51. What are the registration requirements under state law?
Registration pursuant to federal law focuses on disclosure of information to offerees and purchasers. States adopt this approach, but also may impose a test to make certain the security being issued meets certain quality standards. This is known as a “merit review”. The merit review examines certain qualities, such as the financial stability of the company making the issuance. Other examinations may focus on the terms or rights associated with the issued security. With this in mind, states generally employ one of three registration methods for issuers of securities:
• Registration by Qualification – Some states require issuers to undergo a full-blown registration, complete with a merit review. Issuers registering with the SEC must file duplicate documents with the state’s administrative agency regulating securities. Unless a state official objects, the state registration becomes effective automatically when the federal registration statement is deemed effective.
• Registration by Notification – Some states permit issuers with an established track record to simply file a notice before offering their securities. This allows issuers to offer securities for sale automatically after a stated time period expires unless the state administrative agency takes action to prevent the offering.
• Registration by Coordination – Some states permit issuers that have registered with the SEC to file copies of the federal registration statement (and perhaps some additional documents) with the state. This process requires a more detailed disclosure by the issuer. A security cannot be offered for sale until the administrative agency grants the issuer a license or certificate to sell securities.
⁃ Note: Alternatives forms of coordinated registration exist and are discussed below.
• Discussion: Why do you think states employ the additional layer of registration beyond the federal requirements? How do you feel about state merit reviews? Should the Federal Government employ a merit review for issuances? Why or why not?
• Practice Question: ABC Corp is issuing securities for sale in a number of states. ABC plans on seeking a federal exemption from registration under Rule 505. ABC is curious about the different registration requirements that it could face in different states. Can you describe the three major types of state-level registration?