Chapter 14 - § 14.5 • REGISTRATION REQUIREMENTS AND EXEMPTIONS IN COLORADO

• Jurisdiction: Colorado

§ 14.5 • REGISTRATION REQUIREMENTS AND EXEMPTIONS IN COLORADO

§ 14.5.1—Colorado's Registration Requirements

General

When considering whether a given exemption applies to a securities transaction, the advisor should first review the default rule under the Colorado Securities Act, which requires (absent an exemption) that any offer to sell or any sale of a security in Colorado must be registered with the Division of Securities.¹¹¹ Additionally, the Division may require the filing of any prospectus, pamphlet, circular, form letter, advertisement, or other sales literature addressed or intended for distribution to prospective investors.¹¹² Note that while securities attorneys commonly discuss the "registration of securities," to be precise, only securities transactions are registered. There are, however, both "exempt" securities and "exempt" transactions.

The Colorado Securities Act's basic requirements are further developed under the Rules of the Colorado Division of Securities (Rules), commonly referred to as Colorado's "Blue Sky Regulations."¹¹³ The Colorado Securities Act, as expanded by the Rules, provides that registration may be effected by three primary means: (1) registration by coordination, (2) registration by qualification, and (3) a limited offering registration.

Registration by Coordination

The first method, registration by coordination, permits securities for which a registration statement has been filed under the federal Securities Act of 1933 in connection with the offering of the securities to be registered in Colorado by filing the federal registration statement, provided it contains minimum state disclosure and informational require-ments.¹¹⁴ Both a registration statement (Form RC or uniform Form U-1) and a consent to service of process form must be filed with the Division.¹¹⁵ To become effective, the registration statement and consent to service of process on file with the Division must be accurate as of the time the federal registration statement becomes effective.

Registration by Qualification

The second method is registration by qualification, i.e., the offeror of securities must meet all the information and disclosure requirements.¹¹⁶ An application for registration of an offering of securities by qualification is made by filing a Form RQ registration statement and a consent to service of process.

Limited Offering Registration

The Colorado Securities Act provides a limited offering registration, which is available where the issuer meets the following criteria:¹¹⁷

1) The issuer has its principal office and the majority of its full-time employees in Colorado;
2) The issuer provides in its offering document that at least 80 percent of the net proceeds from the offering shall be used in connection with the operations of such issuer in this state;
3) The gross proceeds from such offering of securities and any other offering of securities will not exceed $5 million¹¹⁸ within any 12-month period;
4) The registration statement and offering documents for such limited offering contain the proper disclosures; and
5) The cover page of the offering document contains the legend mandated by the statute.

A limited offering registration is accomplished by filing a Form RL with the Colorado Division of Securities. As stated in the introduction to Form RL:

In addition to its use as a registration statement to be filled with and reviewed by the [Colorado] Securities Commissioner, FORM RL has been designed so that is can be used as the basis for a disclosure document presented to investors. It is meant to expedite the registration process. It is in no way meant to absolve the issuer of the requirement that full disclosure of all material facts must be made to all offerees and purchasers.

Thus the registration form (Form RL) must be filed with and may be reviewed by the Division of Securities together with a consent to service of process (defined by Rule 51-7.1) and a $50 filing fee. Section 11-51-304(8) provides that a "registration statement under [§ 11-51-304(6)] becomes effective when the securities commissioner so orders or fourteen calendar days from the date of the filing if the securities commissioner does not request changes in the registration statement or if the registration statement is not subject to a stop order under section 11-51-306."

Although Colorado law clearly provides the ability to make a $5 million offering under a state registration pursuant to C.R.S. § 11-51-304(6), the advisor cannot forget that federal law still applies. There needs to be an exemption from registration under federal law in addition to the limited offering registration in Colorado. Generally this would be one of two exemptions where, as is typically the case in a registered offering, general solicitation is anticipated:

• If the offering is limited to $5 million in any 12-month period and meets the other requirements of Regulation D, Rule 504, then Rule 504 (discussed in § 14.3.8, "Rule 504") would provide that exemption.
• Where there are problems under Rule 504, the issuer can potentially utilize the statutory intrastate exemption found in § 3(a)(11) of the 1933 Act and Rule 147 or 147A thereunder (discussed in "Section 3(a)(11) — the Intrastate Offering Exemption" in § 14.3.1). Once again, the offering must meet the requirements of the federal exemption in addition to the limited offering registration requirements of the Colorado Securities Act.
• Also, if all else fails, the issuer may look at Rule 506 under Regulation D.

Broker-Dealer/Sales Representation Registration May Be Required

The final point to be made is that if the issuer is selling securities under any Colorado registration form through other persons, those other persons may have to register under Colorado law as a broker-dealer (defined in § 11-51-201(2)) or as a "sales representative" (defined in § 11-51-201(14)) in addition to potentially being subject to the federal registration requirements discussed in § 14.7, "Finders and Broker-Dealers." The only exception to this requirement under Colorado law is found in the two definitions:

• § 11-51-201(2)(b): The term "broker-dealer" "does not include . . . an issuer with respect to purchasing and selling the issuer's own securities."
• § 11-51-201(14): "An individual [attempting to effect purchases or sales of securities] for an issuer is not a sales representative if the individual primarily performs, or is intended primarily to perform upon completion of an offering of the issuer's own securities, substantial duties for or on behalf of the issuer otherwise than in connection with the transactions in the issuer's own securities and the individual's compensation is not based, in whole or in part, upon the amount of purchases or sales of the issuer's own securities effected for the issuer."

The Colorado Securities Commissioner has historically interpreted the broker-dealer and sales representative registration requirements and the exemptions therefrom very strictly and (except in the limited case of M&A Brokers discussed in § 14.7.3, "M&A Brokers") is unlikely to make other exceptions to the broker-dealer registration requirement under Colorado law.

§ 14.5.2—Exemptions from...