The New Colorado Securities Act
| Publication year | 1990 |
| Pages | 1767 |
1990, September, Pg. 1767. The New Colorado Securities Act
The new Colorado Securities Act ("1990 Act")(fn1) became effective on July 1, 1990, replacing the Securities Act of 1981 ("1981 Act").(fn2) The purpose of this article is to explain the most important changes made by this 1990 legislation. The appendix published at the end of this article contains a cross-reference schedule which both displays the structure of the 1990 Act and lists the source of each section of the new statute.
The adoption of the 1990 Act marks the culmination of an effort of a special committee of the Colorado Bar Association ("CBA"). Formed in November 1988 under the auspices of the CBA Business Section, this committee undertook a comprehensive review of the 1981 Act (which itself was the product of a similar committee established nine years earlier). After six months of meetings in the first half of 1989 with regulators, prosecutors and representatives of the securities industry, the committee determined that significant changes of direction in some areas were warranted. As the drafting of these changes proceeded, a new code structure evolved similar to that contained in the Revised Uniform Securities Act ("RUSA").(fn3) The result was a complete rewrite of the 1981 Act, keeping much of the old but also adding much that is new.
In November 1989, after a full year of work, the committee distributed the 1990 Act in its proposed form to securities lawyers, broker-dealers, industry groups and others for review and comment. Several changes were made in response to comments. The committee's final product was then presented to the CBA Board of Governors at its meeting in January 1990, and that body, after removing one proposed change, voted overwhelmingly to give the proposal the CBA's support.
The 1990 Act has the same fundamental goals as the 1981 Act. It is designed to provide better enforcement tools against persons who engage in fraudulent securities transactions and to assure that the resources made available to the securities commissioner of Colorado ("commissioner") are dedicated as much as possible to the investigation and prosecution of fraud rather than the processing of routine filings.
As discussed in detail below, the 1990 Act tightens the securities registration requirements, most notably removing the exemption found in the 1981 Act for all interstate offerings. On broker-dealer matters, the 1990 Act re-instates a general licensing requirement
From meetings with regulators and others, two significant points regarding the registration of securities became clear to the drafting committee. First, securities registration requirements can be an important antifraud enforcement tool for a state securities regulator. Second, "blank check" offerings(fn4) serve legitimate purposes for some issuers but they too often invite abuse and fraud.
In addressing these points, the 1990 Act has borrowed ideas from other states and has also taken some of the refinements contained in RUSA. At the same time, the principal goals and much of the language of the 1981 Act in the securities registration area have been retained. These goals include avoiding unnecessary filings with the commissioner and directing limited state resources to antifraud enforcement rather than duplicating reviews by the commissioner of registration statements filed with the federal Securities and Exchange Commission ("SEC").
The 1981 Act included an exemption for any offer or sale not constituting an intrastate offering.(fn5) This exemption meant that issuers could avoid securities registration in Colorado by making an offer, even a single offer, outside the state. The exemption, once established by making a single out-of-state offer, was then available for all offers and sales within the state, even if no sale was made outside the state. With this readily available exemption in the statute, as a practical matter, the commissioner was precluded from initiating enforcement actions based on a violation of the securities registration requirement. This result was not accidental; it was intended to assure that the commissioner's limited resources would be used to combat fraud.(fn6) Experience showed, however, that this exemption in the 1981 Act overshot the mark and actually made it more difficult to stop fraudulent offerings.
Considering the time and effort usually required to build an antifraud case, an action to enjoin a violation of a securities registration requirement has a much better chance of stopping a fraudulent offering while in progress and before the harm is done. The drafting committee concluded that a strong correlation can be made between offerings that violate registration requirements and those that involve fraud. It decided that Colorado's securities registration requirements should be tightened as a means to strengthen the hand of the commissioner in dealing with fraudulent offerings.
Thus, the 1990 Act removes the exemption for transactions not constituting an intrastate offering. The effects are substantial. Public, interstate offerings now must be registered in Colorado, although the procedure is simple (see below). Issuers making offerings on the basis of an exemption now must be able to demonstrate how they satisfy the conditions of one or more specific exemptions, rather than simply making one offer outside of the state to establish a complete exemption for all offers and sales within the state. More information about public offerings conducted in Colorado will be available to the commissioner and through that office to investors. Finally, without a broad brush exemption for interstate offerings, civil liabilities for violating the securities registration requirement will once again be a significant consideration for Colorado lawyers in advising their clients.
The 1990 Act allows registration of securities through two means---registration by filing or registration by qualification. Registration by filing under CRS § 11-51-303 is limited to securities for which a registration statement has been filed under the Securities Act of 1933 ("1933 Act").(fn7) In that case, a registration statement consisting of a short form notice must be filed with the commissioner, along with a consent to service of process, and a fee must be paid. If the notice has been on file with the commissioner for at least five business days (or any shorter period allowed by the commissioner), the Colorado registration automatically becomes effective with the effectiveness of the federal registration statement. If the federal registration statement becomes effective before all of the Colorado conditions are satisfied, the state registration becomes effective when those conditions are satisfied or waived. Requirements for delivery of a prospectus to investors are left to federal law.
Registration by filing involves two additional steps, but neither is a condition to effectiveness of the Colorado registration. The person filing the Colorado registration statement is required to notify the commissioner of the date and time when the federal registration statement became effective, and that person must "promptly file" the final prospectus with the commissioner. A final prospectus is deemed to be promptly filed if it occurs within five business days after its first distribution to investors.
This concept of registration by filing comes from RUSA. However, in RUSA this type of registration is limited to issuers filing reports with the SEC under the Securities Exchange Act of 1934 ("1934 Act")(fn8) and satisfying certain size and quality standards. In Colorado, registration by filing is available to all issuers filing registration statements under the 1933 Act. This is consistent with the goal that the commissioner will not use resources to review any registration statement that has been filed with the SEC other than for the purpose of detecting possible violations of the antifraud provisions. (If the possibility of an antifraud violation were found, action by the commissioner would involve injunctive and other powers of the commissioner, but the registration statement would become effective at the same time as the federal registration statement.)
As was the case with the 1981 Act, any party may register securities by qualification under CRS § 11-51-304 of the 1990 Act. This section sets forth the information to be disclosed in a registration statement and continues the commissioner's authority to require delivery of an offering circular. This registration procedure remains available, therefore, for public intrastate offerings which are not registered under the 1933 Act.
A new provision in the 1990 Act, in CRS §...
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