Understanding Securities Registration

Understanding Securities Registration On The Series 63 Exam
Uniform Securities Exam

One of the keys to passing the Series 63 exam is to make sure that you have a complete understanding of how securities registration will be tested on the Series 63 Exam. This article which was produced from material contained in our Series 63 textbook and will help you master the material so that you pass the Series 63 exam.

All securities that are sold to a state residence must either be:

• Duly registered; or,
• Exempt from registration; or,
• Sold through an exemption transaction

Exempt Securities

Exempt securities are exempt from the registration requirements of The Securities Act of 1933. Exempt securities are not exempt from the antifraud provisions of the USA. Exempt securities are:

• Issued by exempt issuers, such as governments
• Short-term debt instruments with less than 270 days to maturity

Securities Registration

Non-exempt securities become federally registered by submitting a registration statement to the Securities Exchange Commission (SEC). Non-exempt securities must also register in the states in which the securities will be sold. The three methods of registering securities in a state are:

• Coordination
• Filing/notification
• Qualification

It is important to understand how the three types of securities registration differ and under what circumstances the different registration methods are used.

Registration of IPOs Through Coordination

When a company first sells stock to the public during an initial public offering (IPO), the company must file a registration statement with the SEC. The company must also file a registration statement with the state securities administrator in the states where the issue will be sold. Most IPOs will register with the state securities administrator at the same time that they are becoming registered with the SEC. This process of simultaneous registration is known as coordination.

The following must be submitted to the administrator:

• Three copies of the prospectus
• Any amendments to the prospectus
• The amount of the securities to be offered within the state
• A list of other states where the securities will be offered
• Other information as required by the state securities administrator, including the corporate bylaws, articles of incorporation, specimen of the security, and indenture of any kind

If an amendment has been made to the federal registration, it must also be made to the state registration. A security’s state registration will become effective after 10 days as long as no stop order has been issued; or at the same time as the security’s federal registration becomes effective. It is important to note that a state registration may not become effective prior to the security’s federal registration becoming effective. Under the proposed amendments to the Uniform Securities Act is the extension of the state’s requirement that a security’s registration be on file with the administrator for at least 20 days. A question may ask you to remember either the 10-day or 20-day requirement. It is unlikely that a question will have both answers in the answer key.

Registration of Established Issuer s/ Registration Through Filing or Notification

A corporation will periodically offer new securities as a way of obtaining new funds. The corporation issuing additional securities may register the new securities in the states in which they are to be offered through filing if they meet certain guidelines. The issuer must have:

• Been in business for at least 36 months
• A minimum net worth of at least $4,000,000, or $2,000,000 for two of the last three years
• A bid price of at least $5 per share for the securities being offered
• Not defaulted on their debt or preferred dividend payments in the last 12 months
• At least four market makers on the security
• Its equity securities registered with the SEC
• At least 500 stockholders and a public float of at least 400,000 shares

When registering a security with the state securities administrator through filing, the following must be submitted:

• A statement of the firm’s eligibility to register through filing
• Issuer’s name and address
• Type of organization
• Description of the securities to be offered
• Copy of the prospectus or offering circular

Registration through filing becomes effective at the same time the securities federal registration becomes effective as long as the state registration has been on file for at least five days with the state securities administrator.

Registration of Non-Established Issuers / Registration Through Qualification

Securities of issuers who do not meet the requirements for registering through filing and that are not an IPO must register through qualification. Securities of issuers that will be sold only in one state through an intrastate offering will also be registered through qualification. Registration through qualification is the most complex method of registration. The issuer must file a statement containing all of the information required by the state securities administrator. It may include:

• Name and address of the issuer
• Type of organization
• Nature of the issuer’s business
• Description of industry
• Description of issuer’s assets
• Biographical information on officers and directors including name, address, compensation, and number of shares owned
• Type of securities to be offered
• Price of securities
• Underwriter’s discount
• Issuer’s capitalization and long-term debt
• Balance sheet dated within four months of filing
• Amount and use of proceeds
• Copy of prospectus or offering circular
• Copy of advertising and sales literature
• Specimen of security to be offered
• Any other information requested by the administrator

A securities registration under qualification becomes effective when the administrator so orders.

The following apply to all types of securities registration:

• Registration is effective for up to one year from effective date or until all securities have been sold, whichever is longer
• State securities administrators set filing fees
• State securities administrators may require that the proceeds from the offering be held in escrow until a certain amount has been sold
• The administrator may require that the securities be sold on a specific subscription form
• If the issuer has filed a registration statement for similar securities within the last five years, the issuer may reference the previous registration statement if it is still accurate
• The administrator may not require the issuer to file reports more often than quarterly
• The administrator may require the issuer to report on the progress of the sale of the securities

Exempt Securities Federally Covered Exemption

The National Securities Market Improvement Act of 1996 provided federally covered exemptions for securities that have met the stringent listing requirements of any centralized U.S. stock exchange or NASDAQ Global Market System (GMS). An issuer whose common stock is listed on a U.S. stock exchange or on the NASDAQ GMS is provided an exemption for all of its securities, regardless of their type. An exemption from state registration is also provided to:

• Securities that are sold exclusively to qualified purchasers
• Investment company securities
• Securities and transactions exempt from federal registration
• Debt securities with maturities of less than 270 days and sold in denominations of $50,000 or more
• Exempt issuers
• Employee benefit plans
• Option contracts, both puts and calls on stocks and indexes
• Equipment trust securities issued by a federally covered or exempt issuer

Certain securities are exempt from state registration and sales literature requirements because the issuer is exempt. Examples of exempt issuers are:

• U.S. Government
• State and municipal governments
• Foreign national governments
• Canadian federal and municipal governments
• Insurance companies
• Banks and trusts
• Credit unions and savings and loans
• Common carriers (railroad, trucking, and airlines) who are subject to the Interstate Commerce Commission (the term “consolidated” is a key word)
• Religious and charitable organizations
• Public utility securities
• Securities issued by a cooperative