We’ve already covered the federal registration process and the main federal exemptions. Now we’ll look at registration from the state perspective.
According to 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 (the USA loosely treats the underwriter as a broker-dealer). Because of that, a broker-dealer may file registration paperwork on the issuer’s behalf.
A “person on whose behalf the offering is to be made” usually means a large shareholder who wants to sell previously unregistered securities to the public.
For example, suppose a large institution buys securities through a private placement (e.g., Regulation D), and the issuer never plans to register those shares. If the institution later wants to sell those securities to the general public, it must register them. Otherwise, it would need to sell them through another type of exempt transaction. We’ve already covered federal exempt transactions, and we’ll cover state exempt transactions later in this unit.
There are three ways to register a security at the state level:
You’re already familiar with federal-covered advisers. The National Securities Market Improvement Act (NSMIA) also created a category called federal-covered securities.
The idea is similar: these securities register only with the SEC, and then provide a notice filing to the state administrator.
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 English, 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 these listings. Examples include Visa (NYSE), Tesla (NASDAQ), and Apple (NASDAQ). Smaller 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-traded.
Stocks are the most common securities listed on exchanges. Many debt securities (such as bonds) are not exchange-traded; 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 common stock trades 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 this general order:
Because common stockholders are last in line, most other securities an issuer sells have senior priority. Bottom line: it’s generally safe to assume that any security sold by an issuer with common stock listed on a national exchange is federal-covered.
Investment company securities
As discussed earlier, investment companies pool investors’ money, invest according to a stated objective, and seek the best return possible within that structure. For example, the Vanguard Growth and Income Fund is a mutual fund that invests in stocks with growth and income potential.
There are four types of investment companies to be aware of:
Regulation D securities
Securities sold through Regulation D private placements are exempt from SEC registration. NSMIA also classifies these securities as federal-covered.
Certain federally exempt securities
Some securities are exempt from SEC registration. Two of those exempt categories are also treated as federal-covered:
*NSMIA states that municipal securities are federal-covered only when they’re sold outside their state of issuance. For example, a municipal bond issued in Wisconsin is federal-covered in every state except Wisconsin. Within Wisconsin, that bond is not federal-covered, which gives the Wisconsin state administrator some regulatory authority over the offering. For exam purposes, the key point is that municipal bonds are federal-covered outside the state where they’re issued.
Federal-covered securities are exempt from state registration, but they may still have certain obligations* to the state administrator. Similar to federal-covered advisers, issuers of federal-covered securities must submit a notice filing in each 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 registering 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). The main exceptions are Regulation D securities and government securities, which are also exempt at the federal level.
The USA requires issuers of federal-covered securities to provide the following with the notice filing:
The state administrator generally does not review or “approve” these filings in the way they would for a state-registered offering. The SEC regulates federal-covered securities, not the state.
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 submitted - whichever occurs later. Although the state administrator has limited authority over federal-covered securities, they may issue stop orders to prevent sales if fraud is suspected.
Once a federal-covered security’s registration is effective, the issuer must meet prospectus delivery requirements. A prospectus is the disclosure document given to investors that contains the material information they need. For example, here is AirBnB’s prospectus from its December 2020 IPO.
In any new issue public offering (including registration by coordination and qualification), the prospectus must be delivered to investors by settlement (when the sale is finalized).
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