|  | # Report on the Uniformity of State Regulatory Requirements for Offerings of Securities That Are Not “Covered Securities” ## Pursuant to Section 102(b) of the National Securities Markets Improvement Act of 1996 #### October 11, 1997 ## Contents #### Executive Summary #### I. Federal and State Regulation of Securities Offerings A. Federal Regulation of Securities Offerings 1. Disclosure-based registration system 2. Content and review of registration statements 3. Exemptions from federal registration a. Statutory exemptions b. Commission-created exemptions c. Effect of NSMIA on the Commission's exemptive authority B. Registration of Securities Offerings under State Securities Laws 1. Basic structure of state registration 2. State registration process a. Merit review b. Model merit review standards 3. State exemptions from registration a. Uniform Act-based exemptions b. Other state exemptions #### II. Effect of NSMIA on Federal and State Securities Regulation A. "Covered Securities" 1. Preemption of state registration of offerings of "covered securities" 2. Preservation of certain state rights regarding offerings of "covered securities" B. Examples of Securities That Are Not "Covered Securities" C. Uniformity Study Survey #### III. Uniformity of State Regulation of Offerings of Securities That Are Not "Covered Securities" A. Introduction B. Offerings of Securities That Are Not "Covered Securities" 1. General issues relating to registered or exempt offerings a. Registered offerings of securities that are not "nationally traded securities" i. Survey responses (A) Law firms (B) Issuers (C) Broker-Dealers ii. State initiatives (A) Coordinated Equity Review (B) NASAA Statements of Policy (C) Internet communications (D) Other state actions and recommendations b. Exempt public offerings of securities that are not "nationally traded securities" i. Survey responses ii. State initiatives (A) Small Company Offering Registration Form and regional review project (B) Test the waters c. Exempt offerings under the Securities Act and under state exemptions i. Survey responses ii. State initiatives (A) Uniform Limited Offering Exemption (B) State Accredited Investor Exemptions C. Issues Relating to Offerings of Specific Types of Securities That Are Not "Covered Securities" 1. Various debt securities, including mortgage-backed and asset-backed securities a. Survey responses b. State initiatives 2. Conduit financings 3. Interests in employee benefit plans #### IV. State Regulation of Offerings of "Covered Securities" After NSMIA A. Benefits of Preemption and State Efforts Toward Uniformity B. Continued Issues Regarding Uniformity 1. Rule 506 offerings - "substantially similar" filings 2. Notices for secondary trading transactions 3. Issuer-dealer or agent registration or exemptions 4. Section 3(a)(10) offerings #### Appendices NOTE: Some of the Appendix materials are not available on this site. See the individual Appendix headings (below) for information on obtaining these materials. Appendix A. Survey Response of the North American Securities Administrators Association, Inc. ("NASAA") [NOTE: Not available on this site] Appendix B. Surveys prepared by the Commission staff for Securities Administrators, Issuers, and Broker-Dealers and Counsel Appendix C. Summary of the Survey Responses (excluding NASAA and the states) Appendix D. Summary of State Survey Responses Appendix E. Materials with respect to NASAA's Coordinated Equity Review Program Appendix F. Copy of NASAA Model Accredited Investor Exemption Appendix G. Survey Response of Rushall & McGeever Appendix H. Memorandum of Joseph J. Kornblum regarding "Current State Filing Requirements for SEC Rule 506 Offerings" ## Executive Summary ### National Securities Markets Improvement Act On October 11, 1996, the National Securities Markets Improvement Act of 1996 ("NSMIA") was enacted into law. Title I of NSMIA, relating to "Capital Markets," amended Section 18 of the Securities Act of 1933 ("Securities Act"). As amended, this provision significantly realigns the regulatory partnership between federal and state regulators. Securities Act Section 18(a) preempts state "blue-sky" registration and review of specified securities and offerings. NSMIA refers to the securities in these preempted offerings as "covered securities." ### Requirement of Uniformity Study NSMIA, in Section 102(b), requires the U.S. Securities and Exchange Commission (the "Commission") to "conduct a study, after consultation with the states, issuers, brokers, and dealers, on the extent to which uniformity of state regulatory requirements for securities or securities transactions has been achieved for securities that are not covered securities..." (the "Uniformity Study"). The Commission is required to report to Congress on its findings by October 11, 1997. This report is submitted in accordance with that requirement. ### The Uniformity Study The Uniformity Study consisted of three steps. First, the Commission sent out surveys to state securities administrators, various issuers, broker-dealers and securities counsel. The "Surveys" requested input on the level of uniformity in state regulation of offerings of securities that were not preempted by NSMIA. Second, the Commission posted these Surveys on its Internet Web Site. Finally, the Commission conducted its own review of state blue-sky provisions. The Commission agrees with the statement of the North American Securities Administrators Association, Inc. ("NASAA") that "[e]fforts by federal and state regulatory authorities to craft a more efficient 'division of labor' with respect to securities offerings have eclipsed anecdotes of generations ago." As such, this report focuses on the present condition of federal and state securities regulation and the Survey responses that relate to situations following the enactment of NSMIA. ### Summary of Findings The Commission found that state regulators have taken significant action to enhance uniformity in regulating offerings of securities that are both "covered" and not "covered." As stated in the Survey response of the Securities Industry Association ("SIA"): "The North American Securities Administrators Association and individual state securities regulators have made progress toward achieving uniformity in the regulation of securities offerings." This progress includes: enacting new legislation and regulations to effect NSMIA's changes; developing coordinated review of filings that are registered at the federal level; developing a uniform registration statement for offerings that are exempt at the federal level; creating a regional review program for this uniform registration statement; developing statements of policy on a number of review issues that enhance uniformity in review among the states; developing a statement of policy on Internet offerings that is widely accepted among the states; and developing a new, uniform exemption for offerings to accredited investors. In addition to these significant strides, there is still more to be done to accomplish true uniformity among the states in their regulation of offerings of securities that are not "covered securities." Responses to the Surveys indicate that many issues still exist, including differences among the states regarding: standards of merit review; length of comment periods; suitability standards; notice requirements for exempt offerings, even under the Uniform Limited Offering Exemption; required legends on offering materials; required forms in addition to the standard Form D in exempt offerings; and treatment of offerings of asset-backed securities. Survey respondents also noted some continued issues relating to state regulation of offerings of involving "covered securities." These concerns focused primarily on differing notice requirements for preempted primary and secondary offerings and the need to continue to analyze each state's requirements to determine notice filing requirements. Despite these concerns, respondents generally noted significant efforts by the states in these areas and a decreased cost of state compliance that is facilitating capital formation. Many respondents recognized the important role played by the states in the regulation of securities offerings and applauded the efforts of state regulators to better coordinate the state regulatory system. Respondents noted, however, that there continued to be a disparity among states' requirements. In considering these findings, it is important to note that only a brief period has passed since the adoption of NSMIA. As indicated, there are a number of uniformity initiatives that have already been put forth but will require time for adoption by the individual states. ### Structure of Report This report is presented in four sections. First, it discusses the structure of federal and state regulation of securities offerings. The second section describes the impact of NSMIA on this regulatory structure. The uniformity of state regulation of securities that are not preempted by NSMIA is then discussed. This discussion includes a summary of the findings from the Surveys and a specific discussion of issues regarding offerings of different types of securities that are not "covered securities." Finally, the report includes a brief discussion of Survey responses regarding the uniformity of state regulation of offerings of securities that are "covered securities." The report also includes a number of appendices that provide additional detail to the discussion in the body of the report, including summaries of the responses to the Surveys. ## I. Federal and State Regulation of Securities Offerings An offering of securities must be registered under both the federal Securities Act of 1933 ("Securities Act") 1 and applicable state securities laws, unless an exemption from registration is available. This dual system of federal-state regulation has existed since the Securities Act was adopted. The first modern laws applicable to the regulation of securities offerings were passed in the state of Kansas in 1911. 2 As adopted, the Securities Act specifically preserved the right of each of the states to regulate the offering of securities in that state. In 1996, this layered system was profoundly changed by NSMIA, 3 which preempted state registration and review of specified securities and offerings. Offerings of these "covered securities" are for the most part subject only to federal regulation. Offerings of securities that are not "covered securities" continue to be subject to a dual system of federal-state regulation, including registration and review. ### A. Federal Registration of Securities Offerings #### 1. Disclosure-based registration system The federal registration of securities offerings requires the issuer of the securities to disclose all material information relevant to an informed investment decision. This disclosure must be presented in a registration statement filed with the Commission. No sales of securities in a registered offering may occur until the Commission declares the registration statement effective. A registration statement typically becomes effective by order of the Commission. In declaring a registration statement effective under the Securities Act, the Commission does not consider the merits of the offering, but whether all material information is disclosed. #### 2. Content and review of registration statements The Securities Act requires specific disclosure by issuers and delegates to the Commission the authority to adopt registration statement forms for presenting that information. The Commission has adopted a number of forms for registering securities offerings under the Securities Act. These forms generally contain a prospectus, which includes narrative disclosure regarding the issuer and the terms of the offering, as well as independently audited financial statements. 