What three characteristics define a security?
- An investment of money;
- In a common enterprise;
- With the expectation of profits to be derived primarily from the efforts of a person other than the investor.
Six categories of items that are not securities under the Uniform Securities Act.
- Insurance, endowments or annuities with fixed payouts;
- Interests in a retirement plan;
- Commodities or futures contracts for commodities;
- Condominiums used for personal residences; and
What is the difference between an exempt security and an exempt transaction?
An exempt security is exempt from registration based on the nature of the issuer or the type of security. An exempt transaction is exempt from registration based on the manner in which the sale is made or the nature of the purchaser.
What are the two methods for registration of securities in a state?
- Coordination - An issuer supplies state securities administrators with the federal registration statement filed under the Securities Act of 1933. This is the most frequently used method of registration; and
- Qualification - An issuer supplies registration statements directly to the state securities administrator.
What is the effective date of state registration of a security by coordination?
Registration is effective at the same time the federal registration becomes effective, provided:
- there are no issued stop orders or pending proceedings against the issuer;
- the registration has been on file for the minimum number of days specified by the Administrator (10-20, depending on the state); and
- a statement of the minimum and maximum proposed offering prices and maximum underwriting discounts and commissions have been on file for two business days.
What types of annuities are securities and what types are not?
Annuities with fixed payouts are not securities, but annuities with variable payouts are securities, because the amount of the payouts depends on the performance of securities within the annuity.
What is an issuer transaction?
An issuer transaction is one in which the proceeds of the sale go to the issuer. All newly issued securities transactions are issuer transactions.
What is the difference between a primary offering and an initial public offering (IPO)?
A primary offering is an issuer transaction involving new securities. An initial public offering is the first time an issuer distributes securities to the public.
What is a non-issuer transaction?
A non-issuer transaction (also called a secondary transaction, or a transaction between investors) is one in which the proceeds of the sale do not go to the issuer. Certain isolated non-issuer transactions are exempt transactions.
What are the three main categories of federal covered securities?
- Securities listed on the New York Stock Exchange, the American Stock Exchange, the Chicago Stock Exchange and the Nasdaq Stock Market, and any security equal in seniority or senior to these securities;
- Investment company securities registered under the Investment Company Act of 1940; and
- Offers and sale of certain exempt securities, such as those offered by a municipal/governmental issuer (except in the state the municipal securities are being offered) and private placements under Regulation D of the Securities Act of 1933.
What category of federal covered securities is always required to engage in Notice Filing, and what does it entail?
Investment companies (such as mutual funds, UITs, ETFs, & closed-end funds) are required to file a notice with Administrators in states in which their securities will be sold, and to pay specified filing fees.
State Administrators may require that an issuer file certain documents under notice filing procedure. What are these documents?
- Documents filed with the issuer’s SEC registration statement, and any amendments thereto;
- A report on the value of the securities being offered in the state; and
- Consent to service of process.
When may a security be registered by coordination?
A security may be registered by coordination if a registration statement has been filed with the SEC under the Securities Act of 1933 in connection with the same offering.
What documents must an issuer file with a state Administrator when registering in a state by coordination?
- Consent to service of process;
- If the Administrator requires, copies of the latest prospectus filed with the SEC under the Securities Act of 1933;
- Copies of its articles of incorporation and by-laws, a copy of the underwriting agreement or a specimen copy of the security;
- If the Administrator requires, copies of any other information filed under the Securities Act of 1933; and
- Each amendment to the federal prospectus promptly after it is filed with the SEC.
When may a security be registered by qualification?
Any security may be registered by qualification, and any security not eligible for registration by another method must be registered by qualification. Securities that will be sold only in one state must be registered by qualification. Generally, any security that will also be registered with the SEC will be registered by coordination.
Are warrants and rights securities?
Yes. Warrants and rights are securities.
Are all options securities?
Yes. Options are always securities, even if the underlying asset is not an option. Thus, an option on foreign currency is a security, but the foreign currency itself is not a security.
Are all annuities securities?
No. Variable annuities are securities. Fixed annuities are not securities.
Are municipal bonds securities?
Yes. Municipal bonds are securities.
What is a federal covered security?
Federal covered securities are securities with a federally imposed exemption from state registration. Examples include nationally traded securities, U.S. Government and municipal securities, investment companies and Regulation D private placement securities.
When is a futures contract a security?
A futures contract is a security when the underlying asset is a security. Example: futures on commodities are not securities. But, futures on stock indexes, such as a future on the S&P 500, are securities.
When is registration by coordination available to an issuer?
Coordination is available to any issuer also registering its securities at the federal level.
What is required of an issuer registering by coordination?
An issuer must submit three copies of all federal registration documentation and amendments to the state securities administrator.
Under what circumstances may notice filing be used by an issuer?
The process of notice filing is available to an issuer with securities already registered at the federal level. The issuer may being selling securities in a state after an abbreviated filing and fees are submitted to the state, rather than registering the securities through the coordination or qualification process.
Who may register by qualification?
Registration by qualification is available to any issuer. This is typically used in an intra-state registration.
What is the latest a prospectus may be received by a customer?
With the trade confirmation. If a prospectus is not received prior to or with the trade confirmation the sale is illegal.
What securities are exempt from state registration?
- U.S. government securities,
- Municipal securities,
- Securities issued by national or state banks,
- Securities issued by credit unions,
- Securities issued by nonprofit organizations,
- Commercial paper meeting specific criteria, and
- Bankers acceptances.
What is a non-issuer transaction?
A transaction where the proceeds of the sale go to someone other than the issuer. These transactions are exempt from state registration. Every secondary market transaction is a non-issuer transaction.
What is an unsolicited order?
An unsolicited order is one where a customer contacts an agent and requests to buy or sell securities. Unsolicited orders are exempt transactions.
What is a rights sale and are the sales of rights exempt?
A rights sale permits an investor to maintain a proportional share in a company when the company issues new shares. Rights sales are generally exempt transactions because the issuer engages in a transaction with existing shareholders.
Which party has the burden of proof to demonstrate that a transaction is exempt?
The issuer must demonstrate that a particular transaction is exempt.