Notice filing
We’ve already covered the federal registration process and the key exemptions. Now we’ll look at registration through the lens of state rules and regulations.
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 cases, issuers file registration paperwork when they want to sell their securities. Often, they do this with the help of an underwriter (which the law loosely treats as a broker-dealer). Because of that, broker-dealers sometimes file registration paperwork on behalf of the issuers they represent.
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 institutional investor later wants to sell those securities to the general public, the investor must register them. Otherwise, the investor would need to dispose of them through another type of exempt transaction.
We’ve already covered federal exempt transactions, and we’ll discuss state exempt transactions later in this unit.
There are two ways to register a security at the state level:
A third group of securities avoids state registration altogether. Federal-covered securities are regulated by the SEC rather than the states, and some of them owe the state administrator a notice filing instead. A notice filing is not a form of state registration - it’s covered below.
Federal-covered securities
You’re already familiar with federal-covered advisers. The National Securities Market Improvement Act (NSMIA) also created a category called federal-covered securities.
The “federal-covered” idea works the same way here: these securities are regulated by the SEC rather than the state, and the issuer provides a notice filing to the state administrator.
NSMIA defines the following as federal-covered securities:
- Exchange-traded securities
- Investment company securities
- Rule 506 (Regulation D) securities
- Certain federally exempt 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 listing. Many widely traded companies are listed on these exchanges, including Visa (NYSE), Tesla (NASDAQ), and Apple (NASDAQ). Smaller, lesser-known companies may trade on NYSE American.
NSMIA also treats other securities from the same issuer as federal-covered, even if those securities aren’t exchange-listed.
Stocks are the most common securities listed on exchanges. Most debt securities (e.g., bonds) are not exchange-listed; 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 trade 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 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
As we learned earlier, investment companies pool investors’ money, invest it according to a stated objective, and aim to earn the best return possible within that structure.
For example, the Vanguard Growth and Income Fund is a mutual fund that invests in a portfolio of stocks selected for both growth and income potential.
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
Rule 506 (Regulation D) securities
As discussed in the last chapter, securities offered through Regulation D private placements are exempt from SEC registration. Only offerings made under Rule 506, the most common Regulation D exemption, are federal-covered. A Rule 504 offering is not, and must register with the state or find a state exemption.
Certain federally exempt securities
Some securities are exempt from SEC registration. 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.
Notice filing
Federal-covered securities are exempt from state registration, but some of them still have obligations* to the state administrator. Similar to federal-covered advisers, the issuers of those securities must submit a notice filing in every state where the security will be offered.
A notice filing tells the administrator that the security is coming to that state. It is not a form of state registration - the security never registers with the state at all.
*Notice filings reach investment company securities and Rule 506 offerings. Exchange-listed securities are fully preempted and owe the state nothing at all, and the US Government and municipalities offering securities outside their state are likewise 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 applies to all federal-covered securities except those sold in Regulation D offerings and government securities (which are also exempt at the federal level).
The USA requires issuers of federal-covered securities to provide the following with 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
Typically, the state administrator does not do much substantive review of these documents. The key point is that 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 when the notice filing is submitted, whichever occurs last.
Even though the state administrator has little to no authority over federal-covered securities, the administrator can issue a stop order against one that fails to meet its notice filing or fee requirements, where doing so is in the public interest. Exchange-listed securities sit outside that authority as well.
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 that contains the material information they need.
For example, here is AirBnB’s prospectus from its 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 the settlement of the trade (when the sale to the investor is finalized).