4 The federal registration process is commenced by the filing of a registration statement on the appropriate form with the Commission. The Commission's Division of Corporation Finance uses non-public criteria to determine whether it will review the registration statement. The Division of Corporation Finance promptly informs the issuer whether it will review the registration statement. If the registration statement is reviewed, the Division generally will provide comments on the registration statement to the issuer within 30 days of filing. The issuer addresses these comments in an amendment to the registration statement. When the Division staff has no further comments on the disclosure in the registration statement and the issuer requests effectiveness of the registration statement, the Commission declares the registration statement effective and the securities may then be sold to the public. #### 3. Exemptions from federal registration #### a. Statutory exemptions The Securities Act provides a number of exemptions from registration. There are two types of exemptions - securities exemptions and transactional exemptions. In a securities exemption, any offer or sale of that security is exempt regardless of the nature of the transaction. In a transactional exemption, it is the manner of the particular offer or sale that determines whether it must be registered. Securities exemptions are provided in Section 3 of the Securities Act. These exemptions, which generally are based on either an alternative regulatory scheme or a significant federal policy, include: securities issued by banks or savings and loan associations; securities issued by municipal, state, or federal issuers; securities issued under certain employee benefit plans; securities issued by certain religious, education, charitable and other organizations; securities exchanged by an issuer with its existing security holders; securities issued in exchange for outstanding securities, claims or property interests if the terms of the issuance and exchange are approved by various governmental entities, after a fairness hearing; securities offered and sold only to persons resident in a single state by an issuer resident and doing business in that state; securities issued in certain bank holding company formation transactions; and securities issued by or an interest or participation in certain church plans, companies, or accounts that are not investment companies. Section 4 of the Securities Act lists exempt transactions, including: secondary market transactions by persons other than the issuer or an affiliate of the issuer; non-public offerings by the issuer; and sales by brokers or dealers. #### b. Commission-created exemptions The Securities Act grants the Commission authority to create exemptions from registration. Historically, this exemptive authority was based on Section 3(b) of the Securities Act and the Commission's ability to define the term "not involving any public offering" as used in the Section 4(2) transactional exemption. Section 3(b) limits the Commission's authority to adopt exemptions for offerings of less than $5 million. The Commission has exercised this "limited offering" exemptive authority to this maximum in adopting four exemptions - Rule 505 (specified purchasers), Rule 701 (employee compensation plans by non-public companies), Rule 1001 (coordinated exemption with California), and Regulation A ("mini-registration"). The Commission also used this authority to adopt its "seed capital" Rule 504, which is limited to $1 million. As noted above, Section 4(2) exempts transactions that do not involve a public offering of securities. The Commission adopted Rule 506 to provide a safe harbor as to what type of offering would not be considered to involve a public offering. An issuer complying with Rule 506 is certain that it is conducting a Section 4(2)-exempt "private" offering. Offerings under these exemptions may or may not require specific disclosures or filings, depending on the specific exemption. The Rule 504 and Rule 701 exemptions do not require specific disclosure, except as required by the anti-fraud provisions of the federal securities laws. The Rule 505 and 506 exemptions do not require specific disclosure for sales to "accredited investors," except as required by the anti-fraud provisions of the federal securities laws. 5 Any offerings under these rules to non-accredited investors require delivery of specified information to those investors. The Regulation A exemption is often termed a "mini-registration" process because it requires the filing of an offering statement, which includes the offering document containing required disclosures. Unlike Rules 505 and 506 or registered offerings, the financial statements in a Regulation A offering statement need not be independently audited. The Regulation A offering statement is processed by the Division of Corporation Finance in a manner similar to that applied to registration statements. After completing its review of the disclosure, the Division "qualifies" the offering statement. Securities may be sold in the offering only after the offering statement is "qualified." Offerings under Regulation D (those offerings under Rules 504, 505, and 506) require the filing of a Form D notice with the Commission within 15 days after the first sale of securities in the offering. #### c. Effect of NSMIA on the Commission's exemptive authority NSMIA added Section 28 to the Securities Act. This new section grants to the Commission broad authority to create new exemptions from registration. This exemptive authority is not subject to any dollar limit. To date, the Commission has not exercised this authority. ### B. Registration of Securities Offerings under State Securities Laws #### 1. Basic structure of state registration Approximately 40 states apply a "merit review" approach to the registration of securities offerings. 6 These states, in reviewing a registration statement for a securities offering, will make a determination regarding the fairness of the offering to investors. If an offering is considered unfair in certain respects, the states will issue comments with respect to the substance of the offering, i.e., merit review comments. If a state securities regulator is not satisfied with the "fairness" of an offering, the regulator can refuse to declare the registration statement effective in that state. There are varying degrees of merit regulation, with some states applying stricter standards than other states. A minority of states follow the federal approach to the review of registration statements, requiring only full disclosure of all material information. 7 Forty-one states have adopted or substantially adopted with modifications the Uniform Securities Act of 1956 (the "Uniform Act"). 8 Other states have adopted their own individualized securities laws. The Uniform Act provides for three methods for registering securities offerings with the states: registration by notification, registration by coordination, and registration by qualification. Registration by Notification.&nsbp; This method of registration requires a mere notice filing with the state. Registration by notification generally is reserved for mature issuers, with a relatively sound earnings track record. Registration by Coordination.&nsbp; This method of registration is available where there is registration under the Securities Act. The state registration is coordinated with review and effectiveness by the Commission. Registration by Qualification. This method of registration requires a full review of the transaction by the state. Registration by qualification is required if an offering is not registered under the Securities Act, such as an offering exempt from registration under the Securities Act but not exempt from state registration requirements. #### 2. State registration process Much like the federal system, the state registration process begins by filing the various registration statement forms, the disclosure document, and the requisite fee with the state securities commission of each state in which a proposed offering is to be conducted. The registration statement may or may not be reviewed, as determined by the particular state. If reviewed, the state will review and comment on the statement from a merit, full disclosure or combination merit and full disclosure perspective, depending on the state's approach to the registration statement review process. #### a. Merit review As noted previously, in addition to reviewing offerings for adequate disclosure of all material information, approximately 40 states undertake a "merit review" of the filing. A merit review of a filing involves a substantive review of the issuer and the offering and is intended to "prevent promotion of fraudulent or inequitable issues." 9 Common merit review provisions relate to the following matters: "Cheap stock" -- limiting sales of stock to insiders and promoters that are proximate to the offering at a significantly discounted price. Loans to and other affiliate transactions -- requiring all insider loans to be repaid before the public offering; other material transactions must be on similar terms available from unaffiliated third parties and be ratified by a majority of the independent directors; Debt securities -- requiring cash flow in the past fiscal year that is sufficient to cover fixed charges, meet debt obligations as they become due and service the debt being offered; requiring a trust indenture meeting the requirements of the Trust Indenture Act of 1939; requiring the establishment of a sinking fund or other redemption requirements; Impoundment of proceeds -- subjecting the proceeds from any offering (especially best efforts and minimum/maximum offerings) to impound; Options and warrants -- limiting stock underlying such securities, at the time of the public offering, to, for example, 15 percent of the outstanding common stock; dictating terms of exercisability to not less than 85 percent of fair market value of the underlying common stock on the date of grant; and limiting underwriters compensatory issuances; Preferred stock -- requiring net income in the past fiscal year that is sufficient to cover fixed charges, preferred stock dividends and redemption requirements of the preferred stock being offered; and requiring the establishment of redemption provisions; Promoters' equity investment -- with respect to development stage companies, requiring the promoters' equity interest to be more than 10 percent of the aggregate public offering; Promotional shares -- requiring the escrow of shares or the reduction of the offering price where equity securities of a development stage company have been issued to promoters for a value of less than 85 percent of the proposed public offering price; Selling expenses and selling security holders -- limiting expenses to a percentage of the offering amount; requiring selling security holders to pay a pro rata share of the additional expenses due to the inclusion of their shares in the public offering; Unequal voting rights -- prohibiting these, unless accompanied by preferential dividend or liquidation provisions; Capitalization requirements -- prohibiting the issuance of any security except common equity where the issuer is "unseasoned"; and Specifying offering price -- requiring such prices to relate to book value, earnings history and/or industry price/earnings multiples where there is no established market for the security; requiring the price to be no lower than, e.g., $2 in any event, or no more than 25 times earnings; and forbidding certain types of offerings such as ones with a planned "step-up" pricing mechanism. #### b. Model merit review standards NASAA is an association of securities administrators from each of the fifty states, the District of Columbia, Puerto Rico, Guam, Mexico, and several Canadian provinces. NASAA has published Statements of Policy that contain model merit standards of general applicability. 10 NASAA also has published Statements of Policy that contain model merit standards that relate to specific investments. 11 #### 3. State exemptions from registration #### a. Uniform Act-based exemptions Like the Securities Act, state securities laws exempt from registration both exempt securities and exempt transactions. Examples of exempt securities under the Uniform Act include: securities issued by banks or savings institutions; securities listed or approved for listing on the New York Stock Exchange (the "NYSE"), the American Stock Exchange (the "AMEX"), or the Midwest Stock Exchange; securities issued by an organization formed for religious, charitable, or other purposes, if certain conditions are met; and an investment contract issued in connection with an employee benefit plan if notice is provided to the state securities commission. Examples of transactional exemptions under the Uniform Act include: an offer or sale of a security to specified purchasers, including banks, savings institutions, and institutional buyers; any transaction pursuant to an offer to not more than ten persons in the state during any twelve month period, if certain conditions are met; and any transaction pursuant to an offer to existing security holders of the issuer, if certain conditions are met, including advance notice to the state securities commission. #### b. Other State Exemptions In 1983, NASAA adopted a model exemption, the Uniform Limited Offering Exemption ("ULOE"), designed to provide an exemption at the state level for offerings that are exempt at the federal level under Rules 505 and 506 of Regulation D. 12 Approximately 30 states have adopted ULOE to some extent. 