Registration by coordination

Securities sold in more than one state (interstate) but don’t meet the definition of a federal-covered security are subject to registration by coordination. This version of registration involves both the Securities and Exchange Commission (SEC) and relevant state administrators. Essentially, the security is being registered with both sets of regulators simultaneously (coordination).

We previously learned about the National Securities Market Improvement Act of 1996, which established a “line in the sand” between federal and state regulations. NSMIA determined federal rules supersede state rules when there’s regulation over a common entity. This same concept applies to registration by coordination. Issuers primarily follow SEC guidelines for registration, which are largely established in the Securities Act of 1933. You may already know this legislation through studying for another exam, but the details aren’t important for the Series 66.

As we learned earlier in this unit, the SEC typically processes registration paperwork in 20 days (known as the “20-day cooling-off period”), then grants effective registration if all the necessary documentation has been submitted. While this is unfolding at the federal level, the issuer submits the following to the state administrator:

• The security’s prospectus
• Articles of incorporation
• Any agreement with underwriters
• Any indenture or other instrument governing the issuance of the security to be registered
• Copy of any other information filed with SEC (if requested by state administrator)
• Consent to service of process
• Filing fee

Effective registration with the state typically occurs once the SEC deems the security’s federal registration effective. Prior to granting state registration, the state administrators require the following:

• No stop orders in place by state administrators or other regulators
• Required documentation has been on file with the state administrator for at least 20 days (some states impose a 10-day requirement)

Similar to the same regulations covering registered persons, the issuer, underwriter, or any person connected with the sale of newly-registered securities may not imply approval from the state administrator.

Some securities registered by coordination may be subject to state-enforced escrow requirements. The North American Securities Administrators Association (NASAA) maintains a rule regarding promotional shares. The details aren’t important, but these are basically equity shares (stock) issued by smaller companies with weak financials. If a security meets the definition of promotional shares, the issuer may be required to retain proceeds from an offering for a specified period of time.

Escrow accounts are used to deposit funds with a third party while an offering is taking place. The administrator may require issuers of promotional shares to deposit the proceeds of a particular new issue offering in escrow until a specified amount of money is raised. This prevents an issuer from raising a small amount of money, then running away with the funds. Once a specified amount of money is raised, it is then released to the issuer.

Unlike the registration of persons, a security remains registered for one full year from the effective date. There is no renewal required at the end of the calendar year (December 31st). Registration continues only if the offering has not sold out. In most cases, public offerings of securities last days or weeks, and therefore would not extend past one year. However, if shares are left unsold a year after the effective date, the registration will continue.