I. The Definition of a Covered Security.
A covered security includes: (1) nationally traded securities, such as those on the New York Stock Exchange, American Stock Exchange, National Market System of the Nasdaq Stock Market or substantially similar national securities exchange, or a security of the same issuer equal in seniority or seniority to such nationally traded securities; (2) securities issued by an investment company that is registered or has filed a registration statement under the Investment Company Act of 1940; (3) securities offered or sold to qualified purchasers as defined by the Securities and Exchange Commission (“SEC”) by rule based upon public interest and protection of investors; and (4) certain securities offerings exempt from registration by statute. See 15 U.S.C. § 77r(b) & 77r(d)(4).
The securities offerings exempt from registration by statute include the following: (1) transactions by any person other than an issuer, underwriter or dealer if the issuer files requisite reports; (2) certain transactions by a dealer if the issuer files requisite reports; (3) brokers’ transaction executed upon customers’ orders or any exchange or in the over-the-counter market but not the solicitation of such orders; (4) certain transactions involving accredited investors; (5) certain class of securities adopted by rule or regulation offered or sold on a national securities exchange or to a qualified purchaser as defined by the SEC; (6) exempted securities, including certain government securities except for municipal securities offered or sold in a state in which the issuer is located, certain types of commercial paper, securities issued by certain banks and savings and loan associations, any interest in a railroad equipment trust, certificates issued by a receiver or by a trustee or debtor in possession in a bankruptcy, certain insurance, endowment, and annuity policies and contracts, any security exclusively exchanged by the issuer with its existing security holders where no commission or other remuneration is paid or given for soliciting such an exchange, certain equity securities issued in connection with the acquisition of a bank or savings association by a holding company, certain securities issued by or interest or participation in any church plan, company or account and certain securities futures products; and (7) transactions by an issuer not involving any public offering, i.e., a private offering. See id. § 77r(b)(4).
II. State Regulations that Do Not Apply to a Covered Security.
If a security is a covered security, then it is exempt from state regulation as follows.
First, no state law, rule, regulation, order or other administrative action requiring or regarding the registration or qualification of securities or securities transaction may apply directly or indirectly to a covered security. See 15 U.S.C. § 77r(a)(1).
Second, no state law, rule, regulation, order or other administrative action, other the those of the issuer’s state of incorporation, may directly or indirectly prohibit, limit or impose any condition on the use of any offering document, such as a prospectus or other communication, prepared by or on behalf of the issuer with respect to a covered security, or any proxy statement, shareholders report, or other disclosure document relating to a covered security or the issuer thereof that is required to be and is filed with the SEC or any national securities organization. See id. § 77r(a)(2) & 77r(d)(1).
Third, no state law, rule, regulation, order or other administrative action may directly or indirectly prohibit, limit or impose any conditions on the offer or sale of a covered security based on the merits of the offering or the issuer thereof. See id. § 77r(a)(3).
III. State Regulations that Do Apply to a Covered Security.
A covered security is not exempt from state anti-fraud laws or filing and fee requirements.
Any state securities commission retains jurisdiction to investigate and bring an enforcement action for fraud, deceit or unlawful conduct by a broker, dealer or funding portal in connection with securities or securities transactions, as well as unlawful conduct by an issuer for certain transactions by an issuer. See id. § 77r(c)(1).
In addition, except for listed securities and crowdfunded securities, any state securities commission may require the filing of any document filed with the SEC, together with annual or periodic reports of the value of securities sold or offered to be sold to persons located in the state if such data is not included in the documents filed with the SEC, solely for notice purposes, and the assessment of any fee, together with a consent to service of process and any required fee. See id. § 77r(c)(2). See also id. § 77r(b)(4)(E) (state may impose notice filings requirement substantially similar to those required by rule or regulation under 15 U.S.C. § 77d(a)(2) for private offerings like a Form D).
Arizona law, for example, still requires an issuer to file a Form D with the Arizona Corporation Commission, Securities Division within 15 calendar days after the first sale of the covered security in or from Arizona. See A.R.S. § 44-1843.02(C).
The state securities commission may suspend the offer or sale of securities within the state if the requisite filing and fees are not submitted. See id. § 77r(c)(3).
Thus, in general, the federal law expressly preserves a state securities commission’s authority to enforce to its anti-fraud laws, notice filings and fee requirements.
If you have questions regarding a possible securities law matter, or to arrange for a consultation concerning your legal matter, please contact Robert Mitchell at email@example.com or at (602) 452-2730.