13 Many of the states have made modifications to the model provisions, somewhat limiting its usefulness as a uniform exemption. In addition to the approximately 30 states that have adopted ULOE, another six states have exemptions that coordinate with Regulation D. 14 Most states have some form of limited offering exemption based on either the number of offerees or purchasers, the dollar amount of the offering, or a combination of these limitations. Certain states provide for private offering exemptions similar to Section 4(2) of the Securities Act. Other states provide exemptions for offerings to "accredited investors" as defined in Regulation D or by state law or rule. In April 1997, NASAA adopted a model accredited investor exemption that has been adopted by six states and is under consideration in other states. The increased acceptance of this exemption by the individual states will facilitate uniformity and coordination between federal and state exemptions. NASAA requested in its Survey response that the Commission adopt an exemption that coordinates with the NASAA model exemption. ## II. Effects of NSMIA on Federal and State Securities Regulation ### A. "Covered Securities" #### 1. Preemption of State Registration of Offerings of "Covered Securities" NSMIA amended Section 18 of the Securities Act to preempt state blue-sky registration and review of offerings of "covered securities." 15 The term "covered securities" generally refers to: "nationally traded securities"; 16 securities issued by an investment company that is registered, or that has filed a registration statement, under the Investment Company Act of 1940; 17 securities that are offered or sold to qualified purchasers, as defined by the Commission by rule; 18 securities that are sold in a transaction that is exempt from registration under Securities Act Sections 4(1) or 4(3), and the issuer of such security files reports with the Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); securities that are sold in a transaction that is exempt from registration under Securities Act Section 4(4); 20 securities that are sold in a transaction that is exempt from registration under Securities Act Section 3(a), other than the offer or sale of a security that is exempt from such registration pursuant to paragraph (4) or (11) of such section, except that a municipal security that is exempt from such registration pursuant to paragraph (2) of such section is not a covered security with respect to the offer or sale of such security in the state in which the issuer of such security is located; 21 or securities that are sold in a transaction that is exempt from registration under Commission rules or regulations issued under Securities Act Section 4(2). 22 #### 2. Preservation of Certain State Rights Regarding Offerings of "Covered Securities" Section 18 of the Securities Act preserves certain state authority with respect to anti-fraud, notice filings and fee collection relating to offerings of "covered securities." Specifically, under Section 18: the securities commission (or any agency or office performing like functions) of any state shall retain jurisdiction under the laws of such state to investigate and bring enforcement actions with respect to fraud or deceit, or unlawful conduct by a broker or dealer, in connection with securities or securities transactions; 23 nothing in Section 18 prohibits the securities commission (or any agency or office performing like functions) of any state from requiring the filing of any document filed with the Commission pursuant to this title, together with annual or periodic reports of the value of securities sold or offered to be sold to persons located in the state (if such sales data is not included in documents filed with the Commission), solely for notice purposes and the assessment of any fee, together with a consent to service of process and any required fee; 24 and until otherwise provided by law, rule, regulation, or order, or other administrative action of any state, or any political subdivision thereof, adopted after the date of enactment of NSMIA, filing or registration fees with respect to securities or securities transactions shall continue to be collected in amounts determined pursuant to state law as in effect on the day before such date. 25 ### B. Examples of Securities That Are Not "Covered Securities" While NSMIA separated the roles of federal and state regulators with respect to certain securities, it recognized the vital role played by the states in the regulation of offerings of securities that are not "covered securities." Offerings of securities that are not "covered securities" remain subject to state registration and review. These offerings include, among others: securities traded on the Nasdaq SmallCap system or quoted on the NASD OTC Bulletin Board system; securities listed on securities markets other than the NYSE, AMEX or the National Market System of the Nasdaq Stock Market ("Nasdaq NMS"); various debt securities of non-listed issuers, including asset-backed and mortgage-backed securities; securities issued in private placements under Section 4(2) of the Securities Act that do not meet the requirements of Rule 506 under Regulation D; securities issued in Rule 504 and 505 offerings under Regulation D; and securities issued under Regulation A. ### C. Uniformity Study Survey As part of the Uniformity Study, the Commission sent out Surveys to state securities administrators, various issuers, broker-dealers and counsel concerning the extent to which uniformity of state regulatory requirements for securities or securities transactions has been achieved for securities that are not preempted by NSMIA. 26 The Surveys were also posted on the Commission's Internet Web Site. This posting also generated responses. The Commission received 46 responses from state securities regulators. The Commission received more than 100 other responses from issuers, law firms that represent clients in securities offerings, broker-dealer participants in securities offerings, associations, a stock exchange, and individual investors. 27 In addition, the Commission conducted its own review of certain blue-sky provisions. ## III. Uniformity of State Regulation of Offerings of Securities That Are Not "Covered Securities" ### A. Introduction The following specifically describes the Uniformity Study's results with respect to offerings of securities that are not "covered securities." The following discussion is separated into two general sections. The first section discusses generally offerings of securities that are registered or exempt under the federal securities laws but that are not "covered securities" because they are either not "nationally traded securities" or issued under the Rule 506 exemption. The second section discusses offerings of specific types of securities about which respondents raised particular issues. Each of these sections includes a summary of the responses to the Surveys and a discussion of state initiatives in that area. ### B. Offerings of Securities That Are Not "Covered Securities" #### 1. General Issues Relating to Registered or Exempt Offerings #### a. Registered Offerings of Securities That Are Not "Nationally Traded Securities" As noted above, "covered securities" include "nationally traded securities." 28 This definition of "covered securities" does not include offerings of securities that are traded on the regional exchanges, the Nasdaq SmallCap market, or the NASD OTC Bulletin Board. Given the different listing standards on these exchanges and quotations systems, the issuers of these securities typically are smaller, less mature companies with limited revenues, assets and capitalization. These companies often are development stage or start-up companies. Securities that are traded on regional exchanges, the SmallCap market or the Bulletin Board often are distributed initially in a public offering. To comply with federal requirements, issuers of these securities typically register these transactions under the Securities Act. If the issuer registers these offerings, it may use Securities Act Form S-1, Form S-11, Form SB-1, or Form SB-2. 29 In these registered, public offerings, it is likely that an exemption from state registration will not be available. As such, the issuer must typically also register in each state in which the offering will be made. 30 i. Survey Responses (A) Law Firms. Three law firm respondents indicated that there was a lack of uniformity among state registration requirements and that this lack of uniformity had a greater adverse impact on small issuers. The following potential harmful effects on small issuers were noted: (1) higher offering expenses as a percentage of the offering amount; (2) substantial delays and significant legal fees for companies with limited liquidity; and (3) loss of state registration fees by the issuer if the offering is denied approval. Law firms generally noted concerns regarding differing merit review standards and length of review times with respect to state registration requirements in offerings of securities quoted or approved for quotation on the Nasdaq SmallCap market. Specific concerns included: Differences In Merit Reviews Among States. Four law firms noted significant differences in this area, including the following specific comments. In an offering registered in 20 larger market states, the merit review states imposed non-uniform standards, such as criteria relating to "cheap stock" and escrow requirements. 31 In an offering registered in 15 states, three states issued comments on merit areas, such as cheap stock, offering expenses, terms of outstanding options, transactions with management and sophistication and suitability standards. The issuer was unable to resolve these non-uniform merit issues in two of the three states and had to withdraw from registration in those states. 32 Length of Review Time. Two law firms noted non-uniformity in the length of time for state review. For example, they noted that the length of time for state review varies greatly, with some states issuing comments more than a month after filing. These time delays may prevent an issuer from clearing with certain states,which would cause the issuer to forfeit the registration fees. (B) Issuers. Five issuers noted significant differences between state registration requirements. 33 These differences related to: notice and filing requirements; disclosure requirements; state review times; comments raised; and merit review standards. In discussing its experience in this area, an issuer offering securities to be listed on the BSE indicated that it had registered in many states and sought an exemption in those states that recognized an exemption for BSE listed securities. This issuer stated the following: Notice and filing requirements were extremely different in terms of the amount of money required, the paperwork demanded, questions asked and the time it took to approve registration. Disclosure requirements were varied and some made them sticker the offering with different disclosure items or put in language changing the meaning of some phrases. The amount of review time was inconsistent from days in certain states to weeks in others. Comments issued from the states were almost totally unrelated from state to state. The amount of time it took to be declared effective varied greatly from state to state. The sophistication and suitability standards were different and they had to sticker the prospectus in certain states. The issuer undertakings or representations were uniform among the states. No states raised any concerns about advertising and solicitation restrictions. 34 An issuer that registered its initial public offering with the Commission on Form S-1 and whose securities are quoted on the Nasdaq SmallCap market attempted to register with approximately 20 states. This issuer described its experience as follows: The states were markedly different. May (sic) states contacted the underwriters attorneys requesting additional disclosure (e.g., regarding related party transactions or dilution to new shareholders), but the approach from each state was different. Some states started with a neutral attitude and asked for explanations. Some states started with the attitude that the offering would not be approved. Other states did not raise these issues. The timing of the review by each state was different, both in terms of the length of the review process and the elapsed time expected before the review would begin. One state, Montana, would not respond as we got closer to effective date. We had to withdraw from some states prior to the effective date due to incomplete reviews or proposed burdensome additional state disclosures. 35 (C) Broker-Dealers. One broker-dealer indicated that the majority of states review on full merit or semi-merit basis and follow NASAA's guidelines. 36 Broker-dealers stated that they sought to avoid state review by using either "super suitability" standards37 or, whenever possible, limiting underwriting activities to offerings of securities that qualify for the NYSE, the AMEX or Nasdaq NMS. 38 One broker-dealer noted that, in a registered offering of securities to be traded on Nasdaq SmallCap market, ten of 21 states required stock to be escrowed, with the escrow lasting varying time periods. 