Securities Registration Requirements

Overview of Securities Registration

Under the Uniform Securities Act, securities must be registered with the state before they can be offered or sold to the public within that state, unless the security or the transaction qualifies for an exemption. Securities registration is a disclosure process designed to provide investors with material information about the investment, the issuer, and the risks involved. It is not an endorsement or approval of the security by the state or the Administrator.

The USA provides three distinct methods by which securities may be registered at the state level: registration by coordination, registration by notification (filing), and registration by qualification. Each method is suited to different types of issuers and offerings, and each has different requirements and timelines. Understanding the distinctions among these three methods is essential for the Series 66 exam.

Regardless of the registration method used, the registration statement becomes effective for a period of one year from its effective date. At the end of that period, the registration may be renewed through a process known as "updating" the registration. The Administrator may also impose conditions on a registration, such as requiring escrow of proceeds or impoundment of securities.

Registration Effective Period and Renewals

Once a registration statement becomes effective, it remains in effect for one year from its effective date. If the offering is not completed within that period, the issuer must file a renewal or amendment to continue selling the securities. The Administrator may require updated financial statements and other information as a condition of renewal.

An important concept is the stop order. The Administrator may issue a stop order to suspend or revoke the effectiveness of a registration statement if the Administrator finds that the registration statement contains materially misleading information, that the offering would work a fraud on purchasers, or that the issuer has failed to comply with the conditions of the registration. A stop order can be issued before or after the registration becomes effective, but the Administrator must provide notice, an opportunity for a hearing, and written findings of fact and conclusions of law.

Registration by Coordination

Registration by coordination is the most commonly used method for securities that are being simultaneously registered at both the federal level (with the SEC) and the state level. This method coordinates the state registration process with the federal registration, reducing duplication and simplifying the filing process for issuers.

To use registration by coordination, the issuer must be filing a registration statement under the Securities Act of 1933 with the SEC at the same time. The issuer files the following with the state Administrator:

• A copy of the most recent federal registration statement (or a cross-reference to the EDGAR filing)
• A copy of the latest prospectus filed under the Securities Act of 1933
• A copy of any articles of incorporation, partnership agreement, or trust agreement
• A copy of any underwriting agreement or selling agreement
• A specimen copy of the security
• The filing fee required by the state
• A consent to service of process

The state registration by coordination becomes effective at the same time the federal registration statement becomes effective, provided that the state filing has been on file for at least 20 days, no stop order has been issued by the Administrator, and the registration statement is not the subject of an existing proceeding or examination. This synchronization is the key advantage of coordination: the issuer does not need to wait for separate state approval.

The issuer must also file with the Administrator any amendments to the federal registration statement promptly after they are filed with the SEC. If the final offering price or the underwriting discount changes from what was disclosed in the original filing, the issuer must inform the Administrator of the changes. The Administrator relies on the SEC's review process as the primary check on the adequacy of disclosure, but retains the authority to issue a stop order if the state-level requirements are not met.

Registration by Notification (Filing)

Registration by notification (also called registration by filing) is the simplest and most streamlined registration method under the USA. It is available only to established issuers that have a track record of financial stability and reporting. This method reflects the idea that issuers with a proven track record pose less risk to investors and therefore need less regulatory scrutiny.

To qualify for registration by notification, the issuer must meet specific criteria:

• The issuer has been in continuous operation for at least five years (including predecessors)
• There has been no default on senior securities (bonds, preferred stock, or other debt) during the current fiscal year or the three preceding fiscal years
• The issuer has had average net earnings (after taxes) applied to all outstanding securities of at least 5% of the amount of the outstanding securities during the last three fiscal years, or of the net earnings during the last fiscal year and two of the preceding four fiscal years
• The security being registered is part of an offering that will be made under substantially the same terms as a prior offering that was registered and sold without being the subject of a stop order

The registration by notification becomes effective automatically at a specified time (typically the second full business day after filing, or at a time determined by the Administrator) without affirmative action by the Administrator. This automatic effective date is what makes notification the fastest method.

