Securities Law: An Overview
Registration of Securities
If you decide that your company should make a public offering of its securities, you must be aware of the federal regulations regarding the registration. Section 5 of the Securities Act of 1933 requires that all securities offered for sale be registered with the Securities and Exchange Commission (SEC) unless otherwise exempted. Securities cannot be sold until the SEC has declared the registration statement "effective." The registration process has three periods: the pre-filing period, the waiting period and the post-effective period. An attorney at Jacko Law Group, PC in San Diego, California can help you with the securities registration process.
The Registration Statement
The registration statement is the primary way to disclose information about the security to potential investors so that they can make informed decisions. A registration statement contains two main parts. The first part contains the same information that is in the prospectus. A prospectus is the formal written offer to sell securities. It sets out the business plan, and should contain additional facts that an investor needs to make an informed decision regarding their purchase. It must be accessible to anyone who buys or offers to buy the new issue. The second part of the statement contains additional information and exhibits that are not distributed with the prospectus, but which are available for public inspection in the SEC files.
Once a company files a registration statement with the SEC, it is available to the public. However, the company cannot start to sell securities until the SEC staff declares the registration "effective." During the review process, the SEC staff will make sure that the statement meets the legal disclosure requirements. The SEC will not accept a registration if it decides that the filed document is misleading, incomplete or inaccurate.
The Types of Registration Forms
Form S-1 is the basic registration form that all companies can use. This form is generally used by companies with publicly held securities, but a limited number of shareholders, and for large offerings by first-time issuers. The S-1 form should include all information required by the prospectus including information about the company's general business, any risk to the company, names and salaries of officers and directors, the plan for distribution of the securities, an independently audited financial statement and any other information necessary to make the disclosure complete and not misleading.
Form S-2 can be used by an issuer that has been filing reports under the 1934 Exchange Act for at least three years. Information from the issuer's Form 10-K is incorporated into the prospectus by reference. The registrant must provide a description of the offering and an annual report or comparable information in the prospectus.
Form S-3 can only be used by issuers who have reported under the 1934 Exchange Act for at least one year and for certain kinds of offerings. This form allows for incorporation by reference to reports filed under the Exchange Act. The issuer must only include a transaction-specific description of the offering in the prospectus.
Form SB-1 may be used for offerings in which the aggregate offering price is not more than $10 million and the securities will be sold for cash.
Form SB-2 can be used by small business issuers to register an unlimited dollar value of securities. Companies with less than $25 million in revenues in the previous fiscal year and outstanding publicly traded stock worth no more than $25 million may qualify as small business issuers.
Exemptions from Registration
Under the Securities Act of 1933, all securities must be registered with the SEC unless an exemption applies. The party claiming the exemption has the burden of proving that it applies. Sections 3 and 4 of the 1933 Act set forth the exemptions. The exemptions under section 3 are based on the type of security involved. The exemptions under section 4 are based on the transaction. The following are exempted under section 3:
- Bank securities, insurance policies and government securities (Section 3(a)(2))
- Short-term commercial paper (Section 3(a)(3))
- Securities of nonprofits (Section 3(a)(4))
- Securities issued by building and loan associations (Section 3(a)(5))
- Interests in railroad trusts (Section 3(a)(6))
- Trustees' certificates issued in bankruptcy (Section 3(a)(7))
- Insurance policies and annuities (Section 3(a)(8))
- Certain voluntary exchanges between an issuer and its existing security holders (Section 3(a)(9))
- Judicially or administratively approved exchanges of securities (Section 3(a)(10))
- Intrastate offerings - offerings that are only within one state (Section 3(a)(11))
- SEC has the power to make additional small issue exemptions; offerings of $5 million or less are currently exempted (Section 3(b))
- Securities issued by small business investment companies organized under the Small Business Investment Act of 1958 (Section 3(c))
The following transactions are exempt from registration under section 4:
- Offerings by people other than an issuer, underwriter or dealer (Section 4(1))
- Private placements and other transactions not involving a public offering by an issuer (Section 4(2))
- Sales of securities not publicly traded in the US are exempt and unlimited resales of unregistered securities are allowed if the sales are to "qualified institutional buyers" (Rule 144A; sometimes called a "Section 4(1 1/2)" exemption)
- Certain transactions by dealers are exempt from the prospectus delivery requirements (Section 4(3))
- Unsolicited brokers' transactions (Section 4(4))
- Three exemptions for private and small offerings (Regulation D)
- Exclusive harbor for issuers for stock purchase plans, option plans, bonus plans, stock appreciation rights, profit sharing, thrift plans and incentive plans (Rule 701)
- Offerings made only to accredited investors in which the aggregate amount of securities sold is not more than the dollar limit of section 3(b) (currently $5 million) (Section 4(6))
- Certain small issues with an aggregate offering price of less than $5 million within a one-year period for issuer transactions and $1.5 million for secondary transactions (Regulation A)
Conclusion
Filing a registration statement and working through the exemptions can be complicated tasks. There are large volumes of business information that must be reviewed, analyzed and compiled. An attorney at Jacko Law Group, PC in San Diego, California can help you with the securities registration process.
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