To legally offer a security in a state, the security must be registered in that state or have a valid reason to avoid registration (an exemption). The first three chapters of this unit cover how securities are registered. Then the unit finishes with securities exemptions.
Under the Uniform Securities Act (USA), a registration statement may be filed by any of these entities:
In most cases, the issuer files the registration paperwork when it wants to sell its securities. Often, the issuer works with an underwriter (loosely treated as a broker-dealer in the law). Because of that, broker-dealers sometimes file registration paperwork on behalf of the issuers they represent.
The phrase “a person on whose behalf the offering is to be made” usually refers to a large shareholder who wants to sell previously unregistered securities to the public.
For example, suppose a large institution buys a security through a private placement, and the issuer never plans to register those shares. If the institution later wants to sell those shares to the general public, it must register them. Otherwise, it would need to dispose of them through another type of exempt transaction.
There are three ways to register a security at the state level:
You’ve already seen the idea of federal-covered advisers. The National Securities Market Improvement Act (NSMIA) created a similar category called federal-covered securities.
A federal-covered security registers only with the SEC and then provides a notice filing to the state administrator. In other words, the SEC is the primary regulator, and the state generally receives notice rather than conducting a full registration review.
NSMIA defines the following as federal-covered securities:
Exchange traded securities
NSMIA states:
A security is a covered security if such security is:
- Listed, or authorized for listing, on the New York Stock Exchange or the American Stock Exchange, or listed on the National Market System of the Nasdaq Stock Market (or any successor to such entities);
- Is a security of the same issuer that is equal in seniority or that is a senior security to a security described in [previous bullet point]
In plain terms, a security is federal-covered if it’s listed on a national exchange such as the New York Stock Exchange (NYSE), the American Stock Exchange (now NYSE American), or NASDAQ. Only larger, well-established companies typically qualify for exchange listing. Examples include Visa (NYSE), Tesla (NASDAQ), and Apple (NASDAQ). Smaller, lesser-known companies may trade on NYSE American.
NSMIA also treats certain other securities from the same issuer as federal-covered, even if those securities aren’t exchange-listed.
Stocks are the most common exchange-listed securities. Many debt securities (such as bonds) are not exchange-listed; instead, they trade in the over-the-counter (OTC) markets. An OTC security is one that does not trade on an exchange.
For example, Ford Motor Company has common stock listed on the NYSE. If Ford issued a bond, that bond would likely trade OTC. Even though the bond wouldn’t be listed on a national exchange, it would still be federal-covered because bonds are senior securities* to common stock.
*While not an important topic for the exam, a security’s seniority relates to a company’s liquidation priority. If a company goes bankrupt and must sell its assets (liquidation) to pay creditors and shareholders, payments follow a priority order:
Because common stockholders are last in line, most other securities an issuer sells have senior priority. Bottom line: it’s safe to assume that any security sold by an issuer with common stock listed on a national stock exchange is federal-covered.
Investment company securities
If you’re familiar with mutual funds, you already know the most common type of investment company security. Investment companies pool customer money, invest it according to a stated objective, and seek the best return possible within that structure.
For example, the Vanguard Growth and Income Fund invests a large pool of investor money in stocks intended to provide both growth and income potential. It’s one of thousands of mutual funds available.
There are four types of investment companies to be aware of:
Exam questions usually don’t focus on the details of these products, but you must know they’re federal-covered.
Regulation D securities
If you’ve taken the SIE, Series 6, or Series 7, you’ve likely seen Regulation D, the federal private placement rule. This exemption allows issuers to sell unregistered securities (avoiding registration with the Securities and Exchange Commission) as long as the offering is limited to a small, private group of wealthy and institutional investors.
Because registration is time-consuming and expensive, many companies raise capital through private offerings before going public. For example, AirBnB raised billions of dollars in private placements before its IPO in December 2020.
Regulation D applies to issuers selling unregistered securities in multiple states. Later in this unit, you’ll see the state’s version of private placement later in this unit, which is a different rule. State private placement applies when an unregistered security is sold only in one state.
Certain federally exempt securities
If you’ve taken the SIE, Series 6, or Series 7, you may remember the Securities Act of 1933. This law sets federal requirements for issuers offering interstate (more than one state) securities during issuer transactions (primary market sales).
Some securities are specifically exempt from registration with the Securities and Exchange Commission (SEC). Two of those exempt securities are also treated as federal-covered:
*NSMIA states only municipal securities sold outside their state of issuance are considered federal-covered. For example, a municipal bond issued in Wisconsin is federal-covered in any state but Wisconsin. Technically, a municipal security is not considered federal-covered within the state of issuance. Therefore, the Wisconsin municipal bond would NOT be considered federal-covered in Wisconsin, which provides the state administrator in Wisconsin some regulatory powers over these offerings. For test purposes, it’s only important to know municipal bonds are federal-covered outside of the states they’re issued in.
Federal-covered securities are exempt from state registration, but they may still be subject to certain obligations* with the state administrator. Similar to federal-covered advisers, issuers of federal-covered securities must submit a notice filing in every state where the security will be offered. Under the USA, this is called registration by filing (also known as notice filing), even though the security is not actually registered with the state.
*Unlike other federal-covered securities, the US Government and municipalities offering securities outside their state are typically not subject to any filing requirements.
Federal-covered securities don’t register with the state, but most are registered with the SEC (federal registration). This is true for all federal-covered securities except those sold in Regulation D offerings and government securities (these are also exempt at the federal level). For Series 63 purposes, you can assume SEC registration is happening in the background when it applies.
When an issuer submits a notice filing for a federal-covered security, the USA requires the following items:
The state administrator generally does not review these materials the way it would for a full state registration. The SEC regulates federal-covered securities, not the state administrator.
A federal-covered security can be sold in a state once the required documents and filing fee are submitted. Sales may occur on the day SEC registration becomes effective or on the day the notice filing is filed, whichever occurs last. Although the state administrator has little to no authority over federal-covered securities, the administrator can issue stop orders to prevent sales if fraud is suspected.
Once a federal-covered security’s registration is effective, the issuer is subject to prospectus delivery requirements. A prospectus is the disclosure document given to investors. For example, here is AirBnB’s prospectus from its December 2020 IPO.
During a new issue public offering of any form (including registration by coordination and qualification), a prospectus must be delivered to investors by settlement of the trade (when the sale to the investor is finalized).
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