Registering Securities

Registration Requirements

If something is a security, the default rule under federal and most state laws is that the issuer (the entity or individual offering the security) must do something called a registration (this is sometimes called a qualification under state law). For example, the 1933 Securities Act1 states that

Unless a registration statement is in effect as to a security, it shall be unlawful for any person, directly or indirectly—(1) to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell such security through the use or medium of any prospectus or otherwise; or (2) to carry or cause to be carried through the mails or in interstate commerce, by any means or instruments of transportation, any such security for the purpose of sale or for delivery after sale.

In other words, a registration statement must be filed before securities can be offered or sold.

Almost all states have a provision similar to the federal provision requiring registration of all securities offered in the state. For example, the Uniform Securities Act (adopted in some form by most states) states that “It is unlawful for a person to offer or sell a security in this State unless: (1) the security is a federal covered security (described below); (2) the security, transaction, or offer is exempted from registration . . .; or (3) the security is registered under this [Act].” One notable exception is New York, which does not generally require registration of securities offerings (though other filings are required).

What exactly is a registration? It is a very extensive set of filings that disclose all kinds of facts that would be relevant to an investor’s decision about whether to invest in the offering. When a company does an Initial Public Offering (IPO), it does so pursuant to a registration. If you file a federal registration, you also have to register in the states where you plan to do your offering, but states generally have a streamlined process for federally registered securities (often called registration/qualification by coordination).

State and federal registrations must be approved by the relevant regulatory authorities.2 Under federal law and in some states, all that is required for approval is sufficient disclosure of the material facts. This is called disclosure review. Some states, however, conduct merit review. In those states, even if the registration filing makes sufficient disclosures, the regulatory body may still reject the registration if it finds that the proposed offering imposes too great a risk for the investing public.

If you successfully complete the state and federal registration process, you will generally have the right to offer your securities to the public in the states where you have registered. Some states may require you to impose suitability standards on your investors so that you may not actually sell the securities to all members of the public but only those members of the public who meet the suitability standards. For example, in California, it is very common that the state securities regulators will require the following suitability standards unless the business making the offering has a track record of profitable operations:

The investor (including any spouse) must have, exclusive of homes, home furnishings and cars, either: (1) a minimum net worth of at least $75,000 and minimum gross income of $50,000 during the last tax year and (based on a good faith estimate) minimum gross income of $50,000 during the current tax year, or (2) in the alternative, a minimum net worth of $150,000. In either case, the investment cannot exceed 10 percent of the net worth of the investor.

Very few companies attempt to do a full federal registration. The cost can be very high (hundreds of thousands of dollars). This is because audited financial statements are required (an audit can cost tens of thousands of dollars) and many hours of specialized legal work go into preparing the registration statement and related documents. Also, the federal government and each state charge filing fees that range from several hundred to several thousand dollars. This is one reason so few IPOs take place each year.

Direct Public Offerings

A Direct Public Offering (DPO) is like an Initial Public Offering (IPO), except that the company sells its securities directly to the public rather than using an investment bank as an intermediary.

The cost to do an IPO (legal, accounting, filing, and listing fees; printing costs; etc.) can easily exceed $1 million, so IPOs make sense only for companies seeking to raise large sums, usually $25 million or more. The median IPO size 20 years ago was $10 million; by 2009, it was $140 million.

A DPO is a generic term that can involve several different legal compliance strategies, some of which are surprisingly simple and easy to do! For example, let’s say your company is based in Washington State and pretty much all of your customers are in Washington State. You are incorporated under Washington State law, and you want to raise capital from Washington State residents. You could conduct a DPO without doing any federal filings because you would be eligible for the federal intrastate exemption. All you would have to do is register your offering with the state securities regulators. How do you do that? You need to complete an application that includes an offering document that describes your company, the investment you’re offering, the risk factors that potential investors need to be aware of, and so on. You file this with the state and then the state will either grant you permission to conduct your offering or will ask you to clarify some things in your application. Once the state is satisfied that your offering documents disclose enough information for investors to make an informed decision, you should be granted the right to offer your securities to the public in Washington.

Even though this is a fairly simple process, it is not well known and not very common. There are, however, quite a few examples of successful DPOs. Some recent ones include Saranac Lake Community Store in New York, which recently raised $500,000 from community residents using a DPO and FarmPower, a manure digester manufacturer in Washington, which recently raised $750,000 in a DPO.

Small Company Offering Registration (SCOR)

Another effort has been made, this one by the state securities regulators, to try to reduce the regulatory burden on people like Pat. The North American Securities Administrators Association (NASAA), the association of state securities regulators, created a form called SCOR (also known as U-7). The SCOR form was designed to be a generic form that would be accepted by all states to register a public offering. For example, in Pat’s case, she could fill out one form and submit it to both the Texas and the Louisiana regulators.

In reality, not all states accept the SCOR form (though the vast majority do), and some states, even though they do accept the form, are considered “SCOR unfriendly.” The best practice is to look at the options available in each state. Some states have their own requirements for registration and also accept the SCOR form. In those states it is worthwhile to compare the two options. Even though the SCOR form was designed for use by small businesses with limited resources, parts of it can be tricky to complete.

