Registration by coordination

Securities sold in more than one state (interstate) that don’t meet the definition of a federal-covered security are typically registered using registration by coordination. This registration method involves both the Securities and Exchange Commission (SEC) and the relevant state administrators. In other words, the issuer registers the security with federal and state regulators at the same time (that’s the “coordination”).

We previously covered the National Securities Market Improvement Act of 1996, which drew a clear boundary between federal and state regulations. Under NSMIA, federal rules supersede state rules when both levels regulate the same entity or activity. That same idea shows up in registration by coordination: issuers primarily follow SEC registration requirements, which largely come from the Securities Act of 1933. You may have seen this law in other exam prep, but the detailed provisions aren’t tested heavily on the Series 66.

As we learned earlier in this unit, the SEC typically processes registration paperwork in 20 days (the “20-day cooling-off period”). If the required documents are properly filed, the SEC then declares the registration effective. While the SEC review is happening, the issuer also 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

State registration typically becomes effective when the SEC declares the federal registration effective. Before the state will allow the registration to become effective, state administrators generally require:

• 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)

As with rules that apply to registered persons, the issuer, underwriter, or anyone connected with the sale of newly registered securities may not imply that the state administrator has approved or endorsed the security.

Some securities registered by coordination may also be subject to state-enforced escrow requirements. The North American Securities Administrators Association (NASAA) maintains a rule regarding promotional shares. The details of the rule aren’t important here, but the idea is: these are generally 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 keep offering proceeds in escrow for a specified period.

An escrow account holds funds with a third party while an offering is in progress. For promotional shares, an administrator may require the issuer to place the proceeds from a new issue into escrow until a specified dollar amount has been raised. This helps prevent an issuer from raising only a small amount of money and then disappearing with the funds. Once the required amount is raised, the escrowed funds are released to the issuer.

Unlike the registration of persons, a security remains registered for one full year from its effective date. It doesn’t require renewal at the end of the calendar year (December 31). Registration continues only if the offering has not sold out. Most public offerings last days or weeks, so they usually end well before one year. However, if shares remain unsold one year after the effective date, the registration will continue.