The Securities Act of 1981: a Reduction in Duplicate Regulation
| Publication year | 1981 |
| Pages | 2158 |
1981, September, Pg. 2158. The Securities Act of 1981: A Reduction in Duplicate Regulation
The securities laws ("blue sky laws") of Colorado were revised substantially by new legislation entitled "The Securities Act of 1981 ("Act"), which became effective on July 1, 1981. The Act significantly reduces the registration requirement and other regulation by the Colorado Securities Commissioner of issuers, brokers and dealers and salesmen.
State registration is limited under the new Act to (1) securities sold by issuers in intrastate offerings not exempt under C.R.S. 1973, § 11-51-113; (2) brokers or dealers which are not registered under the Securities Exchange Act of 1934 ("1934 Act"); and (3) salesmen who are not associated with brokers or dealers registered under the 1934 Act.
Concurrently, the enforcement sections of the Act have been strengthened considerably to enable the Securities Commissioner and investors to sue for fraudulent or manipulative activity. Such actions may be brought against brokers, dealers, persons associated with brokers or dealers, issuers, certain controlling persons and aiders and abettors.
The goals of the drafters of the Act were (1) to reduce the regulatory burden, thus making it easier for businesses to raise capital; (2) to eliminate duplicate, inefficient regulation which was thought to be unnecessary to protect investors; and (3) to focus the securities laws and the activities of the Securities Commissioner on the unscrupulous promotor.(fn1) The Act therefore requires state registration only for those entities which are not already regulated by the Securities and Exchange Commission ("SEC"). The new Act accordingly exempts from state registration issuers whose securities are either registered with the SEC or whose securities are exempt from registration under the Securities Act of 1933 ("1933 Act") or rules promulgated thereunder (other than the intrastate exemptions).
The Act further exempts from state registration brokers and dealers which are registered under the 1934 Act and persons associated with brokers or dealers which are registered under the 1934 Act. Only those transactions which are not regulated by the federal government because they involve intrastate offerings (exempt under § 3(a)(11) or Rule 147 of the 1933 Act) and only those brokers or dealers which are not registered under the 1934 Act or salesmen who are not associated with brokers or dealers registered under the 1934 Act are now required to register with the state. Persons or entities which need not register with the state, but are doing business or selling securities in this state, must still file a notice and pay a fee set by the Securities Commissioner.
The provisions of the Act are triggered by the offer or sale of a security to any person in the state of Colorado. Security is broadly defined(fn2) to include stock in a corporation, a limited partnership interest or any investment contract, even if only one offer or sale is made.
Colorado courts, using federal precedent, have previously defined an investment contract to mean a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.(fn3) The Colorado courts have emphasized the need to define security flexibly to enable the state to regulate the various schemes designed by people who seek to use the money of others with the lure of profit.(fn4) Using this flexible definition, the Colorado courts have found the following schemes to be investment contracts subject to regulation under the Colorado securities laws: pyramid schemes,(fn5) the sale of certain condominium property(fn6) and percentage interests in real estate ventures.(fn7) The new Act does not change the statutory definition of security; nor does it alter the judicial interpretations of that definition. Accordingly, the new Act, as the old Colorado statute, will apply to a wide range of situations.
Under prior Colorado law, all offers and sales of securities were required to be registered with the Colorado Division of Securities unless the security or transaction was exempt. The same is true under the new Act, but the exemptions have been substantially broadened. As a result of the new exemptions under the Act, only those offerings which are exclusively intrastate in nature must be registered with the state. Because of the peculiar delegation requirements of the Colorado Constitution,(fn8) this simple concept was effected through a somewhat complex statutory mechanism.
The new Act makes it unlawful for a person to offer or sell any security in Colorado unless the offering is registered or exempt under the Act.(fn9) Section 11-51-113(2)(o), the primary exemption in the new Act, exempts the offer and sale of a security in a transaction which does not constitute an intrastate offering. "Intrastate offering" is defined under the Act as
an offer or sale of a security which is part of an issue of securities offered and sold only to persons resident within the state, where the issuer of such security is a person resident and doing business within, or if a corporation, incorporated in and doing business within, the state.(fn10)
Therefore, if the offering of securities is registered with the SEC and is offered or sold to one or more persons outside the state of Colorado, the offering need not be registered with the Colorado Division of Securities, except for a simple notice filing, which is described below. Likewise, if securities are offered and sold which are not registered under federal law because the transaction is exempt as a private offering under § 4(2) or Rule 146 or under a 3(b) exemption, such as Rule 240, Rule 242 or Regulation A, that offering is exempt under Colorado law, so long as there is an offer or sale to at least one person who is not a resident of Colorado or so long as the issuer is not a resident and doing business within the state. If, however, there is an offering by an issuer resident and doing business in Colorado, whether or not exempt under federal law, and which is made exclusively to Colorado residents, then the transaction is not exempt under § 11-51-113(2)(o) because such an offering is an intrastate offering as defined by the Act. Therefore, another exemption for the offering must be found in § 11-51-113 or Colorado registration would be required.
In summary, the only offerings of securities which must be registered under Colorado law (other than the requirement that a notice be filed) are those offerings by Colorado issuers which are restricted to Colorado residents and which are not exempt under § 11-51-113. Consequently, offerings exempt from the federal securities laws under § 3(a)(11) or Rule 147 must be registered with the Colorado Division of Securities unless otherwise exempt under the Act.
The exemptions in the old Colorado statute were retained intact in the new Act. The difference is that they need only be applied to intrastate offerings since all other offerings are already exempt from registration under § 11-51-113(2)(o). The exemptions for securities, such as bank securities and securities issued and guaranteed by certain governments, still apply to exempt those securities from registration, even when offered or sold in strictly intrastate offerings.(fn11) In addition, the transactional exemptions in the old statute, in particular the private offering exemption, can be relied on to exempt certain instrastate transactions from registration.(fn12) For example, a private offering which is intrastate would be exempt under § 11-51-113(2)(i) of the Act.(fn13) On the other hand, a private offering which is made to at least one out-of-state offeree or purchaser would be exempt under § 11-51-113(2)(o).(fn14)
One exemption was added to the Act to simplify securities compliance for a small Colorado business which offers securities exclusively to Colorado residents. Section 11-51-113(2)(j) exempts any offering of securities to not more than twenty offerees
and not more than ten buyers during a twelve-month period provided that (1) the seller believes that the purchasers are purchasing for investment and (2) no commission or remuneration is paid or given directly or indirectly for soliciting a buyer. If one of the offerees or purchasers is an out-of-state resident, the transaction would be exempt under § 11-51-113(2)(o). If all of the offerees and purchasers are Colorado residents and the issuer is a resident and doing business in Colorado, the "intrastate offering" would be exempt under § 11-51-113(2)(j), provided the purchasers take for investment and no commission or other remuneration is paid. No notice filing is necessary for this exemption.
The Act may be better understood by examining its application in a variety of hypothetical situations.
A corporation offers its common stock to 100 persons, seventy-five of whom purchase shares of the stock for an aggregate price of more than $100,000. Only one of the purchasers is a Colorado resident; all of the other purchasers reside in...
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