Registration of Securities, and the Exemptions

The three methods, and notice filing

Registration by notification, sometimes called filing, is the simplest method and is available only to established issuers meeting stated tests — typically a record of continuous operation and of earnings. It is a short filing and takes effect quickly.

Registration by coordination is used where the offering is simultaneously registered with the SEC under the Securities Act of 1933. The issuer files the federal registration statement and prospectus with the Administrator, and the state registration becomes effective at the moment the federal registration becomes effective, provided the state filing has been on file for a specified period and no stop order is in effect. Coordination is the method for most public offerings.

Registration by qualification is the fall-back and may be used for any security. It requires the most extensive filing — the issuer's business, capitalization, use of proceeds, officers and their compensation, financial statements — and takes effect when the Administrator so orders. It is the method for an intrastate offering not registered federally.

A registration statement may be filed by the issuer, by any other person on whose behalf the offering is made, or by a registered broker-dealer, and it must be accompanied by a consent to service of process. A registration is effective for one year from its effective date, and the Administrator may require periodic reports.

For a federal covered security, state registration is pre-empted by the National Securities Markets Improvement Act. What remains is the notice filing: the state may require the documents filed with the SEC, a consent to service of process and a fee. A notice filing is not a registration and involves no merits review.

Exempt securities

An exempt security is exempt whoever sells it and however often. Section 402(a) lists them, and the exam expects the list:

Securities issued or guaranteed by the United States, any state, any political subdivision, or any agency or instrumentality of them — including revenue obligations and certificates of deposit for such securities.

Securities issued or guaranteed by Canada, a Canadian province or political subdivision, or another foreign government with which the United States maintains diplomatic relations, if recognized as a valid obligation by the issuer or guarantor. Note the asymmetry: Canadian provincial and municipal debt is exempt; other foreign governments' national debt is exempt but their political subdivisions' is not.

Securities issued or guaranteed by a bank, savings institution or trust company organized and supervised under United States or state law.

Securities issued or guaranteed by a federal savings and loan association or a state building and loan association.

Securities issued or guaranteed by an insurance company authorized to do business in the state — but expressly not an annuity or investment contract whose payments are not fixed in dollars and are substantially dependent on the investment results of a segregated account. That bracketed carve-out is what excludes variable annuities and variable life from the insurance exemption.

Securities issued or guaranteed by a federal credit union or a state credit union or industrial loan association.

Securities issued or guaranteed by a railroad, common carrier, public utility or holding company subject to specified regulation.

Securities listed or approved for listing on a specified exchange, together with senior or substantially equal securities of the same issuer and rights or warrants for them. In modern practice this category has been overtaken by the federal covered security regime.

Securities issued by a person organized and operated not for private profit but exclusively for religious, educational, benevolent, charitable, fraternal, social, athletic or reformatory purposes, or as a chamber of commerce or trade or professional association.

Commercial paper: a promissory note, draft, bill of exchange or banker's acceptance payable within nine months, issued in denominations of at least $50,000, and rated in one of the three highest categories by a nationally recognized statistical rating organization.

Investment contracts issued in connection with an employees' stock purchase, savings, pension, profit-sharing or similar benefit plan, if the Administrator is notified in writing thirty days before the plan's inception.

Exempt transactions

An exempt transaction exempts a particular sale of a security that would otherwise have to be registered. The exemption belongs to the transaction, not to the security, so the same security sold a different way may need registration.

Section 402(b)'s list, with the ones the exam favours first:

Any isolated non-issuer transaction, whether or not effected through a broker-dealer.

A non-issuer transaction by a registered agent of a registered broker-dealer in a security meeting stated conditions — including that the issuer is actually engaged in business and is not a blank check, blind pool or shell company, that the price is reasonably related to the current market price, that the security is not part of an unsold underwriting allotment, and that specified current information about the issuer is available in a recognized securities manual or through EDGAR.

Any non-issuer transaction effected by or through a registered broker-dealer pursuant to an unsolicited order or offer to buy. The Administrator may require the customer to acknowledge on a specified form that the sale was unsolicited and require the broker-dealer to preserve a signed copy. This is the exemption that makes it lawful to execute a customer's own idea in an unregistered security.

Any transaction between the issuer or other person on whose behalf the offering is made and an underwriter, or among underwriters.

Any transaction by an executor, administrator, sheriff, marshal, receiver, trustee in bankruptcy, guardian or conservator — the fiduciary exemption. Note who is not on that list: a trustee of an ordinary inter vivos trust, and a custodian, are not included.

Any transaction executed by a bona fide pledgee without any purpose of evading the act.

Any offer or sale to a bank, savings institution, trust company, insurance company, investment company, pension or profit-sharing trust, other financial institution or institutional buyer, or to a broker-dealer — the institutional exemption, which applies whether the purchaser buys for itself or as a fiduciary.

The private placement exemption: any transaction pursuant to an offer directed by the offeror to not more than ten persons in the state, other than institutional buyers, during any period of twelve consecutive months, if the seller reasonably believes all the non-institutional buyers in the state are purchasing for investment, and no commission or other remuneration is paid for soliciting any non-institutional prospective buyer in the state.

Three things about that provision are heavily tested. The limit is on offers, not on sales — ten offerees, however many actually buy. Institutional purchasers are excluded from the count entirely. And no commission may be paid for soliciting a non-institutional buyer, which is what makes the exclusion from the agent definition work.

A preorganization certificate or subscription exemption also exists, requiring no commission for soliciting subscribers, no more than ten subscribers, and no payment by any subscriber.

What an exemption does not do

Three limits, and the exam tests all three.

An exemption from registration is never an exemption from the anti-fraud provisions. Section 101's prohibition on fraud in the offer, sale or purchase of any security applies to exempt securities and exempt transactions alike. Selling a United States Treasury bond by misrepresentation is fraud under state law exactly as selling a registered stock that way is.

The burden of proving an exemption is on the person claiming it. The Act says so, and it means that a firm relying on the private placement exemption must be able to document the offeree count and the absence of solicitation compensation.

And the Administrator may by order deny or revoke an exemption for a specific security or transaction — the exemptions are conditional grants, not permanent entitlements. An order denying or revoking an exemption is subject to the same procedural requirements as any other: notice, opportunity for hearing and written findings.

One more distinction worth holding: exempt from registration is not the same as exempt from the requirement that the person selling be registered. An agent selling exempt securities for a broker-dealer is still an agent and still registers — the exclusions from the agent definition apply to individuals representing issuers, not to individuals representing broker-dealers.