Registration by Qualification
Registration by qualification is the most comprehensive form of state securities registration. It's used primarily for intrastate offerings—securities sold only within a single state where SEC registration is not required.
When Qualification Is Used
| Situation | Use Qualification? |
|---|---|
| Intrastate offering (one state only) | Yes |
| No SEC registration required | Yes |
| Small local company raising capital | Yes |
| Multi-state offering with SEC registration | No—use coordination |
| Federal covered securities | No—use notice filing |
Key Point: Any security may be registered by qualification, but it's primarily used when SEC registration is not required—typically for local, intrastate offerings.
Filing Requirements
Registration by qualification requires the most extensive disclosure:
Required Information About the Issuer
| Information | Details |
|---|---|
| Organization | State of incorporation, date organized |
| Business Description | Nature of business, history, prospects |
| Officers & Directors | Names, addresses, compensation |
| Principal Shareholders | 10%+ owners |
| Capitalization | Outstanding securities, how held |
| Financial Statements | Audited balance sheet, income statements |
Required Information About the Offering
| Information | Details |
|---|---|
| Security Description | Type, rights, preferences |
| Amount Offered | Total shares/units, offering price |
| Use of Proceeds | How funds will be used |
| Offering Expenses | Underwriting costs, commissions |
| Promoters' Interests | Consideration received by promoters |
Required Information About Selling Arrangements
| Information | Details |
|---|---|
| Underwriters | Names, commissions, arrangements |
| Selling Agents | Broker-dealers involved |
| Material Contracts | Management, acquisition agreements |
Other Requirements
| Requirement | Details |
|---|---|
| Consent to Service of Process | Required |
| Filing Fee | State-specific amount |
| Specimen Copies | Sample of security certificate |
| Prospectus | Selling document for investors |
Effective Date
Unlike coordination, qualification has its own effectiveness rules:
Standard Effectiveness
| Rule | Description |
|---|---|
| Timing | Noon on the 30th day after filing |
| Condition | No stop order issued |
| Complete Filing | All required documents submitted |
Administrator Actions
| Action | Effect |
|---|---|
| Earlier Effectiveness | Administrator may grant |
| Delayed Effectiveness | Administrator may postpone |
| Stop Order | Prevents effectiveness |
Exam Tip: Registration by qualification becomes effective at noon on the 30th day after the Administrator receives a complete filing, unless the Administrator takes other action.
Escrow Requirements
The Administrator may require escrowing of:
| Escrow Target | Reason |
|---|---|
| Securities of Promoters | Protect investors from early insider sales |
| Proceeds of Sale | Ensure minimum capital is raised |
| Impounded Proceeds | Released only when conditions met |
When Escrow Is Required
| Situation | Escrow Likely? |
|---|---|
| New company with no track record | Yes |
| Promoters received securities for non-cash | Yes |
| Issuer has limited assets | Yes |
| Established company with audited financials | Less likely |
Administrator Review
Registration by qualification involves full state review:
Review Process
| Step | Action |
|---|---|
| 1. Receipt | Administrator receives filing |
| 2. Examination | Staff reviews all documents |
| 3. Comment | Administrator requests clarifications |
| 4. Response | Issuer addresses comments |
| 5. Effectiveness | Registration becomes effective |
What Administrator Reviews
| Area | Concerns |
|---|---|
| Completeness | All required information provided |
| Accuracy | No false or misleading statements |
| Fairness | Terms fair to investors |
| Promoter Dealing | No overreaching by insiders |
| Financial Condition | Adequate capitalization |
Conditions the Administrator May Impose
| Condition | Purpose |
|---|---|
| Escrow of Securities | Prevent early insider sales |
| Escrow of Proceeds | Ensure minimum offering size |
| Impoundment | Hold funds until conditions met |
| Reports | Require periodic updates |
| Limitations | Restrict how securities may be sold |
Comparison: Qualification vs. Coordination
| Feature | Qualification | Coordination |
|---|---|---|
| SEC Filing | Not required | Required |
| Document Preparation | State-specific | Use SEC documents |
| State Review | Full review | Limited review |
| Effective Date | 30th day after filing | When SEC effective |
| Primary Use | Intrastate offerings | Multi-state offerings |
| Complexity | Most complex | Moderate |
Practical Example
Scenario: XYZ Inc., a Texas company, wants to raise $2 million by selling stock only to Texas residents (intrastate offering).
Process:
- XYZ prepares extensive state registration documents
- Files with Texas Securities Board with fee
- Administrator reviews all disclosures
- Administrator may require escrow of promoter shares
- If no stop order, registration effective at noon on 30th day
- XYZ can begin selling to Texas residents
Key Takeaways
- Qualification is for intrastate offerings without SEC registration
- Requires most extensive disclosure of all methods
- Becomes effective at noon on 30th day after filing
- Administrator conducts full review
- Escrow may be required for promoter securities or proceeds
- Any security CAN be registered by qualification, even if also SEC-registered
Registration by qualification is primarily used for:
Under registration by qualification, when does the registration become effective?
The Administrator may require escrowing of proceeds when registering by qualification. What is the purpose of this requirement?
Which statement about registration by qualification is TRUE?
3.4 Registration by Filing (Notice Filing)
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