1. Introduction
2. Investment vehicle characteristics
3. Recommendations & strategies
4. Economic factors & business information
5. Laws & regulations
6. Wrapping up
Achievable logoAchievable logo Registration by qualification
Achievable Series 66
5. Laws & regulations
5.3. Registration
5.3.5. Securities

Registration by qualification

Registration process

While any security is eligible for registration by qualification, this form of registration is primarily utilized by issuers of intrastate 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 in this manner. The entire process is dictated and facilitated by the state administrator.

Like all other registration forms, significant disclosures must be made on 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. Generally speaking, the state administrator can request a significant number of disclosures. While you may encounter an exam question testing the granular details, they 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

Plus, anything else the administrator requests

Disclosure document that provides details on a security and its issuer, including the risks involved with the investment
A financial firm hired by an issuer to market and sell their securities to investors

Several disclosures must be made to register a security by qualification. Because of this, it is considered the most difficult form of registration with the state. On the other hand, registration by filing (notice filing) is regarded as the easiest (even though it’s not technically registration; it’s just the easiest process of the three methods).

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

As long as all the necessary disclosures and documents are filed, a 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 decides to sell more shares or change other aspects of the offering, an amendment must be filed with the administrator.

Stop orders

A stop order is an administrator-created demand for an issuer to no longer issue a security. While these orders may not be permanent, they prevent the issuer from raising capital (money) from investors for at least a short period. In most circumstances, stop orders are instituted to protect investors because of a lack of disclosure. It’s important issuers are transparent with their offerings so investors are able 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 institute punishments (stop orders punish the issuer) without it being in the “public’s interest.” If a punishment 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 their security is federal covered to avoid the significant work involved in registering a security by coordination or qualification. If the administrator suspects this is occurring, they 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 a nutshell, the administrator must notify the issuer of the stop order and provide the reasons for the punishment (findings of fact and law). If the issuer wants to protest the order, they can request a hearing and argue their case. If a hearing is requested, the administrator must facilitate the meeting within 15 days of request. If no hearing is requested, the stop order remains in effect until the administrator modifies or vacates (removes) it.

Key points

Registration by qualification

  • State registration only
  • Items required:
    • Business information
    • Information on company insiders
    • Business disclosures
    • Specifics of security
    • Consent to service of process
    • Filing fee
    • Anything else requested by state administrator
  • Effective registration granted on 30th day after filing if
    • All necessary items submitted
    • No stop orders exist

Stop orders

  • Order to stop issuance of a security
  • Typically occurs if disclosures lacking or registration is improper
  • To institute, administrator must:
    • Notify the issuer
    • Provide written findings of fact and law
    • Provide opportunity for a hearing

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