Registration by qualification

Registration process

While any security is eligible for registration by qualification, this method is used most often by issuers of intrastate securities (securities sold in one state only). Unlike registration by filing (notice filing) or registration by coordination, the Securities and Exchange Commission (SEC) has no jurisdiction over securities registered this way. The process is handled entirely at the state level by the state administrator.

Like the other registration methods, registration by qualification requires extensive disclosure on the registration paperwork. The Uniform Securities Act requires the following documents* be submitted to the state administrator:

*There’s no need to memorize every single item listed below perfectly. The main idea is that the state administrator can require a wide range of disclosures. You may see an exam question on specific items, but detailed questions are typically uncommon.

Business characteristics

• Business name
• Address
• Business form (corporation, partnership, etc.)
• Business formation documents (e.g., articles of incorporation)
• State of organization
• General character of the business
• Description of business properties and equipment
• Statement of industry’s competitive conditions
• Any pending legal actions that may affect the business or security

Information on company insiders

• Name, address, and occupation of officers and directors
• Amount of issuer’s securities held by officers and directors
• Amount of issuer’s securities that will be purchased by officers and directors
• All of the information listed above, but for investors owning 10% or more of the issuer’s stock

Business disclosures

• Business debt levels
• Other securities offered by the issuer
• Business financial statements (e.g., balance sheet)

Specifics of security to be offered

• Security type (e.g., common stock, debenture)
• Amount of security to be offered
• Proposed offering price of security
• Estimated underwriting fees
• Basic information on underwriter(s)
• Other fees associated with the offering
• Estimated proceeds to be received by the issuer
• Expected purpose of proceeds received
• A copy of any prospectus or other document offered to investors

Typical registration requirements

• Consent to service of process
• Filing fee

Plus, anything else the administrator requests

Because registration by qualification requires so many disclosures, it’s generally considered the most difficult state registration method. By comparison, registration by filing (notice filing) is considered the easiest (even though it’s not technically registration; it’s simply the easiest of the three processes).

In addition to the required disclosures, securities registered by qualification are also subject to the same escrow requirements discussed in the registration by coordination chapter.

If all required disclosures and documents are filed, the filing fee is paid, and no stop order or delay exists, the state administrator will grant effective registration on the 30th day after the initial filing. If the issuer later wants to sell more shares or change other terms of the offering, the issuer must file an amendment with the administrator.

Stop orders

A stop order is an administrator-issued order requiring an issuer to stop issuing a security. A stop order may not be permanent, but it prevents the issuer from raising capital (money) from investors for at least some period of time. Stop orders are typically used to protect investors, most often when required disclosure is missing or the offering is otherwise improper. The goal is to ensure investors have enough information to make informed investment decisions.

According to the USA, the administrator may institute a stop order if:

• The order is in the public’s interest*, and:
• One of the following circumstances exist:
  • The registration form is incomplete
  • The USA or any rule or regulation has been violated
  • The security is subject to an injunction or court order preventing the sale
  • The issuer’s business is engaged in illegal activities
  • The offering is fraudulent or unfair
  • The offering involves unjustifiable compensation to the underwriter
  • An issuer subject to registration by coordination does not properly involve the SEC
  • An issuer performs a notice filing when they’re not eligible**
  • A filing fee has not been paid

*The USA does not allow the administrator to impose punishments (and a stop order is a punishment) unless doing so is in the “public’s interest.” If the action does not benefit the public in some way, it cannot be instituted.

**Only federal covered securities may perform a notice filing, which is the easiest way to offer a security in a state legally. An issuer may incorrectly claim its security is federal covered to avoid the work involved in registering a security by coordination or qualification. If the administrator suspects this is happening, the administrator may initiate a stop order.

When the administrator institutes a stop order, they must follow the following protocols:

• Notify the issuer of the stop order
• Provide written findings of fact and law
• Provide the opportunity for a hearing

In other words, the administrator must notify the issuer and explain the basis for the stop order (the findings of fact and law). If the issuer wants to challenge the order, the issuer can request a hearing. If a hearing is requested, the administrator must hold it within 15 days of the request. If no hearing is requested, the stop order remains in effect until the administrator modifies or vacates (removes) it.