Whether you use the SCOR form or the state-specific registration process, it is likely that you will have to provide professionally prepared financial statements, your organizational documents, an opinion of counsel, and detailed information about the business. Once you complete the package, you submit it to the state regulators. They most likely will respond with various questions and requested changes to the document. There is a back-and-forth process until the state is satisfied with what has been provided. States will often require various protections for investors, such as an impound account where investment funds must be held until a pre-determined minimum has been raised. If you aren’t able to raise the minimum within a specified period, all the money is returned to the investors.

If you do use the SCOR form, you may be able to use regional coordinated review. If you choose to request coordinated review, you will generally only have to work with one of the states, the lead jurisdiction, that will coordinate the review and comments of all states within the region in which you want to offer your securities.

The following is a list of the groups of states that do coordinated review:

•  CR-SCOR-Mid-Atlantic: Delaware, Maryland, New Jersey, Pennsylvania, Virginia, and West Virginia;

•  CR-SCOR-Midwest: Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, South Dakota, and Wisconsin;

•  CR-SCOR-New England: Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont;

•  CR-SCOR-Southwest: Arkansas, Oklahoma, and Texas;

•  CR-SCOR-West: Alaska, Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, and Wyoming.

Anti-fraud Rules

Regardless of whether a securities offering is exempt from the federal or state registration requirements, anti-fraud provisions of the state and federal securities laws still apply. For example, Section 12 of the 1933 Act states that “any person who […] offers or sells a security […] by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading […]shall be liable […] to the person purchasing such security from him, who may sue either at law or in equity in any court of competent jurisdiction, to recover the consideration paid for such security with interest thereon […].”

The anti-fraud provisions are the reason why offerors should prepare a prospectus for potential investors even when they are not required to do so under the applicable exemption from registration. This makes it less likely that an investor will sue, claiming that the offeror omitted to state a material fact.

Registration Under the 1934 Securities and Exchange Act

 Under the 1933 Act, all securities offerings must be registered with the SEC unless exempt. In addition to this requirement, certain companies must file registrations under the 1934 Act. This registration establishes a public file containing financial and business information about the company. Because of this, a company that registers under the 1934 Act is known as a “public company.” Public companies are required to make quarterly filings of reports on Forms 10-Q and 10-K, and on Form 8-K, as applicable. Public companies are also subject to certain regulations from which private companies are exempt such as the governance requirements of the Sarbanes–Oxley Act of 2002.

Under what circumstances does a company have to register under the 1934 Act? If a company wants to list a class of its securities on a national exchange (such as the New York Stock Exchange), it has to register under the 1934 Act.3

Also, any company that has at least 500 equity investors of record in any class of equity investment and has total assets of $10 million or more must register under the 1934 Act within 120 days after the end of the first fiscal year in which the both of those conditions are met. The term ‘‘class’’ includes all securities that are of substantially similar character and the holders of which enjoy substantially similar rights and privileges.4

There are some exemptions to the requirement to register under Section 12(g)(1):5

(A) Any security listed and registered on a national securities exchange (which would be registered under Section 12(a)

(B) Any security issued by an investment company registered pursuant to […] the Investment Company Act of 1940

(C) Most securities issued by banks and similar institutions

(D) Any security of an issuer organized and operated exclusively for religious, educational, benevolent, fraternal, charitable, or reformatory purposes and not for pecuniary profit, and no part of the net earnings of which inures to the benefit of any private shareholder or individual […].

(E) Any security of an issuer which is a ‘‘cooperative association’’ as defined in the Agricultural Marketing Act, approved June 15, 1929, as amended, or a federation of such cooperative associations […].

(F) Any security issued by a mutual or cooperative organization which supplies a commodity or service primarily for the benefit of its members and operates not for pecuniary profit, but only if the security is part of a class issuable only to persons who purchase commodities or services from the issuer, the security is transferable only to a successor in interest or occupancy of premises serviced or to be served by the issuer, and no dividends are payable to the holder of the security

(G) Any security issued by an insurance company (under certain conditions)

(H) Any interest or participation in any collective trust funds maintained by a bank or in a separate account maintained by an insurance company […].

The JOBS Act changed the requirements to register as a public company under 12(g)(1). You can now have up to 2,000 investors before the registration requirement is triggered, but no more than 500 unaccredited investors.

What If You Don’t Comply with the State and Federal Registration Requirements?

Consequences that can result from non-compliance include the requirement to return all investor funds, fines, and civil and criminal liability. Generally the severity of the consequences increases with the level of malicious intent on the part of the offeror.


  1. § 5(a).
  2. Note that this is not really an “approval”—you are usually required to include a statement in the offering document that says the securities regulators do not in any way endorse or recommend the offering.
  3. 1934 Act § 12(a).
  4. 1934 Act § 12(g)(1) & Rule 12g-1.
  5. 1934 Act § 12(g)(2).