39 Broker-dealers recognized the non-uniformity is more burdensome and costly for small issuers.40 One broker-dealer recommended that securities quoted on the Nasdaq SmallCap market should be classified as "covered securities." 41 ii. State Initiatives. NASAA and the individual states have recognized the need for greater uniformity among state registration requirements. Many of the state responses describe state actions to increase uniformity, including the Coordinated Equity Review ("CER") program and NASAA Statements of Policy. (A) Coordinated Equity Review. One significant step that the states have taken to enhance uniformity at the state level is the CER program. 42 The CER program was developed by NASAA to bring greater speed and uniformity to the registration process. The program targets equity offerings between $5 and $20 million that typically are federally registered on Forms S-1, SB-1 or SB-2. These securities usually trade on the Nasdaq SmallCap market, the regional exchanges or the NASD OTC Bulletin Board. Under the CER program, the issuer sends its registration materials to the states in which it intends to offer its securities along with a one-page application form requesting CER. An identical package is submitted to the Arizona Securities Division, which has agreed to act as the program administrator. Within three days, Arizona designates two lead states -- one merit review state and one full disclosure review state. The non-lead states have ten days to comment on the application. A state participating in CER agrees to review CER offerings on the basis of compliance with NASAA Statements of Policy. Once the comments have been collected, the two lead states gather comments from all of the states in which the issuer is making the offering. The two lead states then issue one review letter incorporating the comments that they receive. The lead states then resolve outstanding comments with the issuer. Once the lead state clears the application, all participating states agree to clear it as well. NASAA indicates that, of the 43 states that require the review of non-exempt equity offerings, 37 states have joined the CER program. The CER program is a very recent innovation that holds promise in furthering uniformity in state regulation. As of September, 1997, there have been two coordinated equity reviews. (B) NASAA Statements of Policy. NASAA has issued statements of policy relating to various aspects of equity offerings so that state securities regulators, especially those in "merit" review states, would have uniform guidelines in reviewing offerings. 43 A revised set of policies was drafted and adopted by the NASAA membership as April 27, 1997, to comport with NSMIA. 44 Of the 46 states responding to the survey, 28 states indicated that they have adopted or apply some or all of the NASAA Statements of Policy. 45 (C) Internet Communications. With the relatively recent growth in the popularity of the Internet, issuers of securities have begun to post securities offering materials on the Internet. Under certain circumstances these Internet communications might be considered an offer of a security in any state in which a person might access the communication. If considered an offer, these Internet communications would be subject to the state securities regulation. NASAA adopted a resolution addressing the offering of securities through Internet communications in January 1996. This resolution encouraged the states to exempt Internet offers from the registration provision of their securities laws if certain conditions are met. Generally, the exemption would apply if (1) the Internet communication indicates that the securities are not being offered to the residents of the state, (2) no offer is otherwise specifically directed to any person in the state, and (3) no sales are made in the state until the offering is registered and declared effective or the sales are exempt from registration. Thirty-three states reported they have adopted NASAA's model exemption for Internet offers.46 Two states plan to adopt the exemption, 47 and one state is considering the exemption. 48 Eight states indicated that they have their own unique exemptions for Internet offers or their definition of offer would exclude Internet communications. 49 Nebraska is the only state that has not adopted the NASAA exemption or excluded Internet offers from state regulation. (D) Other State Actions and Recommendations. Many states indicate that they support uniformity or work with NASAA to promote uniformity among the states. Several states asserted that the CER program has already increased uniformity and would further increase uniformity in the future. 50 Several states emphasized that state blue-sky laws have played a strong role in protecting investors in their states and promoting the stability and integrity of the states' securities markets. Certain states asserted that the states, as opposed to the Commission, are in the best position to regulate small offerings, which are usually local or regional in nature. 51 Maine, Washington and Wisconsin said that all offerings of less than $10 million should be exempt from registration under the Securities Act and regulated only by the states. Wisconsin suggested this could be done by replacing Regulation A and Rule 147 with an expanded version of Rule 504 exempting offerings up to $10 million, if exempt or registered at the state level. #### b. Exempt Public Offerings of Securities That Are Not "Nationally Traded Securities" Rule 504 and Regulation A under the Securities Act provide exemptions for offerings of securities on a public basis. 52 Offerings under these exemptions are considered public because there are no restrictions on advertising or general solicitation in these offerings unlike other exemptions under the Securities Act. Section 4(2) of the Securities Act and Rules 505 and 506 generally prohibit advertising and general solicitation. Rule 504 exempts from federal registration offerings of up to $1 million during a twelve month period if the offering meets certain conditions. Rule 504 is available only to companies that are not required to file periodic reports under the Exchange Act. A company may not rely on Rule 504 if it is an investment company or a blank check issuer. 53 Offerings under Rule 504 need not comply with specific disclosure requirements and do not require federal filings, except for a post-sale Form D notice. Rule 504 offerings typically are registered in the states in which the offerings are to be conducted. Regulation A exempts from federal registration offerings of up to $5 million during a twelve month period. While these offerings are exempt from registration, the issuer must file an offering statement with the Commission for review and qualification. These offerings usually are registered with the states. A feature unique to Regulation A offerings is the issuer's ability to "test the waters" for investor interest before preparing and filing the Regulation A offering statement. Many issuers offering their securities pursuant to Rule 504 or Regulation A use the SCOR format. 54 i. Survey Responses. Rule 504 and Regulation A offerings are a significant source of seed capital for small business. This is evidenced by the more than 1,500 offerings that were made under these exemptions in the last fiscal year. The respondents indicate that the SCOR form and the SCOR regional review program among the states holds great hope for facilitating the use of these exemptions through uniform state review. One law firm respondent noted that, in its experience with the SCOR form, one state took significantly longer than the other states to review the offering. Despite this, the law firm indicated that the SCOR system: "leads me to conclude that this registration format shows considerable promise as a means of allowing small businesses to enter into the securities marketplace, perhaps for the first time, to raise investment capital on a modest scale and have access to public solicitation without going through a broker/dealer or agent." 55 Another law firm described a Rule 504 offering registered in the states of Kansas and Missouri. The states had entered a joint review agreement and the offering was reviewed under this agreement, with Kansas acting as the lead state in the review process. The law firm described the process as "extremely professional and timely." This firm noted that coordinated review programs with respect to SCOR, Regulation A, and larger offerings will greatly enhance uniformity among the states. 56 One law firm concluded that Rule 504 is "fairly useless without the ability to `test the waters' from state to state." This firm thought that small businesses cannot afford to register in states in which the securities could not be sold. By determining whether there is interest in the issuer's securities by using "test the waters," a small business company could avoid registration in states which would not produce significant sales. 57 ii. State Initiatives (A) Small Company Offering Registration Form and Regional Review Project. Many states have adopted the SCOR form for registration of Rule 504 and Regulation A offerings with the states. Thirty-six states reported that they have adopted the SCOR form. 58 Another four states accept filings on the SCOR form although the form has not been formally adopted. 59 In connection with the review of SCOR filings, the NASAA membership has developed a manual for the state examiners. This manual is intended to unify the examination of SCOR filings among the states. 60 NASAA recently instituted a new program for the review of SCOR filings, known as the regional review project. 61 Under this project, a group of states in close geographical proximity to one another agree to permit one securities regulator in the region to lead the review of the form and communicate comments to the issuer. The SCOR regional review program now consists of the Western, 62 New England63 and Midwestern64 regions. These regions represent almost half of the states requiring registration of these offerings. In response to the Survey, twelve states reported that no regional review program is available to join. 65 These states are located in the southern, mid-Atlantic and north central regions of the country. Ohio does not participate in the program because it raises only full disclosure issues, not merit matters. Texas does not participate in the program because to date the SCOR registrations in Texas have been only intrastate offerings. (B) Test the Waters. &nbap; One of the major problems in raising capital under Regulation A for a small start-up or developmental company is the cost of preparing the mandated offering statement, including the offering circular. In 1992, the Commission adopted a "test the waters" provision in Regulation A to permit a company relying on the exemption to measure the potential interest in the company prior to preparing the required offering statement. 66 Under this provision, if certain conditions are met, a company may issue written or oral statements asking whether investors would be interested in purchasing its securities. If insufficient interest is indicated, the company will avoid the cost of preparing an offering statement, filing it with the Commission and delivering it to investors. Seventeen states reported that they have adopted "test the waters" provisions.67 Four states indicate that they plan to adopt the exemption 68 and another five states said they are considering the exemption. 69 Fifteen additional states have not adopted the exemption and did not report that the exemption was under consideration. 70 California permits "test the waters" in its qualified purchaser exemption. Kansas provides an exemption for issuers organized and based in Kansas. Oklahoma provides an exemption only by order of the securities administrator. NASAA has issued a Proposed Statement of Policy on Solicitation of Interest that relates to "test the waters" provisions. However, the proposal has not been adopted by NASAA's membership pending the results of a study of the effects of the procedure in jurisdictions that have chosen to adopt the proposal. #### c. Exempt Offerings Under the Securities Act and Under State Exemptions i. Survey Responses. Rule 505 of Regulation D provides an exemption from federal registration for offers and sales of securities totaling up to $5 million in any 12-month period. Four law firms indicated that there is substantial non-uniformity among state exemptions used in connection with offerings under Rule 505. One law firm noted the following non-uniformity among state exemptions used in connection with Rule 505 offerings: 71 states have pre-sale or pre-offer notice requirements that depart from Rule 505, which has a post-sale requirement; states require the filing of a special form instead of or in addition to Form D; some states require sales reports; states require suitability standards; states require specific legends; states have "bad person" disqualification provisions that differ from the ULOE provision; two states grant rescission rights to purchasers; two states impose holding periods on the securities acquired; four states require specific language in the subscription agreement; states restrict commissions and offering expenses; two state impose recordkeeping requirements; and two states restrict the use of projections. Three other law firms expressed concerns about non-uniformity in state regulation of Rule 505 offerings. 