Registration By Qualification

Sedgewhistle Brewing, a company with no federal registration statement on file and no operating history, files a State Z registration statement by qualification. Its chief executive asks counsel to confirm the date on which it may begin selling. Under the Uniform Securities Act, a registration by qualification becomes effective:

1. A.automatically at noon on the thirtieth day after the registration statement is filedNo automatic clock runs on a qualification registration.
2. B.at the moment a corresponding federal registration statement becomes effectiveThat describes coordination, and this issuer has no federal filing.
3. C.when the Administrator so ordersCorrect. Effectiveness by qualification occurs on the Administrator's order, which lets him attach conditions.
4. D.automatically two full business days after the offering price is filed, provided no stop order is in effectThe two-business-day pricing requirement is a condition of coordination, not a route to effectiveness by qualification.

Why: Qualification is the method of last resort and the most searching of the three. Unlike coordination, which piggybacks on federal effectiveness, and unlike the filing method available to seasoned issuers, a qualification registration does not become effective by the running of any clock. It becomes effective WHEN THE ADMINISTRATOR SO ORDERS. That is what gives the Administrator the leverage to impose conditions - escrow of promoters' shares, impoundment of proceeds, delivery of a prospectus before sale - as the price of the order. So counsel cannot name a date; the issuer sells when the Administrator says so.

Pellamere Ceramics has filed a registration statement by qualification in State C. Its chief financial officer asks the underwriter when the firm may begin accepting money, assuming no proceeding is pending. Under the Uniform Securities Act, a registration by qualification becomes effective:

1. A.automatically at noon on the tenth day after filing if no stop order is pendingNo such automatic period governs qualification. The Administrator issues an order.
2. B.automatically at the moment the SEC declares the federal registration statement effectiveThat describes coordination, which requires a concurrent federal filing that a qualification offering does not have.
3. C.as soon as the issuer certifies to the Administrator that the prospectus is completeAn issuer self-certification has no effect on the effective date.
4. D.when the Administrator so ordersCorrect. Qualification takes effect on the order of the Administrator.

Why: Qualification is the method used when there is no concurrent federal registration to ride on, and it is the one method whose effective date the Administrator controls directly. The registration becomes effective when the Administrator so orders. Coordination becomes effective automatically at the moment the federal registration statement becomes effective, and notification runs on a waiting period, but qualification waits for the order.

Bellweather Securities has just had its broker-dealer registration in State Y become effective, and a $12 million offering by one of its clients has just been registered by qualification in the same state. Bellweather's marketing head drafts a mailer reading: 'Both our firm and this offering have been cleared by the State Y Securities Administrator.' Under the Uniform Securities Act, this statement is:

1. A.Permissible as to the offering, since a registration by qualification is reviewed on the merits by the AdministratorQualification involves the most disclosure, but the Act still forbids describing any registration as approval or clearance.
2. B.Permissible, provided the mailer also discloses that registration does not guarantee investment resultsA disclaimer does not rescue a statement the Act makes unlawful. The representation itself is the violation.
3. C.Unlawful, because no representation may be made that registration means the Administrator has approved or passed on the merits of a person or a securityCorrect. The Act bars representations inconsistent with the rule that registration is not approval.
4. D.Permissible as to the firm, since a broker-dealer registration does reflect the Administrator's judgment that the firm is qualifiedThe prohibition names persons as well as securities. Effective registration is not a finding about the registrant's merits.

Why: The Act says plainly that neither the filing of an application or a registration statement, nor the fact that a person or a security is effectively registered, constitutes a finding by the Administrator that anything filed is true, complete or not misleading, and that none of it means the Administrator has passed on the merits or given approval. It then makes it unlawful to make any representation to a prospective purchaser, customer or client that is inconsistent with that. The mailer is therefore unlawful on its face, and it is unlawful for the firm as well as for the offering.

The State M Administrator adopts a rule requiring that certain sales literature be filed with her office before it is used. Four items are about to be distributed to State M residents: a brochure for an offering registered in State M by qualification; a circular for an offering of a federal covered security sold under SEC Rule 506; a form letter for bonds of a State M city; and a client newsletter from a State M-registered investment adviser. Which items may the Administrator require to be filed?

1. A.All four items, since the Administrator may require the filing of any communication reaching state residentsThe power is broad but not unlimited. Material for exempt securities and for federal covered securities is carved out.
2. B.The qualification brochure and the adviser's client newsletterCorrect. Both concern non-exempt, non-covered material and advisory communications are expressly within the power.
3. C.The qualification brochure onlyThe statute expressly extends to material intended for the clients and prospective clients of an investment adviser, so the newsletter is reachable too.
4. D.The qualification brochure, the Rule 506 circular and the adviser's newsletterA Rule 506 offering is a federal covered security, and material relating to federal covered securities sits outside the filing power.

Why: The Act lets the Administrator require, by rule or order, the filing of prospectuses, circulars, form letters, advertisements and other sales literature intended for prospective investors, including material addressed to an adviser's clients and prospective clients. The power stops at two boundaries: it does not reach material for an exempt security or exempt transaction, and it does not reach material for a federal covered security. So the qualification brochure and the adviser's newsletter are within reach; the Rule 506 circular is for a federal covered security and the city's bonds are an exempt security, so both are outside it.