Chapter 2: Regulations of Securities and Issuers - C. Registration of Securities

Question 1

Registration of securities

Answer 1

All securities sold in the U.S. that are classified as non-exempt are required to be registered. The registration forms that companies file provide essential facts. In general, registration forms call for the following information:

• A description of the company’s properties and business;
• A description of the security to be offered for sale;
• Information about the management of the company; and
• Financial statements certified by independent accountants.

It is unlawful under the USA for any person to sell or offer any unregistered securities in the state unless they are federal covered (securities registered on a national exchange or on Nasdaq) or exempt.

The process of registering a security before the state is commonly known as “blue-skying” an issue.

Question 2

State securities Administrator

Answer 2

The Uniform Securities Act provides that every state has an Administrator to administer the provisions of the Act. The administrator can be the state securities commission, its commissioner, or its secretary.

Question 3

General provisions of securities

Answer 3

The initial step in the registration of a security is the filing of a registration statement with the administrator. The filing can be performed only by the issuer, a registered broker/dealer, or a person on whose behalf the offering is being made (non-issuer distribution). A registration statement is effective for 1 year. This effective date can be extended providing that there is no stop order denying the registration in effect. The registration statement may not be withdrawn for 1 year from its effective date if any securities of the same class are outstanding, unless the administrator permits a withdrawal in accordance with specific rulings.

An appropriate filing fee must accompany the registration statement. This fee is usually based on a percentage of the total offering price of the security. If the fee is not paid in full, the registration will be stopped or denied. The registration statement includes the following:

• The amount of securities being offered;
• Other states in which a registration statement has been or will be filed; and
• Any adverse rulings entered in connection with the offering.
  If the administrator deems a registration statement to be inaccurate or incomplete, an amendment must be filed before the registration can become effective.

The administrator may also request that the issuer file quarterly reports to disclose the progress of the offering. A prospectus or disclosure document must be sent to each person to whom an offer or sale is made.

The administrator can also permit the omission of any information or requirement.

Question 4

Types of security registration

Answer 4

The Uniform Securities Act (USA) provides for the registration of securities by any of the following 3 methods:

1) Notice filing (this is not technically a registration; it operates more like a notice to the state for federal covered securities) = Easiest, well-established federal-covered securities only

2) Registration by coordination = Usually for IPOs, federal and state concurrently

3) Registration by qualification = Hardest, most detailed paperwork. Usually intrastate offerings.

Question 5

Security registration - notification by filing

Answer 5

The notification or notice filing method is available to well-established corporations that are considered federal covered. Although notice filing is not a true form of registration, it is a way for the state administrator to know what securities are being offered in their state, and also enables the administrator to receive the consent to service of process, as well as a filing fee.

Although only those corporations that meet the strict criteria to qualify for notice filing may do so, the process of notification by filing is the easiest and least costly of the filing methods for a corporation.

Under this method, the corporation uses the prospectus on file with the SEC under the Securities Act of 1933 as the filing document with the state. The company simply notifies the administrator that it is meeting the requirements mandated by that state and pay any appropriate fees.

If the issuer is a mutual fund or unit investment trust that is considered federal covered, the notification by filing applicant is allowed as long as it is accompanied be any required fees.

The documentation for notification by filing must include a consent to service of process (if required by that state) and other papers containing the following information:

• A statement of eligibility for the filing;
• The name, address, and type of organization of the issuer;
• A descriptive statement of the security being registered; and
• A copy of the most current prospectus of the security on file with the SEC.

If any part of the offering is being made for the benefit of anyone other than the issuer (a nonissuer distribution), the statement must also include

• That person’s name and address;
• The amount of securities being offered; and
• The reason for the offering.

An example of this situation would be an officer of a corporation including restricted shares that he or she owns as part of the offering. This type of offering is considered a nonissuer offering because the proceeds are going to the officer who is selling the unregistered restricted shares, and not to the actual Corporation.

When the federal registration becomes effective, the state registration is effective as well. A notice filing for mutual funds and unit investment trusts becomes effective on the same day the information is filed with the administrator.

