Securities Registration

Overview of Securities Registration

Under the Uniform Securities Act, it is unlawful to offer or sell any security in a state unless the security is registered under the Act, the security or transaction is exempt from registration, or the security is a federal covered security for which a notice filing has been made (if required by the state). This registration requirement is one of the fundamental investor protections in state securities law.

The registration process serves multiple purposes. It ensures that investors receive adequate disclosure about the security being offered, it gives the state Administrator the ability to review offerings and reject those that are fraudulent or unfair, and it creates a public record of securities that have been authorized for sale within the state. Registration is not permanent; it is effective for one year from the effective date and must be renewed annually.

The USA provides three methods by which securities may be registered at the state level: coordination, notification (also called filing), and qualification. Each method is designed for different circumstances, and the requirements for each differ significantly. Understanding the distinctions among these three methods is heavily tested on the Series 63 exam.

Registration by Coordination

Registration by coordination is used when a security is being registered under the Securities Act of 1933 at the federal level (i.e., a registration statement has been filed with the SEC). This method "coordinates" the state registration with the federal registration, making the process more efficient. It is the most commonly used method for initial public offerings and other securities that are being registered with the SEC simultaneously.

Requirements for Registration by Coordination

To register by coordination, the issuer must file the following with the state Administrator:

1. A copy of the latest form of the prospectus filed under the Securities Act of 1933
2. A copy of the articles of incorporation and bylaws (or equivalent organizational documents), as well as any amendments
3. A copy of any agreements with or among underwriters, including the underwriting agreement
4. A copy of the indenture (for debt securities)
5. A specimen or copy of the security
6. A consent to service of process
7. The filing fee as required by the state

The issuer must also file any information or documents required by the Administrator that are not already included in the federal registration.

When Does Registration by Coordination Become Effective?

The state registration by coordination becomes effective at the same time as the federal registration statement becomes effective, provided that:

• No stop order is in effect and no proceeding is pending under the state's securities act
• The registration statement has been on file with the state for at least the number of days specified by the Administrator (the statute does not specify a minimum, but administrators typically require some advance notice)
• A statement of the maximum and minimum proposed offering prices and the maximum underwriting discounts and commissions has been on file for at least two business days

The key advantage of coordination is efficiency: the state registration automatically becomes effective when the SEC registration becomes effective, eliminating the need for separate timing.

Registration by Notification (Filing)

Registration by notification, also known as registration by filing, is the simplest and least burdensome method of state registration. It is available only to issuers that meet certain conditions, essentially issuers with an established track record that suggests a lower risk to investors.

Eligibility Requirements

To use registration by notification, the issuer must meet one of the following conditions:

• The issuer has been in continuous operation for at least the past five years
• During those five years, there has been no default in the payment of principal, interest, or dividends on any security of the issuer with a fixed maturity or fixed income or dividend provision
• The issuer's net earnings, available for the payment of senior obligations and dividends, have averaged at least 5% of the amount of the outstanding securities over the past three fiscal years

Alternatively, the issuer qualifies if the security has a fixed maturity or fixed income/dividend provision and has been outstanding for at least five years, with no default in payment during that period.

Filing Requirements

The registration by notification filing must include:

• A statement demonstrating the issuer's eligibility to use this method
• The name, address, and form of organization of the issuer
• A description of the security being offered
• Information about the offering price and the proposed date of the offering
• A consent to service of process
• The filing fee

Effective Date

Registration by notification becomes effective at a designated time on the second full business day after the filing date (or at such earlier time as the Administrator may determine by rule or order). This is sometimes referred to as the "automatic" effective date because, assuming all conditions are met, the registration goes into effect without affirmative action by the Administrator.

Registration by Qualification

Registration by qualification is the most detailed and burdensome method of state securities registration. It is available to any issuer regardless of its history or the nature of the security. It is typically used when the other two methods are not available, such as when the issuer is not registering with the SEC (making coordination unavailable) and does not meet the established track record required for notification.

When Is Qualification Used?