72 One of these firms expressed specific concern regarding non-uniformity remaining among state limited offering exemptions and isolated purchaser exemptions after NSMIA. This law firm stated that, "[t]he criteria for such exemptions, and applicable disclosure and filing requirements, vary from state to state. Special difficulties are posed by pre-transaction requirements that can have the effect of delaying fast-paced transactions." 73 ii. State Initiatives (A) Uniform Limited Offering Exemption. Twenty-nine states indicated that they have adopted ULOE. 74 Eight of these states said their versions contained modifications from the model ULOE. South Dakota indicated that its state law had recently changed and a ULOE rule should be proposed in the near future. Delaware said ULOE was under consideration for adoption. Oregon provides for an abbreviated registration procedure for ULOE type offerings. Colorado has adopted Rules 504 through 506 by reference. Arizona, Connecticut and Ohio have exemptions that coordinate with Rule 505 offerings. Four states replied that they have limited offering exemptions or private placement exemptions that are similar to ULOE. 75 (B) State Accredited Investor Exemptions. &nbap; Six states have adopted the NASAA Model Accredited Investor exemption. 76 Ten states indicated that they plan to adopt the exemption. 77 Another 14 are considering the exemption.78 California, Illinois, Iowa, Minnesota, Nebraska, Texas and Wisconsin have existing exemptions for individual accredited investors. Georgia has no current plans to adopt the exemption. ### C. Issues Relating to Offerings of Specific Types of Securities That Are Not "Covered Securities" #### 1. Various Debt Securities, Including Mortgage-Backed and Asset-Backed Securities Many debt securities are "covered securities" because they are senior to another security that is considered a "covered security." In this regard, debt securities and preferred stock that are senior to common stock listed on the NYSE, AMEX or Nasdaq NMS are "covered securities."/ 79 Debt or preferred stock that is not senior to a "covered security" remains subject to state registration and review. Such securities generally include corporate debt issued by companies whose common stock is listed on the Nasdaq SmallCap market or the regional exchanges. 80 Asset-backed securities, mortgage-backed securities (collectively, "ABS") and conduit financings also are not "covered securities." Offerings of ABS offer unique regulatory challenges. These offerings involve the creation of a series of pools of assets that generate cash flows with minimal management. 81 Therefore, an investor is looking only to the pool of assets to determine the appropriateness of the investment. The typical registration process relating to a description of the "company" and disclosure of "company" financial information is not as relevant to these offerings. The Commission has greatly simplified federal registration of offerings of these securities, if they are investment grade, by permitting them to be sold off of "shelf" registration statements under Rule 415. 82 A "shelf" offering allows an issuer to form a new pool of assets and effect an immediate offer and sale of a series of securities representing interests in that pool. This offering is not subject to pre-review, as it is made under a registration statement that was previously filed with and declared effective by the Commission. #### a. Survey Responses The SIA presented its general view that "state laws remain largely non-uniform with respect to [ABS]." One law firm respondent reported that certain issuers of ABS have experienced "major obstacles in certain states" with respect to securities to be sold in series under "shelf" registration statements. This respondent indicated that a number of states have refused to recognize the concept of shelf registration, and instead insist upon separate filings and fees for each series of securities offered under the shelf. It was noted that certain states insist on separate filing fees for each class within a given series. In addition to the question of fees, this respondent noted that these states' policies also require the preparation and filing of new applications for each "takedown" of a new series, which entails additional time and expense, thereby essentially defeating the purpose of the streamlined process envisioned by Rule 415. 83 Four survey respondents or their affiliates have issued ABS that are traded on the over-the-counter market. These companies were Bank of America, Metropolitan Mortgage, Norwest Asset Securities; and Summit Securities. Bank of America and Norwest Asset Securities each formed trust vehicles that issued mortgage-backed pass-through trust certificates registered under the Securities Act. The trust certificates sponsored by Norwest Asset Securities were registered in a number of states. Norwest Asset Securities indicated that the states had requested similar documents and reviewed the filings in timely fashion. The offerings sponsored by Bank of America generally were exempt from state registration under the Secondary Mortgage Market Enhancement Act of 1984 or sold under institutional investor exemptions, except in New York where the offerings were registered under the New York Real Estate Syndicate Act. Metropolitan Mortgage and Summit Securities issued debt or preferred stock backed by mortgages and other receivables. These issuers indicated that the states followed different suitability guidelines and that they will not register in certain western states due to overly burdensome requirements. #### b. State Initiatives In 1995, NASAA adopted its Statement of Policy Regarding Registration of Asset-Backed Securities to provide the states with guidelines in the review of these offerings. These guidelines "place substantive requirements on sponsors, and impose suitability standards on purchasers, somewhat analogous to the [Direct Purchase Program] Guidelines."/ 84 #### 2. Conduit Financings In a "conduit financing," a state, political subdivision, or public instrumentality of a state issues securities and the investor must look to a third party (often a private company) and not the state, political subdivision, or public instrumentality for repayment. These transactions often involve the offer of more than one security to investors. Specifically, the governmental entity is offering the debt security and the private company is offering a security in the form of an interest in its agreement with the governmental entity. The offering of the debt securities by the governmental entity is exempt from registration under Section 3(a)(2) of the Securities Act. Section 3(a)(2) also exempts certain tax-exempt governmental securities (including any separate securities that are offered by the private company as a part of the financing). 85 In certain circumstances, however, such as taxable issuances and other conduit financings that are not "industrial development bonds" within the meaning of Section 3(a)(2), the separate security must either be federally registered or offered under another available federal exemption. To the extent that these securities are federally exempt under Section 3(a)(2), they are "covered securities" and are preempted from state registration and review by Section 18(b)(4)(C) of the Securities Act. This preemption does not, however, extend to regulation by the home state of the governmental entity. NASAA stated in its Survey response that "further preemption in this area would appear unwarranted" since only a small minority of states require registration of such securities. As with other offerings of "covered securities," if a conduit financing is preempted by Section 18(b)(4)(C), Section 18(c)(2) preserves the states' right to require the filing of certain notices and fees with respect to such offerings. NASAA supported the NSMIA structure relating to conduit financings. 86 One law firm observed that with respect to the application of Section 18(c)(2) to such offerings that "a 52 jurisdiction analysis must still be made to determine whether any conditions for exemption apply under state laws in order to pay a fee for a security which is not filed with the SEC." 87 Two respondents expressed their view that some states have inordinate fee requirements with respect to these securities. 88 #### 3. Interests in Employee Benefit Plans Employee benefit plans, such as 401(k) plans, which include a participation interest in the plan or offer employer stock under stock option plans have presented some concerns. Since a participation interest in a plan under which the company offers "covered securities" does not itself qualify as a "covered security," the state securities registration requirements may be applicable to that participation interest. This can result in exemption filings being required to be made in order to claim the employee benefit exemption provided by some state blue-sky statutes for the offer of the participation interest even when the underlying securities are "covered securities." Two companies commented on the lack of uniformity among state exemptions for interests in employee benefit plans. One company, whose securities are "covered securities" because they are traded on the NYSE as well as other exchanges, indicated that interests in its employee benefit plans were not "covered securities" and thus subject to state registration requirements. 89 The offering of the employee benefit plan interests and the company common stock offered under the plan were registered with the Commission on Form S-8 and were exempt from registration in most states. However, this company observed that the offering had to be registered in one state and an application for an exemption had to be filed in another state. These processes delayed the offering up to two months. This company asserted that interests in employee benefit plans of companies whose securities are "covered securities" also should be considered "covered securities." This company also recommended that the activities of the issuer and its employees in connection with the employee benefit plan should not require registration under state broker-dealer or sales agents provisions. Another company, whose securities are traded on the NASD OTC Bulletin Board, also reported non-uniformity among the states in an offering of company shares under employee stock options that was registered under the Securities Act on Form S-8. 90 This company indicated that all states, except one, provided a "self-executing" exemption for the offering which did not require notice filings or fees. This company recommended self-executing exemptions for these offerings in all states. Two law firms commented on this area. One law firm echoed the concern discussed above regarding the status of participation interests in employee benefit plans as not "covered securities" even when the securities offered under the plan are "covered securities." 91 Another law firm indicated non-uniformity among state exemptions that coordinate with Rule 701 under the Securities Act. 92 Rule 701 generally provides non-public companies with an exemption from registration for offers and sales of securities under their employee benefit plans. This law firm recognized that, as provided under the Uniform Act, many states have exemptions for the issuance of securities under employee benefit plans, but that the availability and criteria for these exemptions vary from state to state. In this regard, it was noted that some states exempt all plans while others exempt only tax-qualified plans. Certain states require the issuer to be registered as an issuer-dealer and file a transaction notice. Some states require notice and fees for plans that meet specific requirements. ## IV. State Regulation of Offerings of "Covered Securities" After NSMIA The Commission's mandate in the Uniformity Study and this report relate to the uniformity of state regulation of offerings of securities that are not "covered securities." Given this mandate, the Surveys and this report focused on securities that are not "covered securities." Despite this focus, respondents provided significant information regarding the effects of the preemption of "covered securities." The following is a brief summary of the information provided to the Commission regarding state regulation of "covered securities" after NSMIA. ### A. Benefits of Preemption and State Efforts Toward Uniformity The vast majority of respondents have said that the operation of the preemption provisions of Securities Act Section 18(b) have improved. Several respondents specifically noted the decrease in costs relating to compliance with state regulation as a result of this preemption.93 A number of states have already enacted legislation or regulations that effect the preemption provisions of Section 18(b). 