§15.5 - Regulation of Securities Issuances Under State Law

• Jurisdiction: Washington

§15.5 REGULATION OF SECURITIES ISSUANCES UNDER STATE LAW

In October 1996, Congress passed the National Securities Markets Improvement Act (NSMIA), 15 U.S.C. §§77z-3, 78mm, 80b-3a. The enactment of NSMIA resulted in substantial revisions to essentially all federal securities statutes, including the Securities Act, 15 U.S.C. §§77a-77aa, and the Exchange Act, 15 U.S.C. §§78a-78o. As part of NSMIA, Congress created a new classification of instrument, the "covered security," and preempted state registration requirements with respect to all covered securities. See 15 U.S.C. §77r.

(1) Federal preemption

The definition of covered security includes any security that has been registered under the Investment Company Act of 1940, 15 U.S.C. §§ 80a-1 to 80a-64, or that is, or upon issuance will be, admitted for listing on the New York Stock Exchange, American Stock Exchange, or the NASDAQ National Market. Perhaps more importantly for purposes of real estate transactions, the definition of covered security also includes any security that is issued in accordance with SEC rules or regulations under Securities Act §4(2), 15 U.S.C. § 77d(2). Rule 506 of Regulation D, 17 C.F.R. § 230.506, was promulgated under Securities Act §4(a)(2), and NSMIA thus exempts from state securities registration requirements all offerings conducted under Rule 506.

Note: Although NSMIA served to exempt offerings conducted under Rule 506 from state registration requirements, NSMIA does not prevent application of federal or state antifraud rules to securities transactions conducted under Rule 506 or under any other exemption from registration.

Should an issuer wish to proceed with an offering in a fashion that will not result in the issuance of a covered security, it is necessary to consider and coordinate state and federal registration requirements.

(2) Registration of securities

Although registration with the SEC focuses primarily on disclosure, registration under most state securities statutes, including the Securities Act of Washington, involves review of the fairness of the offering as well as the adequacy of disclosure. This approach is commonly known as "merit" review. As a consequence, an offering may be cleared by the SEC, having met the disclosure requirements, only to be delayed or denied under the state securities, or "Blue Sky," laws for failure to meet merit standards. Depending upon the type of offering, the Washington Securities Act has two methods of registration: by coordination and by qualification.

Registration by coordination. Registration by coordination is limited to offerings of securities filed for registration with the SEC. Although technically not a registration, filings relying upon Regulation A under the Securities Act, 17 U.S.C. §§ 230.251-.260, may also be registered by coordination. See RCW 21.20.180. In a coordinated filing, audited financial statements are required if the aggregate sales price of the offering exceeds $1 million. RCW 21.20.180(8).

Note: The filing for registration by coordination with the Washington State Securities Administrator may be made on Form U-1, found in 1 BLUE SKY L. REP. (CCH) ¶5115, and Form U-2 (consent to service of process), found in 1 BLUE SKY L. REP. (CCH) ¶5116.

Registration by qualification. Any security, including real estate securities, may be registered by qualification. Most registrations by qualification involve relatively small intrastate offerings of securities, generally of a newly formed corporation or limited partnership. An application for registration by qualification must contain information and documents as set forth in RCW 21.20.210, including organizational information, an offering circular, and financial statements. If the estimated proceeds to be received from the offering, together with the proceeds from securities registered during the year preceding the date of filing, exceed $1 million, certain or all of the financial statements must be audited. In addition, the Securities Administrator has promulgated general rules covering all registrations in Chapter 460-16A WAC.

The North American Securities Administrators Association (NASAA) statements of policy for real estate programs, as adopted with amendments through May 7, 2007, apply to offerings registered under either RCW 21.20.180 or RCW...