Registration by coordination

Securities sold in more than one state (interstate) that don’t meet the definition of a federal-covered security are subject to registration by coordination. This type of registration involves both the Securities and Exchange Commission (SEC) and the relevant state administrators. In other words, the issuer registers the security with federal and state regulators at the same time (that’s the “coordination”).

We previously learned about the National Securities Market Improvement Act of 1996, which drew a clear boundary between federal and state regulations. NSMIA determined that federal rules supersede state rules when both levels regulate the same entity. That same idea shows up in registration by coordination.

Issuers primarily follow SEC registration guidelines, which are largely established in the Securities Act of 1933. You may have seen this law while studying for another exam, but the details aren’t important for the Series 63.

Assume there’s a federal securities registration process that requires numerous issuer and security-related disclosures. The SEC typically processes registration paperwork in 20 days (the “20 day cooling off period”), then grants effective registration if all required documentation has been submitted.

While the SEC review is happening at the federal level, the issuer submits the following to the state administrator:

• The security’s prospectus
• Articles of incorporation
• Any agreement with underwriters
• Any indenture or other instrument governing the issuance of the security to be registered
• Copy of any other information filed with SEC (if requested by state administrator)
• Consent to service of process
• Filing fee

State registration typically becomes effective once the SEC declares the federal registration effective. Before granting state registration, state administrators require the following:

• No stop orders in place by state administrators or other regulators
• Required documentation has been on file with the state administrator for at least 10 days (some states impose a 20-day requirement)

As with rules covering registered persons, the issuer, underwriter, or any person connected with the sale of newly registered securities may not imply that the state administrator has approved the security.

Some securities registered by coordination may be subject to state-enforced escrow requirements. The North American Securities Administrators Association (NASAA) maintains a rule regarding promotional shares. The details aren’t important here, but these are generally equity shares (stock) issued by smaller companies with weak financials. If a security meets the definition of promotional shares, the issuer may be required to keep offering proceeds for a specified period of time.

Escrow accounts hold funds with a third party while an offering is in progress. An administrator may require issuers of promotional shares to place the proceeds of a new issue offering into escrow until a specified amount of money is raised. This helps prevent an issuer from raising a small amount of money and then disappearing with the funds. Once the specified amount is raised, the funds are released to the issuer.

Unlike registration of persons, a security remains registered for one full year from the effective date. There is no renewal required at the end of the calendar year (December 31st). Registration continues only if the offering has not sold out. In most cases, public offerings last days or weeks, so they don’t extend past one year. However, if shares are still unsold one year after the effective date, the registration will continue.