requirements for issuers conducting registered offerings of unlisted securities, and to describe any significant transactional delays associated with complying with such requirements.

In addition, as noted above, the SEC has proposed blanket preemption for all registered offerings of unlisted securities. However, the proposing release specifically requests comments on whether the SEC should “instead preempt only certain types of registered offerings.” Non-traded REIT sponsors and industry participants should consider submitting comments supporting the breadth of the proposed definition to help ensure that the final rule, if adopted, continues to cover non-traded REIT offerings.

We will continue to monitor developments as the comment period progresses and as the SEC moves toward a final rule.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.