Registration by qualification is commonly used in the following situations:

• The issuer is a new company with less than five years of operating history (cannot use notification)
• The issuer is not concurrently filing a federal registration statement with the SEC (cannot use coordination)
• The offering is limited to a single state or a few states and does not require federal registration
• The issuer is conducting an intrastate offering under Rule 147 that is not federally registered

Extensive Filing Requirements

Registration by qualification requires the most comprehensive disclosure. The filing must include:

1. The name, address, and form of organization of the issuer, and the date and state of organization
2. The names, addresses, and compensation of directors, officers, partners, and any person owning 10% or more of the issuer's equity securities
3. The nature of the issuer's business (current and proposed)
4. A description of the security being offered, including the amount, offering price, and estimated aggregate offering price
5. The estimated net proceeds and the purposes for which the proceeds will be used
6. The type and amount of securities previously issued, and the consideration received
7. The type and amount of any options outstanding, or to be created in connection with the offering
8. A copy of any prospectus, pamphlet, circular, form letter, advertisement, or other sales literature intended to be used in connection with the offering
9. A specimen or copy of the security, and any indenture or other instrument governing the rights of holders
10. A signed opinion of counsel about the legality of the security being registered
11. A balance sheet dated within four months of the filing and other financial statements
12. A consent to service of process
13. The filing fee

Effective Date

Registration by qualification becomes effective only when the Administrator so orders. Unlike coordination (which becomes effective automatically with the federal registration) and notification (which becomes effective on the second business day), qualification requires an affirmative order from the Administrator. This gives the Administrator the greatest control over the registration process.

Exempt Securities

Certain securities are exempt from the registration requirements of the USA. These exemptions exist because the securities are considered to have sufficient oversight or safety characteristics that state registration would be duplicative or unnecessary. It is critical to understand that exemption from registration does NOT mean exemption from the anti-fraud provisions of the Act. The Administrator always retains anti-fraud authority over all securities.

Categories of Exempt Securities

The following securities are exempt from state registration requirements:

1. Government Securities: Securities issued, insured, or guaranteed by the United States, any state, any political subdivision of a state (municipal bonds), any agency or instrumentality of the foregoing, or any foreign government with which the United States maintains diplomatic relations. U.S. Treasury bonds, municipal bonds, and agency securities (like Ginnie Mae) fall into this category.
2. Bank and Financial Institution Securities: Securities issued, guaranteed, or insured by any bank organized under the laws of the United States, any federal savings association, or any building and loan or savings institution authorized to do business in the state. This includes certificates of deposit and other bank-issued instruments.
3. Insurance Company Securities: Any security issued by an insurance company authorized to do business in the state, provided the insurance company is subject to regulation by the state's insurance commissioner. This exemption typically covers fixed annuities and fixed life insurance (which are not securities anyway) but may also cover certain other insurance-related instruments.
4. Nonprofit Organization Securities: Securities issued by organizations that operate exclusively for religious, educational, benevolent, fraternal, charitable, social, athletic, or reformatory purposes and not for pecuniary profit, provided no part of the net earnings inures to the benefit of any private shareholder or individual.
5. Federal Covered Securities: Securities that fall under NSMIA as federal covered (listed on national exchanges, investment company securities, Reg D Rule 506 offerings, etc.) are exempt from state registration, though the state may require a notice filing.
6. Commercial Paper: Any promissory note, draft, bill of exchange, or banker's acceptance that arises out of a current transaction or the proceeds of which are used for current business purposes, is not advertised to the public, and has a maturity of nine months or less (270 days).
7. Public Utility Securities: Securities listed or designated for listing on a recognized stock exchange, or securities issued by a public utility company regulated by the state public utility commission, or by a railroad, common carrier, or holding company regulated by the Interstate Commerce Commission (now the Surface Transportation Board).
8. Employee Benefit Plan Securities: Securities issued in connection with an employee stock purchase, savings, pension, profit-sharing, or similar benefit plan.

Exempt Transactions

In addition to exempt securities, the USA provides exemptions for certain types of transactions. A transaction exemption means that the particular manner or circumstances of the transaction do not require registration of the security for that specific transaction. The security itself may still need to be registered for other types of transactions.