94 However, most states have not yet adopted such legislation or regulation changes. 95 Further, even those states that have not yet enacted such legislation have been cooperative in facilitating the transition to the preemption scheme. 96 A number of states have not enacted legislation due primarily to the fact that their legislatures do not sit year-round. For example, Alaska has a package of legislative changes readied for when its legislature's session begins in January 1998. 97 ### B. Continued Issues Regarding Uniformity Despite strong support for activities to date, respondents did voice some concerns with the respect to uniformity of state requirements relating to offerings of "covered securities" 98 as well as securities that are not "covered securities." The following discussion is a summary of these concerns: #### 1. Rule 506 Offerings - "Substantially Similar" Filings In offerings of "covered securities," Section 18(b) specifically preserves the right of a state to require an issuer to file certain notices and pay fees in connection with the offering. With respect to offerings that are exempt under Rule 506, states may impose "notice filing requirements that are substantially similar to those required by [Rule 506]."99 Some respondents noted that non-uniform state notice filing and fee requirements continue to be problematic. Rule 506 requires issuers to file a Form D within 15 days after the first sale under that rule. Consistent with Rule 506, the majority of states appear to require notices on Form D to be filed within 15 days after the first sale in their state. Also, NASAA has adopted a uniform policy of requiring notice filings for offerings of "covered securities" pursuant to Rule 506 within 15 days after the first sale in the state. 100 Despite the significant efforts made by NASAA and most of the states, respondents noted some continuing issues. Specifically, respondents noted that some states: require the filing of notice and payment of fees either before any offers or before any sales of securities in those states; 101 require the filing of notice and payment of fees from 20 days to 60 days after the sale of securities in those states; 102 have increased their filing fees for Rule 506 offerings; 103 have begun charging fees; and 104 require the filing of offering materials, which are not required to be filed with the Commission. 105 While these inconsistencies do not involve a large number of states, their existence leads to the requirement that the issuer undertake a survey of blue-sky laws to determine which states have different notice, information, or fee requirements. Several respondents indicated that a great stride toward easing compliance would be the establishment of a central repository of each state's requirements in this regard. 106 The Commission anticipates that uniformity in this area will increase as states adopt new requirements for Rule 506-exempt offerings of "covered securities." #### 2. Notices for Secondary Trading Transactions The SIA indicated its view that the secondary trading exemptions in the Uniform Act work well. The most widely used of these exemptions is the so-called "manual exemption," which exempts secondary transactions of securities of issuers that are included in nationally published and recognized securities manuals. 107 The SIA stated, however, that the "manual exemption varies from state-to-state as to: (i) the content of the information required to be included in the manual necessary for the manual to be recognized; or (ii) the designation of specific manuals." 108 Section 18(b)(4)(A) of the Securities Act preempts state registration requirements in regard to secondary trading in securities of reporting companies under the Exchange Act. However, Section 18(b)(4)(A) does not eliminate the need for broker-dealers to submit notice filings and fees when selling securities that are not otherwise exempt under state law. One law firm noted that the blue-sky exemptions for secondary trading vary greatly from state to state. In this regard, a broker-dealer that intends to engage in secondary trading in reliance on Section 18(b)(4)(A) therefore must undertake a survey of the blue-sky laws to identify those states which require notice filings and fees. 109 #### 3. Issuer-Dealer or Agent Registration or Exemptions Although NSMIA preempts the states from requiring any filings or fees for transactions in which a company issues listed "covered securities" in a merger or acquisition, it does not provide an agent exemption for the individuals representing the issuer in such transactions. The issuer must file exemption notices as required by certain states in order to perfect the exemption provided by such state statutes for agents representing the issuer in mergers or offerings to existing security holders. Some respondents to the Surveys believe that the failure of NSMIA to provide an agent or issuer-dealer exemption may allow a state to indirectly regulate the offerings of "covered securities." 110 This issue also was raised in the context of Rule 506 offerings. Many states, with respect to Rule 506 private placements, require the registration of issuer agents in connection with the offer and sale of such securities. Such states take the view that NSMIA applies to the offering of such "covered securities," but not the definition of "agent" in relation to persons who are associated with the issuer. Under the blue-sky laws of some states, the definition of agent excludes a person who represents an issuer in an exempt offering of a "covered security." However, many states require that a person who is not an employee of a licensed broker-dealer that serves as the placement agent, but is an employee of the issuer only, must be separately licensed before he or she may offer the issuer's securities in a private placement of "covered securities." Some respondents pointed out that Section 18(a)(1) of the Securities Act provides that no state law requiring the registration of securities transactions shall "directly or indirectly" apply to any offering of "covered securities" (including Rule 506 offerings). These respondents believe that the states should not apply agent registration requirements to the employees of Rule 506 issuers because doing so would "indirectly" regulate the offering. 111 NASAA, in recognition of this problem, issued an "Interpretative Memorandum" on November 27, 1996 recommending that the states exempt such persons from agent registration. In addition, the NASAA staff, in drafting amendments to the Uniform Act and the Uniform Securities Act of 1985, as amended, for states to use when drafting amendments to their own blue-sky statutes, reflected the exclusion from the definition of agent of those individuals representing issuers in Rule 506 offerings. These amendments were adopted formally by the NASAA membership on April 27, 1997. However, some states have not adopted this provision. 112 #### 4. Section 3(a)(10) Offerings Section 3(a)(10) of the Securities Act provides an exemption from registration for securities issued in exchange for outstanding securities of an issuer pursuant to a fairness hearing. Section 18(b)(4)(C) of the Securities Act preempts any state from registering securities that were "covered securities" before such a hearing and therefore preempts the state law authorizing that hearing. The staff of the Commission has stated its view on this issue. In Staff Legal Bulletin No. 3 (CF), the staff stated: When a state fairness hearing relates to the registration, or exemption from registration, of securities that are "covered securities" before the hearing, Section 18 preempts the state law authorizing that hearing. An issuer, therefore, cannot use that hearing as a basis for relying on the Section 3(a)(10) exemption for securities that are "covered securities" before the hearing. In this regard, one law firm noted that the loss of the Section 3(a)(10) exemption often forces issuers to register their transactions under the Securities Act, which is significantly more time-consuming and costly than the hearing procedure. 113 For securities that were not "covered securities" before such a hearing, there appears to be a great deal of non-uniformity among the states in how such exempt, but not "covered securities" transactions, are to be treated. 114 ### Footnotes for the Main Report 115 U.S.C. §77a et seq. 2Campbell, Blue Sky Laws and the Recent Congressional Preemption Failure , 22 Iowa J. Corp. L. 175 (Winter 1997), fn. 2. 3 Public Law 104-290, 110 Stat. 3416 (October 11, 1996). 4 The Commission's basic registration statement is Form S-1. Special forms have been developed over the years to meet the special needs of issuers and offerings. Form S-3 was adopted to provide a simplified format for reporting companies widely known and followed by the investing public. More recently, the Commission adopted Forms SB-1 and SB-2 for small business issuers. In addition, the Commission has adopted a system of forms for offerings by foreign companies. 5 Rule 501 of Regulation D defines "accredited investor" to generally include: (A) banks, savings and loan associations, registered broker-dealers, insurance companies, registered investment companies, small business investment companies, governmental employee benefit plans with assets over $5 million, certain employee benefit plans under the Employee Retirement Income Security Act of 1974, if certain conditions are met, and private business development companies; (B) business entities, certain organizations and trusts with total assets over $5 million, if certain conditions are met; (C) natural persons with individual or joint net income with his or her spouse of $200,000 or $300,000, respectively, for the past two years and the current year; (D) natural persons with individual or joint net worth over $1 million; (E) certain members of management of the issuer; and (F) any entity in which all the equity owners are accredited investors. 6 Campbell, Blue Sky Laws and the Recent Congressional Preemption Failure , fn. 61, supra n. 2. Based on the Survey responses from 46 states, this estimate appears correct. The Survey responses from the states indicate that five states primarily review for full disclosure but apply merit standards in specific areas such as escrow of offering proceeds, unreasonable underwriter's compensation, insolvent issuers, and blind pools. These states are Colorado, Delaware, New Jersey, Idaho and Utah. Some states characterized their review as limited, instead of full, merit. Iowa, North Carolina, Pennsylvania, Virginia described their merit review in this manner. Some states indicated that merit review was applied on certain types of registrations. Arizona, for example, said it applies merit review to registrations by qualification. Twenty-five states described their review approach as merit and full disclosure or merit only. 7 Of the states furnishing responses to the Survey, nine described their review process for securities offerings as a full disclosure and anti-fraud approach. These states are Connecticut, Georgia, Illinois, Maryland, Nevada, New Hampshire, Rhode Island, Wisconsin and Wyoming. 8 1 Blue Sky L. Rep. (CCH) 5500. These states are:
Alabama | Maryland | Oregon
Alaska | Massachusetts | Pennsylvania
Arkansas | Michigan | Puerto Rico
Colorado | Minnesota | Rhode Island
Connecticut | Mississippi | South Carolina
Delaware | Missouri | South Dakota
District of Columbia | Montana | Tennessee
Guam | Nebraska | Utah
Hawaii | Nevada | Virginia
Idaho | New Hampshire | Washington
Indiana | New Jersey | West Virginia
Iowa | New Mexico | Wisconsin
Kansas | North Carolina | Wyoming
Kentucky | Oklahoma |
