4.4 Securities Registration & Exemptions
This chapter covers federal registration of a new issue under the Securities Act of 1933, the three ways to register at the state level, and the exemptions that let a security or a sale skip registration. Exam questions often turn on telling these apart, such as an exempt security versus an exempt transaction, or a federal rule versus its state version. Advisers need the same distinctions to judge what an offering must file.
What each topic covers
Federal Registration & Underwriters follows a new issue from filing to sale. Filing the registration form with the SEC starts a 20-day cooling off period. A firm may distribute the preliminary prospectus, take indications of interest and publish a tombstone, but may not recommend, advertise or sell the issue or take deposits. The effective date is the first day of legal sales, and the final prospectus must be delivered unaltered.
Federal Exempt Securities & Transactions separates securities that are always exempt from sales that are exempt only because of how they are made. The first group includes government, bank (but not bank holding company), non-profit and railroad equipment trust securities, insurance products other than variable contracts, and anything maturing in 270 days or less. Regulation D allows unlimited accredited investors and up to 35 non-accredited ones. Rule 147 covers intrastate offerings under the 80% rule.
State Registration by Filing is a notice filing for federal-covered securities: exchange-traded, investment company and Regulation D securities, plus US Government securities and municipals sold outside their state of issuance. The issuer files the SEC form, a consent to service of process, a dollar-amount report and a fee. Sales begin on the later of the SEC effective date or the notice filing.
State Registration by Coordination is for interstate securities that are not federal-covered. The issuer registers with the SEC and the state together, and state registration is effective when the SEC declares, if no stop order exists. The lesson also covers escrow for promotional shares and a registration that lasts one full year from the effective date, with no December 31 renewal.
State Registration by Qualification is the hardest method. Any security may use it, though it mostly suits intrastate offerings, and the state administrator handles it alone. Registration is effective on the 30th day after filing if the paperwork is complete, the fee is paid and no stop order exists. A stop order needs the public interest plus one of nine circumstances, and the issuer can request a hearing, held within 15 days.
State Exempt Securities lists ten Uniform Securities Act categories, from US, Canadian and national foreign government securities to promissory notes and employee benefit plans. A state-exempt promissory note must mature in 9 months or less, be issued in denominations of at least $50,000, and carry one of the three highest ratings. The federal exemption has no denomination or rating test.
State Exempt Transactions covers eight transactions that let a non-exempt security be sold without registration. A private placement allows no more than 10 retail investors in 12 months, bought for investment, with no retail commissions. The others are isolated and unsolicited non-issuer sales, certain fiduciaries, debt-related sales, issuer-to-underwriter sales, institutional sales, and pre-organization certificates offered to no more than 10 subscribers.