This is a crucial distinction: an exempt security is always exempt regardless of how it is sold, but an exempt transaction exempts only the specific transaction, not the underlying security.

Key Exempt Transactions

1. Isolated Non-Issuer Transactions: A transaction by a person who is not the issuer, an underwriter, or a dealer, and who does not regularly engage in securities transactions. The word "isolated" means the transaction is not part of a regular course of repeated and successive transactions. An ordinary investor selling shares in a private sale to a friend would typically qualify. However, if the same person regularly engages in selling securities (even non-issuer transactions), the transactions may no longer be "isolated."
2. Unsolicited Brokerage Transactions: Transactions in which a broker-dealer or agent executes a customer's order without having solicited the order. If the customer initiates the transaction on their own, without any recommendation or solicitation by the broker-dealer or agent, the transaction is exempt. The key is that the order must be truly unsolicited; the broker-dealer must not have promoted or recommended the investment. This is sometimes called the "unsolicited order" exemption.
3. Transactions with Institutional Investors: Transactions between the issuer (or any other person on behalf of the issuer) and institutional buyers. Institutional buyers include banks, savings institutions, trust companies, insurance companies, investment companies, pension or profit-sharing trusts, and other entities defined by the Administrator. The rationale is that institutional investors are sophisticated enough to protect themselves and do not need the same level of state registration protection as retail investors.
4. Private Placement Transactions: Offers directed to a limited number of persons (not more than a specified number, such as 10 persons in the state during any 12-month period) where the seller reasonably believes that all buyers are purchasing for investment purposes (not for resale). No commission or remuneration may be paid for soliciting prospective buyers (except to a registered broker-dealer), and no general advertising or solicitation may be used. The exact number of offerees and requirements may vary by state.
5. Preorganization Certificates or Subscriptions: Sales of preorganization certificates or subscriptions to no more than 10 subscribers in the state, provided no commission or remuneration is paid and no payment is made by any subscriber. This exemption facilitates the early organizational stages of new businesses.
6. Transactions by Fiduciaries: Transactions executed by a court-appointed executor, administrator, sheriff, marshal, receiver, trustee in bankruptcy, guardian, or conservator. These fiduciaries are acting under court supervision, providing an alternative form of investor protection.
7. Underwriter Transactions: Transactions between issuers and underwriters, or among underwriters. These are professional intermediaries who are subject to their own regulatory requirements.
8. Mergers, Consolidations, and Reorganizations: Transactions involving the offer or sale of securities to existing security holders of the issuer as part of a merger, consolidation, or exchange authorized by the competent authority of the state, including reclassification of securities, stock splits, and reverse stock splits.
9. Transactions with Existing Security Holders: Offers or sales to existing security holders of the issuer (including holders of convertible securities, warrants, or rights) if no commission or remuneration is paid for soliciting the transaction in the state.

Stop Orders and Denial of Registration

The Administrator has the authority to issue a stop order to deny, suspend, or revoke the effectiveness of a registration statement. A stop order essentially halts the offering and prevents further sales of the security in the state.

Grounds for a Stop Order

The Administrator may issue a stop order if:

• The registration statement (as of its effective date or as of any earlier date) is incomplete in any material respect or contains a statement that was, in light of the circumstances, false or misleading with respect to a material fact
• The offering has worked or tended to work a fraud upon purchasers, or would so operate
• The offering has been or would be made with unreasonable underwriting or selling discounts, commissions, or other compensation, or with unreasonable amounts of promoters' profits or participation
• The offering price is unreasonably unfair
• A person identified in the registration statement is subject to certain disqualifying conditions (such as a prior felony conviction or a pending administrative proceeding)
• The issuer's enterprise includes illegal activities

Notice and Opportunity for Hearing

Before issuing a stop order, the Administrator must generally provide the applicant with notice and an opportunity for a hearing. However, the Administrator may summarily postpone or suspend the effectiveness of a registration statement pending a final determination (a temporary stop order) if the public interest or protection of investors so requires. Even in the case of a summary action, the Administrator must promptly provide notice and an opportunity for hearing afterward.

Any person adversely affected by a stop order has the right to judicial review, meaning they can appeal the Administrator's decision to a court.