9 Survey response of NASAA, attached as Appendix A. 10 These statements address affiliated transactions, debt securities, impoundment of proceeds, options and warrants, preferred stock, promoter's equity investment, promotional shares, underwriting and selling expenses, unsound financial condition and use of proceeds. 11 These statements address asset-backed securities, cattle-feeding programs, church bonds, commodity pool programs, equipment programs, health care facility offerings, mortgage programs, real estate investment trusts, real estate programs and variable annuities companies and trusts. 12 The initial version of ULOE provided a state counterpart only to Rule 505 offerings. In 1989, the exemption was revised to include Rule 505 and/or 506 offerings. After NSMIA, securities sold in Rule 506 offerings are "covered securities" and preempted from state registration and review. 13 Mark A. Sargent & Hugh H. Makens, ULOE: New Hope, New Challenge, 45 Bus. Law. 1319 (May 1990), fn. 9. 14 Id. 15 NSMIA replaced the pre-existing Section 18 of the Securities Act that preserved the jurisdiction of the states with a new Section 18 that preempts most state authority to regulate many securities offerings. 16 Section 18(b)(1) of the Securities Act defines a "nationally traded security" as a security that is: "(A) listed or authorized for listing, on the New York Stock Exchange or American Stock Exchange, or listed on the National Market System of the Nasdaq Stock Market (or any successor to such entities); (B) listed, or authorized for listing, on a national securities exchange (or tier or segment thereof) that has listing standards that the Commission determines by rule (on its own initiative or on the basis of a petition) are substantially similar to securities described in subparagraph (A); or (C) is a security of the same issuer that is equal in seniority or that is a senior security to a security described in subparagraph (A) or (B)." Section 18(d)(4) defines the term "senior security," for purposes of Section 18, as "any bond, debenture, note, or similar obligation or instrument constituting a security and evidencing indebtedness, and any stock of a class having priority over any other class as to distribution of assets or payment of dividends." 17 Securities Act Section 18(b)(2). 18 Securities Act Section 18(b)(3). The Commission has not yet proposed a definition of "qualified purchaser." 19 Securities Act Section 18(b)(4)(A). The Exchange Act is located at 15 U.S.C. §78a et seq . 20 Securities Act Section 18(b)(4)(B). 21 Securities Act Section 18(b)(4)(C). 22 Securities Act 18(b)(4)(D). 23 Securities Act Section 18(c)(1). 24 Securities Act Section 18(c)(2)(A). 25 Securities Act Section 18(c)(2)(B)(i). Under Securities Act Section 18(c)(2)(D), fees may not be required with respect to "nationally traded securities" under Section 18(b)(1). Specifically, Section 18(c)(2)(D) states: Fees not permitted on listed securities. - Notwithstanding subparagraphs (A), (B), and (C), no filing or fee may be required with respect to any security that is a covered security pursuant to subsection (b)(1), or will be such a covered security upon completion of the transaction, or is a security of the same issuer that is equal in seniority or that is a senior security to security that is a covered security pursuant to subsection (b)(1). NSMIA also preserves the authority of the states to require registration of the offer and sale of "covered securities" within a state as a result of a refusal to pay a fee. Specifically, Section 18(c)(2)(C) states: Availability of preemption contingent on payment of fees. - (i) In general. - During the period beginning on the date of enactment of the National Securities Markets Improvement Act of 1996 and ending 3 years after that date of enactment, the securities commission (or any agency or office performing like functions) of any State may require the registration of securities issued by any issuer who refuses to pay the fees required by subparagraph (B). (ii) Delays. - for purposes of this subparagraph, delays in payment of fees or underpayments of fees that are promptly remedied shall not constitute a refusal to pay fees. 26 The Commission staff prepared separate Surveys for state securities administrators, issuers, and broker-dealers and counsel, respectively. Surveys were sent out to 51 securities administrators, 1083 issuers, 220 broker-dealers and 587 law firms. The Surveys are attached as Appendix B. 27 In addition to securities administrators, the Commission received responses from 60 issuers, 15 broker-dealers, 25 law firms, 3 individual investors, the Boston Stock Exchange ("BSE"), NASAA and the SIA. The responses to the Surveys are available for inspection and copying in the Commission's public reference room. Refer to File No. S-7-20-97. A summary of the Survey responses (excluding NASAA and the states) is attached as Appendix C. A summary of the state Survey responses is attached as Appendix D. 28 Securities Act Section 18(b)(1). In connection with the Commission's authority to designate those other exchanges on which a listing will qualify the securities as "nationally traded," the Commission has proposed to include the Chicago Board Options Exchange and Tier 1 of the Pacific Exchange. Securities Act Release No. 7422 (June 10, 1997). 29 Forms SB-1 and SB-2 are tailored for small business issuers and require less burdensome disclosure to help alleviate the cost and burden of the registration process. A "small business issuer" is a United States or Canadian issuer that had less than $25 million in revenues in its last fiscal year, and whose outstanding publicly-held stock is worth no more than $25 million. During the fiscal year commencing on October 1, 1996 and ending September 30, 1997, the Commission received 547 Form SB-2 registration statements and 10 Form SB-1 registration statements. 30 See the discussion under Section I.B. "Registration of Securities Offerings Under State Securities Laws" regarding the state securities registration process. 31 Survey response of Kelley Drye & Warren LLP. 32 Survey response of Krys Boyle Freedman Scott & Sawyer, P.C. 33 Survey responses of CRAGAR Industries, Inc.; Obie Media Corporation; General Bearing Corporation; Kideo Productions, Inc.; and Simulations Plus, Inc. 34 Survey response from CRAGAR Industries, Inc. 35 Survey response of Obie Media Corporation. 36 37 Survey response of Paragon Capital Corporation. 37 Id . 38 Survey response of Paulson Investment Company, Inc. 39 Survey response of Capital West Securities, Inc. 40 E.g. , Survey response of Spelman & Co., Inc. 41 Survey response of Argent Securities, Inc. 42 Materials regarding the CER program are attached as Appendix E. 43 See , fn. 10 and fn. 11, supra . 44 State securities administrators are not prevented from applying different standards than those contained in NASAA's Statements of Policy. 45 Arkansas, Indiana, Iowa, Kansas, Kentucky, Maine, Massachusetts, Michigan, Mississippi, Nebraska, New Mexico, North Carolina, North Dakota, Oklahoma, Oregon, Ohio, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, West Virginia, Washington, Wisconsin and Wyoming. 46 Alaska, Arkansas, Connecticut, Georgia, Florida, Indiana, Iowa, Kansas, Kentucky, Maine (applies exemption, plans to adopt formally as rule), Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Nevada, New Hampshire (applies exemption, plans to adopt formally), New Jersey, North Carolina, North Dakota, Oregon, Rhode Island, South Carolina, South Dakota, Texas, Utah, Vermont, Virginia, West Virginia, Washington, Wisconsin and Wyoming. 47 Arizona and Delaware. 48 Tennessee. 49 These states are California, Colorado, Idaho, Illinois, New Mexico, New York, Oklahoma and Ohio. 50 E.g. , Survey responses of Connecticut, Delaware, Indiana and Kansas. 51 E.g. , Survey responses of Maine, Maryland, New Jersey, Pennsylvania and Washington. 52 During the fiscal year commencing on October 1, 1996 and ending September 30, 1997, the Commission received 109 Regulation A offering statements and more than 1,400 Rule 504 notices. 53 For this purpose, a blank check issuer is "a development stage company that either has no specific business plan or purpose or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies, or other entity or person." Securities Act Rule 504(a)(3). 54 SCOR stands for Small Company Offering Registration, a 50-question form used to register small public offerings in most states without going through the time and expense of filing a registration statement with the Commission. While regulations vary among the states, the Securities Act permits the use of the form in Rule 504 offerings. The SCOR form can also be used in Regulation A offerings that are filed with the Commission. In either case, the securities must be registered in the states in which they are to be sold. 55 Survey response of Wohlforth, Argetsinger, Johnson & Brecht. 56 Survey response of Polsinelli, White, Vardeman & Shalton. 57 Survey response of Butler, Snow, O'Mara, Stevens & Cannada, PLLC. 58 Alaska, Arizona, California, Colorado, Connecticut, Florida, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Nevada, New Hampshire, New Mexico, New Jersey, North Carolina, North Dakota, Oklahoma, Oregon, Ohio, Pennsylvania, Rhode Island, South Carolina, Texas, Utah, Vermont, Washington, Wisconsin and Wyoming. 59 Arkansas, South Dakota, Virginia and West Virginia. 60 Survey response of NASAA. 61 The information in this section regarding the SCOR regional review program is derived from the NASAA Survey response. 62 These states are Alaska, Arizona, California (for Regulation A offerings only), Colorado, Idaho, Oregon, Utah, and Washington. Nevada recently amended its rules so that it can participate in the Western Regional Review Program. 63 These state are Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont. 64 These states are Illinois, Indiana, Iowa, Kansas, Michigan, Missouri, and Wisconsin. 65 Florida, Maryland, Mississippi, New Mexico, New Jersey, North Carolina, North Dakota, Pennsylvania, South Carolina, South Dakota, Virginia and Wyoming. 66 Securities Act Rule 254. 67 Colorado, Illinois, Indiana, Iowa, Massachusetts, Nevada, New York, North Dakota, Oregon, Pennsylvania, South Carolina, Utah, Vermont, Virginia, Washington, Wisconsin and Wyoming. Wisconsin indicated that its exemption is more expansive than most since it permits "test the waters" in exempt offerings. 68 Arizona, Maine, Michigan and New Jersey. 69 Delaware, Florida, Kentucky, Maryland, and Rhode Island. 70 Alaska, Arkansas, Connecticut, Idaho, Minnesota, Mississippi, Nebraska, New Hampshire, New Mexico, North Carolina, Ohio, South Dakota, Tennessee, Texas and West Virginia. 71 Survey response of Drinker Biddle & Reath. 72 Survey responses of the Venture Law Group, Douglas Pollitt for Schulte Roth & Zabel, and Waller Lansden Dortch & Davis. 73 Survey response of the Venture Law Group. 74 Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Oklahoma, Pennsylvania, Tennessee, Texas, Utah, Vermont, Virginia, West Virginia, Washington, Wisconsin and Wyoming. 75 Alaska, California, Delaware, and Florida. 76 These states are Colorado, Pennsylvania, South Carolina, Utah, Washington and Wyoming. A copy of the NASAA Model Accredited Investor Exemption is attached as Appendix F. NASAA proposed the Model Accredited Investor Exemption based, in part, on the use of the Angel Capital Electronic Network ("ACE-Net"). ACE-Net is a nationwide Internet-based listing service sponsored by the Small Business Administration that provides information on Rule 504 and Regulation A offerings to "accredited" angel investors. Angel investors are allowed to view the securities offerings of these issuers via the Internet. 77 Alaska, Delaware, Kansas, Maine, Michigan, Mississippi, New Jersey, Ohio, Rhode Island and Texas. 78 Connecticut, Florida, Idaho, Kentucky, Maryland, Massachusetts, Nevada, New Mexico, North Carolina, North Dakota, Oklahoma, South Dakota, Tennessee and Virginia. 79 Securities Act Sections 18(b)(1)(C) and 18(d)(4). 80 Respondents did not specifically address offerings of corporate debt securities in response to the Surveys. 81 During the fiscal year commencing October 1, 1996 and ending September 30, 1997, the Commission received 238 ABS offerings registering over $241 billion dollars worth of securities. 82 Form S-3 permits the use of such form for all investment grade rated ABS offerings, thereby qualifying for "shelf" treatment pursuant to Rule 415. 83 Survey response of Cadwalader, Wickersham & Taft. 84 Survey response of NASAA. 85 This exemption is often referred to as the "IDB (industrial revenue bond) exclusion" from federal registration. 86 Survey response of NASAA. 87 Survey response of Skadden, Arps, Slate, Meagher & Flom LLP. 88 Survey response of Gardner, Carton & Douglas and Skadden, Arps, Slate, Meagher & Flom LLP. 89 Survey response of BellSouth Corporation. 90 Survey response of Exigent International, Inc. 91 Survey response of Drinker Biddle & Reath. 92 Survey response of the Venture Law Group. 93 E.g. , Survey response of Douglas Pollitt for Schulte Roth & Zabel. In comparing a Rule 506-exempt offering before and after the enactment of NSMIA, this respondent indicated that the legal and paralegal hours required to comply with blue-sky requirements decreased from 146 hours to 41.7 hours. 