Series 63

Securities - Other Definitions

Let's review a couple of definitions and note how they could appear on the exam. Again, the italicized lines are quotes from the USA.

Issuer
According to the USA:
"Issuer" means a person that issues or proposes to issue a security..."
By this definition, if a business - or other person - has begun the process that will result in the sale of securities to the public, it is by law, already considered an "issuer."

Nonissuer Transaction
According to the USA:
"Nonissuer transaction" ... means a transaction or distribution not directly or indirectly for the benefit of the issuer."

This is simple enough: if the company gets the money from a transaction; it is an issuer transaction. If the company does not get the money from a transaction - a secondary market trade - then it is a non-issuer transaction.

Offer to Purchase
According to the USA:
"Offer to purchase includes an attempt or offer to obtain, or solicitation of an offer to sell, a security or interest in a security for value."
Exam Tips and Tricks
The following is a list of additional securities-related information, mostly pertaining to issuers. Many portions will be on the test, so make sure you do not skip this section!

Unlawful Sale
The USA clearly states that it is "unlawful for a person to offer or sell a security" in a state unless:
  • "the security is a federal covered security;"
  • "The security, transaction, or offer is exempted from registration;" and or
  • "The security is registered under" the USA.
Initial Registration
Before an offer to sell a security can legally be made, a REGISTRANT (the issuer, insider, or the underwriting broker-dealer) must file a registration with the state Administrator. As we noted earlier, the general requirement is that securities sold in the state must be registered with the state. Of course, there are exceptions to, and exemptions from, this rule. The USA states the following:
"It is unlawful for a person to offer or sell a security in this State unless:
    1. the security is a federal covered security;
    2. the security, transaction, or offer is exempted from registration; or
    3. the security is registered under this [Act]."
The official comment then says that:
"Except for federal covered securities, exempt securities, or securities offered or sold in exempt transactions, no sale of a security may be made in this State before the security is registered."
Look Out!
As a refresher, go back and take a look at the definition of a federal covered security. Remember, this term first came into securities law with the National Securities Markets Improvement Act (NSMIA) of 1996. It is only in the 2002 version of the USA and in NASAA documents that this law is taken into account.

Filing fees
Issuers are required to pay filing fees at both initial registration, and at annual re-registration. Filing fees vary from state to state. If a filing fee is not paid (or an issuer fails to comply with a notice from the state), the Administrator may issue a stop order "suspending the offer and sale of a federal covered security".

General filings
The registrant must supply general information to the Administrator regarding the securities including:
  • The states where the securities will be solicited or offered.
  • Number of securities to being issued.
  • Any guidelines or judgments required by the SEC or other administrative or regulatory entity.
Registration Records
Along with the initial registration statement, offerings must be accompanied by (specifically from the USA):
  • A copy of the latest form of prospectus filed under the Securities Act of 1933;
  • A copy of the articles of incorporation and bylaws or their substantial equivalents currently in effect
  • A copy of any agreement with or among underwriters
  • A copy of any indenture or other instrument governing the issuance of the security to be registered
  • Copies of any other information or any other records filed by the issuer under The Securities Act of 1933 requested by the Administrator
Effective Date
Once the Administrator accepts an offering, it is valid for one year after the date of approval (the effective date). Offerings may be renewed the following year, if the entire issue was not sold.

Effectiveness of Registration Statement
The USA states, "If the federal registration statement becomes effective before each of the conditions is satisfied or is waived by the Administrator, the registration statement is automatically effective ..." The conditions are that of registration records, above.

Periodic Reports
Issuers may be required to file reports "to keep the information or other record in the registration statement reasonably current and to disclose the progress of the offering." The Administrator cannot require reports to be filed more than quarterly.

Post Effective Amendments
A "registration statement may be amended after the effective date" to alter information, or to increase the number of securities to be offered. Of course, on amendment, an issuer may be required to pay a registration fee.

Form of Subscription
An offering may be required to "be sold only on a specified form of subscription or sale contract and that a signed or conformed copy of each contract be filed" with the Administrator.

Escrow and Impoundment
Escrow
may be required if the offering is:
  • issued within the last five years;
  • "to be issued to a promoter for a consideration substantially less than the public offering price..."; or
  • to be issued "to a person for a consideration other than cash ..."
Impoundment simply means that proceeds from the sale must be put in Escrow until "the issuer receives a specified amount from the sale of the security ..."
This is normally in conditional offerings such as all or none, or mini-max.


Offering Outstanding
According to the USA, "Unless the Administrator determines otherwise, a registration statement cannot be withdrawn until one year after its effective date if any securities of the same class are outstanding ..."

Notice Filing
If an issuer deals in exempt securities, the person/entity is only required to file the federal forms with the state Administrator. Of course, all fees must be paid.

The article A New Uniform Securities Act by Richard B. Smith defines Notice Filing as:
"Notice filing under the 2002 Uniform Act is for federal covered securities other than listed securities. This filing consists of a consent to service of process, a filing fee, and (depending on the state securities Administrator's requirements) can include copies of material filed with the SEC. The 2002 Uniform Act provides a platform for eventually effectuating one-stop filing, whereby documents filed with the SEC can be electronically filed with states within which offerings are to be made."


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