Registration by filing

Introduction to registering securities

A security must be registered or have a legitimate reason for avoiding registration (an exemption) to be legally offered in a state. We’ll discuss how securities are properly registered in the first three chapters of this unit. Then, we’ll round out this unit with a discussion on securities exemptions.

According to the Uniform Securities Act (USA), a registration statement may be filed by any of these entities:

• Issuers
• A person on whose behalf the offering is to be made
• Broker-dealers

In most scenarios, issuers file registration paperwork when attempting to sell their securities. Oftentimes, this is done with the help of an underwriter (loosely referred to as a broker-dealer in the law). Therefore, broker-dealers sometimes file registration paperwork on behalf of the issuers they represent.

“A person on whose behalf the offering is to be made” typically references a large shareholder attempting to offer previously unregistered securities to the public. For example, assume a large institution purchases a security through a private placement and the issuer has no intention of ever registering those shares. The institutional investor must register those securities if they plan on selling them to the general public in the future. Otherwise, they could dispose of them through another type of exempt transaction.

There are three ways to register a security at the state level:

• Registration by filing (notice filing)
• Registration by coordination
• Registration by qualification

Federal-covered securities

You’re already well aware of federal-covered advisers at this point in the material. The National Securities Market Improvement Act (NSMIA) additionally created a category of federal-covered securities. The concept of “federal-covered” still applies; these are securities that register only with the SEC while providing a notice filing to the state administrator.

NSMIA defines the following as federal-covered securities:

• Exchange traded securities
• Investment company securities
• Regulation D securities
• Certain federally exempt securities

Exchange traded securities
Let’s quote NSMIA:

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]

Translated to plain English, a security is considered federal-covered if it’s listed on a national exchange like the New York Stock Exchange (NYSE), American Stock Exchange (now known as NYSE American), or NASDAQ. While you don’t need to know the specifics, only large and well-established companies are eligible for listing (trading) on exchanges. The most popular publicly traded companies are traded here, including Visa (NYSE), Tesla (NASDAQ), and Apple (NASDAQ). Smaller, lesser-known companies trade on NYSE American.

Other securities from the same issuer may be considered federal-covered, even if they’re not listed on an exchange. Stocks are the most common security to be listed on exchanges. However, most debt securities (e.g. bonds) are not; they trade in what’s known as 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 that is listed and traded on the NYSE. If Ford issued a bond, it would likely trade in the OTC markets. Although the bond would not be trading on a national exchange, it would be considered 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 is forced to sell all company assets (liquidation) in order to pay back their creditors and shareholders, there’s a priority to be aware of:

• Secured creditors (secured bondholders)
• Unsecured creditors (debenture holders)
• Preferred stockholders
• Common stockholders

Common stockholders are the lowest on the priority list, so virtually any other security sold by an issuer has senior priority. Bottom line - it’s safe to assume any security sold by an issuer with common stock listed on a national stock exchange is federal-covered.

Investment company securities
If you know about mutual funds, then you’re aware of the most popular type of investment company security. Investment companies offer to invest their customers’ money according to a specific investment objective and attempt to make the highest possible return given the structure of the fund. For example, the Vanguard Growth and Income Fund is a large portfolio of investor money placed into stocks that provide both growth and income potential. This is one of thousands of available mutual funds.

There are four types of investment companies to be aware of:

• Open-end management companies (mutual funds)
• Closed-end management companies (closed-end funds)
• Unit investment trusts
• Face amount certificates

Exam questions typically do not focus on the specifics of these securities, but you must know they’re federal-covered.

Regulation D securities
If you’ve already taken the SIE, Series 6, or 7, you’re probably already familiar with Regulation D, known as the federal private placement rule. This exemption allows issuers to sell unregistered securities (avoiding registration with the Securities and Exchange Commission) as long as they’re only offered to a small, private group of wealthy and institutional investors. As we’ve discussed thoroughly, registration is time consuming and expensive. Most publicly traded companies raise capital (money) through private offerings of their securities before going public. For example, AirBnB raised billions of dollars in private placements prior to selling their shares in an initial public offering (IPO) in December 2020.

Regulation D applies to issuers selling unregistered securities in multiple states. We’ll discuss the state’s version of private placement later in this unit, which is a completely different rule. State private placement applies when an unregistered security is being sold only in one state.

Certain federally exempt securities
If you’ve recently taken the SIE, Series 6, or Series 7 exams, you probably remember reading about the Securities Act of 1933. This law covers the requirements for issuers offering interstate (more than one state) securities during issuer transactions (primary market sales).

A number of securities are specifically called out as exempt from registration with the Securities and Exchange Commission (SEC), and it’s important to know two of these exempt securities are also considered federal-covered:

• US Government securities (Treasuries)
• Municipal securities*

*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.

Registration by filing

While federal-covered securities are exempt from state registration, they may still subject to certain obligations* with the state administrator. Similar to federal-covered advisers, issuers of federal-covered securities must provide a notice filing in every state their security will be offered in. This is legally referred to as registration by filing (a.k.a. notice filing), although the name is misleading.

*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 actually register with the state, but most are registered with the SEC (federal registration). This is true of all federal-covered securities except those sold in Regulation D offerings and government securities (these are also exempt at the federal level). While the specifics of the federal registration process aren’t important for Series 63, you must assume SEC registration is occurring in the background. The USA requires issuers of federal-covered securities to provide the following upon submitting their notice filing:

• A copy of the SEC registration form and any amendments
• Consent to service of process
• Report detailing the dollar amount of securities to be sold in state
• Filing fee

There’s not much in place in regards to processing and reviewing this documentation. Remember - the SEC regulates federal-covered securities, not the state administrator. A federal-covered security can be legally sold in a state once the proper documents and filing fee are submitted. Sales may occur on the day SEC registration is effective or when the notice filing was filed, whichever occurred last. While the state administrator has little-to-no power in regards to regulating federal-covered securities, they can issue stop orders preventing a sale from occurring if fraud is suspected.

Once a federal-covered security’s registration is effective, the issuer is subject to prospectus delivery requirements. A prospectus is a document provided to investors that includes all the important disclosures that must be made to investors. For example, here’s AirBnB’s prospectus from their IPO in December 2020. 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).