Registration by Qualification

Registration by qualification is the most comprehensive and detailed registration method under the USA. It is used when neither coordination nor notification is available, typically for issuers that are not simultaneously filing with the SEC and do not meet the established issuer requirements for notification. This method requires the most extensive disclosure and takes the longest to complete.

A registration by qualification requires the filing of the following information with the state Administrator:

• The name, address, and form of organization of the issuer, along with the state of organization and the date of organization
• The names, addresses, and security holdings of all officers, directors, partners, and persons owning 10% or more of the issuer's securities
• A description of the issuer's business, properties, and material legal proceedings
• A description of the security being offered, including all rights, preferences, and restrictions
• The offering price and the amount of selling and underwriting discounts or commissions
• The estimated aggregate offering price and the estimated net proceeds to the issuer
• The intended use of proceeds
• Financial statements for the current fiscal year and the three preceding fiscal years, prepared in accordance with Generally Accepted Accounting Principles (GAAP)
• A copy of any prospectus, pamphlet, circular, or other literature to be used in the offering
• A consent to service of process

Unlike coordination and notification, registration by qualification becomes effective only when the Administrator so orders. There is no automatic effective date. The Administrator reviews the filing and may request additional information, impose conditions (such as escrow requirements), or deny the registration. This gives the Administrator the greatest degree of control over the offering.

Federal Covered Securities and Notice Filing

As discussed in Chapter 1, federal covered securities are exempt from state registration requirements under NSMIA. However, states may require issuers of certain federal covered securities to make a notice filing and pay a fee. A notice filing is not a registration; it is simply a notification to the state that federal covered securities are being offered or sold within the state.

The securities most commonly subject to notice filing requirements include:

• Securities issued by registered investment companies (mutual funds, closed-end funds, and unit investment trusts) must make notice filings in states where their shares are sold
• Securities sold under Regulation D, Rule 506 offerings must file a notice (typically Form D) with the states where the securities are sold, along with the applicable fee and a consent to service of process
• Securities listed on national exchanges (NYSE, Nasdaq) may be subject to notice filing in some states, though many states do not require it for exchange-listed securities

The notice filing must include copies of documents filed with the SEC, a consent to service of process if not previously filed, and the required fee. The Administrator may require that notice filings be updated or renewed periodically.

Administrator Powers Over Registration

The Administrator has significant powers over securities registration, including the ability to deny, suspend, or revoke a registration. A denial prevents the registration from becoming effective. A suspension temporarily halts an effective registration. A revocation permanently terminates an effective registration. These powers are exercised through the issuance of a stop order.

The Administrator may issue a stop order if the registration statement is incomplete, misleading, or contains material misrepresentations; if the offering would work a fraud on investors; if the issuer's enterprise is not based on sound business principles; if the offering involves unreasonable underwriting compensation; or if the applicant has violated the USA or any related securities law. Before issuing a stop order, the Administrator must provide prior notice, opportunity for hearing, and written findings of fact and conclusions of law. However, the Administrator may summarily postpone or suspend the effective date pending investigation if it is in the public interest.

Common Filing Requirements and Procedures

Regardless of the registration method, all registrations share certain common requirements and procedures. Every registration must include a consent to service of process from the issuer, allowing the Administrator to receive legal process on the issuer's behalf. The registration must also be accompanied by the filing fee required by the state.

The Administrator may by rule or order require that a registration include additional information beyond what the statute specifies. This may include information about the issuer's financial condition, the use of proceeds, the background and qualifications of officers and directors, and any material legal proceedings. The Administrator may also require that financial statements be prepared in accordance with Generally Accepted Accounting Principles (GAAP) and audited by an independent certified public accountant.

Effective Period and Unsold Securities

A registration statement is effective for one year from the effective date. After one year, any unsold securities covered by the registration can no longer be sold unless the registration is renewed or a new registration is filed. The issuer may petition the Administrator to allow a renewal of the registration for an additional period.

If the terms of the offering change materially after the registration becomes effective (for example, a change in offering price, a change in the use of proceeds, or a change in the securities being offered), the issuer must file an amendment to the registration statement with the Administrator. The Administrator may require that a new or amended prospectus be distributed to prospective investors.