Question 6

Security registration – registration by coordination

Answer 6

An issuer may perform a registration by coordination if the same offering is to be registered with the SEC under the Securities Act of 1933. Most IPOs (initial public offerings) are registered by coordination. Filing the SEC information with the state will satisfy the state registration requirements.

Although this method can be used by any issuer, it is a more stringent process to follow. If registration by filing is not available, this may be the next best alternative.

In order to register by coordination, the issuer must file the consent to service of process, the registration statement, and the following information to the state:

• 3 copies of the current prospectus on file with the SEC;
• A copy of the articles of incorporation and bylaws of the issuer;
• Any underwriter agreements;
• A copy of any indenture relating to the issue;
• A sample of the security to be issued; and
• Any other appropriate information or documents requested by the administrator.

If no stop order is in effect, the state registration becomes effective when the federal registration becomes effective provided the following conditions exist:

• The state registration has been on file for at least 10 business days (depending on the state, it may be up to 20 business days); and
• A statement containing the minimum and maximum proposed offering prices and maximum underwriting discounts and commissions has been on file with the state for at least 2 business days prior to the effective date.

Question 7

Security registration – registration by qualification

Answer 7

A registration by qualification is the most difficult method due to the detail of disclosures required. This registration may be used in any state for any security that is not an IPO filed with the SEC and does not meet requirements for filing by notification. Also, an intrastate security (one that is being registered in only one state) will typically be registered by qualification. The required information for this filing includes the following:

• General information about the issuer. For a non-issuer distribution, the name, address, and amount of securities owned by the person on whose behalf the offering is made;
• Information on all officers and directors of the issuer, including earnings for each director for the past and current year;
• Information on all shareholders of 10% or more of the issuer’s securities;
• Amounts paid to promoters and non-issuers over the past 3 years and anticipated future payments. The administrator can require that if a promoter is compensated with stock that the stock be held in escrow for up to 3 years after the effective date in order to prohibit the promoter from immediately cashing out at a profit;
• Terms of the offering and the proposed utilization of the sales proceeds by the issuer;
• A current income statement, balance sheet, and description of the issuer’s capitalization and long-term debt;
• A copy of any prospectus or other disclosure documents, advertisement, and sales literature related to the offering;
• All contracts made within the past 2 years and disclosure of any litigation. If the security is a debt offering, a legal opinion is also required;
• The issuer’s articles of incorporation, any indenture related to the offering, and a specimen of the security being offered; and
• Any additional information required by the administrator.

A registration by qualification becomes effective on a date determined by the administrator. If there are no misstatements or omissions of material facts found, the effective date is usually 30 days after the filing date. As usual, any purchaser must receive a prospectus or other disclosure document at or before the time an offer is made or a written confirmation of a sale is sent.

Question 8

Denial, Suspension and Revocation of Registration

Answer 8

The administrator has the authority to issue a stop order denying the effectiveness of a registration statement, or to suspend or revoke the registration of an issue if it is deemed to be in the public’s best interest and there is just cause in accordance with the Uniform Securities Act. This would usually occur under the following conditions:

• The registration statement is incomplete or contains false or misleading information concerning a material fact;
• A provision of the USA has been willfully violated by any person involved in the offering (contumacy is another term for willful violation or disregard of regulation);
• The security is already subject to a stop order or injunction by another state or federal court;
• The issuer’s method of business or enterprise includes illegal activities, or an officer of the issuer or underwriter has been convicted of a securities crime;
• The offering tends to be fraudulent or is made on terms that are deemed unfair or inequitable to the purchaser;
• The issuer is ineligible for the registration method applied for, such as when a company attempts a registration by filing when it does not meet the requirements; and
• The proper filing fees have not been paid. In this case, the administrator enters a denial order that is released when the fees are received.

An administrator may not enter a stop order against a registration based upon facts that were known by the administrator when the registration became effective, unless the proceedings are initiated within 30 days of the effective date.

If a stop order is issued, the administrator is required to promptly notify all parties that the order has been entered, and provide the reasons for the order. The registrant is allowed to have the matter presented before a hearing, which must be held within 15 days of a written request. If no hearing is requested or ordered, the stop order will remain in effect unless changed or released by the administrator.