State Registration

An agent tells a client that shares of a large exchange-listed company are "federal covered securities, which means they are not securities under state law at all, so the State Administrator has no role." Under the Uniform Securities Act and NSMIA, this statement is:

1. A.Incorrect, but only because the state may still require the issuer to register the offering.Incorrect. The state may not require registration of a federal covered security; the error lies elsewhere in the statement.
2. B.Correct, because NSMIA transferred all authority over exchange-listed securities to the SEC.Incorrect. States retain antifraud authority over offers and sales within the state.
3. C.Incorrect, because a federal covered security is still a security and the state retains antifraud jurisdiction.Correct. Preemption reaches state registration, not the definition or the antifraud provisions.
4. D.Correct, because federal covered securities are excluded from the definition of a security under state law.Incorrect. There is no such exclusion from the definition.

Why: A federal covered security is still a security. The federal covered designation preempts STATE REGISTRATION of the offering, leaving the state to notice filings and fees where permitted, but the state retains full antifraud jurisdiction over offers and sales of those securities within the state.

Thackery Cider Works is incorporated in State J, does all of its business there, and plans a $4 million offering of common stock exclusively to State J residents. No registration statement has been or will be filed with the SEC, and Thackery has no prior public reporting history. The appropriate method of registering the offering in State J is:

1. A.A notice filing accompanied by a consent to service of process and the required feeNotice filing applies to federal covered securities. A purely intrastate offering is not federal covered.
2. B.Registration by coordination, becoming effective concurrently with the federal registrationCoordination requires a Securities Act of 1933 registration statement to coordinate with. Thackery has none.
3. C.Registration by qualification, becoming effective when the Administrator so ordersCorrect. With no concurrent federal filing, qualification is the available method and effectiveness is set by the Administrator's order.
4. D.No registration, because an offering sold only to residents of the issuer's own state is exempt under the ActAn intrastate offering may be exempt from FEDERAL registration, but the Uniform Securities Act contains no general intrastate exemption from state registration.

Why: Registration by coordination is available only when a registration statement has been filed under the Securities Act of 1933, because coordination synchronizes the state registration with the federal one. With no federal filing and no reporting history, Thackery must register by qualification, the method available for any security and the one designed for purely intrastate offerings. A qualification registration becomes effective when the Administrator so orders.

An issuer expects to sell to about sixty investors, most of whom are neither accredited nor financially sophisticated, and wants to stay inside Regulation D. Which rule accommodates that investor mix, and what does it cost the issuer?

1. A.Rule 506(b), because sixty purchasers is inside its ceiling once accredited investors are excluded.Wrong. Most of these buyers are non-accredited, so they are counted and the ceiling is breached.
2. B.Rule 506(c), because verification is only required where the issuer advertises the offering.Wrong. Rule 506(c) requires every purchaser to be accredited, which this group is not.
3. C.Rule 504, at the price of a capped raise and no preemption of state registration.Correct. It carries neither a purchaser ceiling nor a sophistication condition.
4. D.Rule 504, and the offering will also be preempted from state registration as a covered security.Wrong. Only Rule 506 offerings are covered securities; Rule 504 offerings are not preempted.

Why: Rule 504 imposes no ceiling on the number of purchasers and no sophistication condition; those are Rule 506(b) conditions. An issuer with sixty unsophisticated buyers therefore fits Rule 504 and does not fit Rule 506(b), whose purchaser ceiling counts every non-accredited buyer and whose nature-of-purchasers condition requires sophistication alone or with a purchaser representative. The cost is that Rule 504 caps the raise at ten million dollars measured with a twelve-month look-back, and that Rule 504 securities are not covered securities, so the issuer must clear state registration or a state exemption everywhere it sells. Rule 506(c) is no help here either, since every purchaser in that branch must be accredited.