94 The Survey response of NASAA states: Over thirty states introduced legislation to amend their codes in light of NSMIA. NASAA is pleased to report that nearly 20 states adopted legislation to implement NSMIA. A number of state legislatures will not meet until late 1997 or early 1998. Others were able to implement the provisions of NSMIA by regulation. 95 Survey response of Rushall & McGeever, attached as Appendix G, with respect to "state position on federally covered securities following NSMIA." See also Survey response of NASAA. 96 E.g. , Survey response of the State of Florida. 97 Survey response of Wohlforth, Argetsinger, Johnson & Brecht. 98 Survey response of Drinker, Biddle & Reath, including memorandum of Joseph J. Kornblum regarding "Current State Filing Requirements for SEC Rule 506 Offerings." This memorandum is attached as Appendix H, as an example of some concerns that have been expressed. 99 Section 18(b)(4)(D) includes as "covered securities" those securities that are issued in an offering that is exempt from Securities Act registration under "rules or regulations issued under Section 4(2)" of the Securities Act. The only rule that the Commission has issued under Section 4(2) is Rule 506 of Regulation D. While securities offered under Rule 506 are, therefore, "covered securities," Section 18(b)(4)(D) specifically preserves the right of a state to impose "notice filing requirements that are substantially similar to those required by rule or regulation under section 4(2)" of the Securities Act. 100 NASAA Reports (CCH) 4876.307 and 4876.307.15. 101 Survey response of Drinker, Biddle & Reath. 102 Id . 103 Id . 104 Id . 105 Some respondents noted a lack of uniformity regarding the meaning of "substantially similar" in Section 18(b). These respondents indicate that some states still ask for offering materials (which are not required by Form D) in Rule 506 offerings. Further, some states have indicated the view that filing of a notice before an offering is "substantially similar" to filing of a notice within 15 days after the first sale. 106 E.g. , Survey response of Cadwalader, Wickersham & Taft. 107 Examples of these manuals include Moody's and Standard & Poor's. 108 Survey response of the SIA. 109 Survey responses of Sullivan & Cromwell and Skadden, Arps, Slate, Meagher & Flom LLP. 110 Survey response of BellSouth Corporation. 111 Survey responses of Sullivan & Cromwell; Douglas Pollitt for Schulte; Roth & Zabel; Reid & Priest; and Skadden, Arps, Slate, Meagher & Flom, LLP. 112 Many respondents have raised a particular concern about the New York blue-sky statute, the Martin Act [Y.Y. Gen. Bus. L. art, 23A, §352 at seq . (1996)]. The Martin Act does not regulate securities offerings directly, except for real estate and theater syndications. It does regulate those who distribute securities, i.e. "dealers." Except for firm commitment underwritings and non-public sales, issuers in most securities offerings fall within the definition of dealer, and historically have either registered on Form M-11 or sought exemption under Section 359-f(2) of the Martin Act. Many respondents noted the fact that the New York Department of Law did not consider New York blue-sky law to be preempted by NSMIA. See Survey response of Rushall & McGeever, above; also see Mark A. Sargent, Blue-Sky Mysteries of the National Securities Markets Improvements Act. 113 Survey response of the Venture Law Group. 114 ## Appendix A ## Survey Response of the North American Securities Administrators Associations Inc. ("NASAA") This survey response is not available electronically. It may be found in Comment File S7-20-97, which may be obtained from the SEC's Public Reference Room: tel. 292-942-8090; electronic mail publicinfo@sec.gov ## Appendix B Surveys prepared by the Commission staff for Securities Adminstrators, Issuers, Broker-Dealers and Counsel ### State Securities Administrators NSMIA Uniformity Study Questions 1. Please generally describe your state's regulatory approach to the review of securities offerings, i.e., anti-fraud, full disclosure or merit review. If a combination of these approaches is applied, please indicate and describe the approach. 2. Please discuss your state's approach to the review, if any, of offerings of securities that are registered in your state. For example, under what circumstances does your state review and comment upon offerings that are required to be registered under the Securities Act of 1933 and those offerings that are exempt from the registration requirements of that Act. Please discuss whether your state allows registration by coordination or qualification, or both. When commenting, please discuss the timing of issuance of comments. Please describe any areas in which your state does or does not comment. 3. Please discuss your state's approach to the review, if any, of offerings that are exempt from registration in your state. For example, what, in general, are your exemptive provisions? Do you require notice filings for exempt offerings? Do you review and comment upon exempt offerings? 4. Please indicate whether your state has adopted ULOE or whether it has made changes to the model ULOE adopted by NASAA. 5. Please list any NASAA "Statements of Policy" which have been adopted by your state. Please describe other disclosure standards applied by your state. 6. Does your state participate, or plan to participate, in a coordinated equity review program with other states? 7. Has your state adopted, or does it plan to adopt, SCOR? If yes, is there a SCOR regional review program in your region? If not, are there efforts to create this program? Please explain. If there is a program in your region, does your state participate in the program? If yes, please discuss your experience with the program. 8. Has your state adopted, or does it plan to adopt, "test the waters?" 9. Please indicate whether your state exempts offers via the Internet under NASAA's Model exemption for Internet offers? If not, do you plan to adopt this exemption or do you otherwise exempt these offers? Please describe the conditions to any existing or proposed exemption. 10. Does your state allow, or plan to allow, computer matching networks (e.g., "ACE-Net") without registration? 11. Has your state adopted, or does it plan to adopt, NASAA's model accredited investor exemption? 12. Please describe any other steps taken, or planned to be taken, to increase uniformity of your state registration procedures and state exemptions with those of other states in connection with NSMIA or otherwise. 13. Please make any additional comments with respect to uniformity of state regulation of securities offerings that you consider important or matters that should be considered for the NSMIA Uniformity Study. ### Issuer NSMIA Uniformity Study Questions 1. Please tell us the name of your company. What is its principal business and what markets are its securities traded upon? 2. Has your company engaged, in the past two years, in one or more offerings of securities that are NOT preempted under NSMIA (i.e., securities offerings which remain subject to state registration and review)? 3. If yes, please indicate the following for each offering: Describe the type of securities offered, (e.g., common stock, debt, asset-backed securities, etc.). The commencement date of the offering. Whether the offering was registered with the SEC. Whether the offering was exempt from registration with the SEC. Please describe the exemption relied upon (e.g., Regulation D Rule 504, 505 or 506, or Regulation A). Whether the offering was registered in any state (which states?). Whether the offering was exempt from registration in any state (which states?). Please describe the exemptions relied upon. 4. For each offering, please describe similarities and differences in treatment by the states. Specific examples would be most helpful. The areas which you may wish to address include: Notice and other filing requirements. Disclosure requirements. Review by the states. Comments received from the states. Timing considerations. Sophistication or suitability standards for investors. Issuer undertakings or representations. Advertising and solicitation restrictions. 5. Have you noticed changes in state laws or regulations or the manner in which the states apply their laws and regulations since the adoption of NSMIA on October 11, 1996? If yes, please describe these changes. 6. Please make any additional comments with respect to uniformity of state regulation of securities offerings that you consider important or matters that should be considered for the NSMIA Uniformity Study. ### Broker-Dealers and Law Firms NSMIA Uniformity Study Questions 1. Please tell us the name of your firm or organization. 2. Please tell us about your securities offering experience during the past two years by indicating the following for each offering: The commencement date of the offering. What was your role in the offering? Was the offering registered with the SEC? Was the offering exempt from registration with the SEC? Please describe the exemption relied upon (e.g., Regulation D Rule 504, 505 or 506 or Regulation A). OR Was the offering registered in any state (which states?)? Was the offering exempt from registration in any state (which states?)? Please describe the exemptions relied upon. Describe the type of securities offered, (e.g., common stock, debt, aset-backed securities, etc.). Markets which the securities are traded upon, if any. [Note: If you have participated in more than just a few offerings during this time period, a representative sampling of offerings will suffice.] 3. For each offering, please describe similarities and differences in treatment by the states. Specific examples would be most helpful. The areas which you may wish to address include: Notice and other filing requirements. Disclosure requirements. Review by the states. Comments received from the states. Timing considerations. Sophistication or suitability standards for investors. Advertising and solicitation restrictions. Issuer undertakings or representations. Restrictions on the use of unlicensed or unregistered broker-dealers or sales agents. Limitations on broker/dealer compensation or offering expenses. 4. Have you noticed changes in state laws or regulations or the manner in which the states apply their laws and regulations since the adoption of NSMIA on October 11, 1996? If yes, please describe these changes. 5. Please make any additional comments with respect to uniformity of state regulation of securities offerings that you consider important or matters that should be considered for the NSMIA Uniformity Study. ## Appendix C Summary of the Survey Responses (excluding NASAA and the States) ### Contents List of Respondents I. Introduction II. Specific Questions and Responses A. Law firms B. Broker-dealers C. Companies D. Other Commenters ### List of Respondents #### Law Firms
Adler Pollock & Sheehan Inc. | Adler Pollock
Butler Snow O'Mara Stevens & Cannada, PLLC | Butler Snow
Cadwalader, Wickersham & Taft | Cadwalader
Jane Katz Crist | Crist
Drinker, Biddle & Reath LLP (2 responses) | Drinker Biddle
Gardner, Carton & Douglas | Gardner Carton
Housley Kantarian & Bronstein | Housley Kantarian
Kelley Drye & Warren | Kelley Drye
Kirkpatrick & Lockhart | Kirkpatrick
Krys Boyle Freedman Scott & Sawyer | Krys Boyle
Kutak Rock | Kutak Rock
Malizia, Spidi, Sloane & Fisch | Malizia
McDermott, Will & Emery (2 responses) | McDermott
Pileggi, Pileggi & Pileggi | Pileggi
Petillon & Hansen | Petillon
Douglas B. Pollitt for Schulte Roth & Zabel | Pollitt for Schulte Roth
Polsinelli, White, Vardeman & Shalton | Polsinelli
Seward & Kissel | Seward
Skadden Arps Slate Meagher & Flom | Skadden Arps
Sullivan & Cromwell | Sullivan
Reid & Priest | Reid
Rushall & McGeever | Rushall
Venture Law Group | Venture
Waller Lansden Dortch & Davis | Waller Lansden
Wohlforth, Argetsinger, Johnson & Brecht | Wohlforth
#### Broker-Dealers
Argent Securities, Inc. | Argent
Capital West | Capital West
Federated Investors | Federated
Hanifen Imhoff Clearing Corp. | Hanifen
Lloyd Wade Securities, Inc. | Lloyd Wade
McFarland, Grossman & Co. | McFarland
Millennium Financial Group, Inc. | Millennium
J.C. Bradford & Co. | J.C. Bradford
Josephthal Lyon & Ross Inc. | Josephthal
Paragon Capital Corp. | Paragon
PaineWebber Inc. | PaineWebber
Paulson Investment Company, Inc. | Paulson
RAF Financial Corp. | RAF
Smartwood Hesse Inc. | Smartwood
Spelman & Co., Inc. | Spelman
#### Companies
ARCO Chemical Company | ARCO
Asia Satellite Telecommunications Co., Ltd. | Asia Satellite
BA Mortgage Securities, Inc. | BA Mortgage
Bank of America | Bank of America
BEA Systems, Inc. | BEA Systems
BellSouth Corp. | BellSouth
BIORA AB | BIORA
Biosense Inc. | Biosense
Bouygues Offshore | Bouygues
Bowlin Outdoor | Bowlin
Cragar Industries, Inc. | Cragar
Cross-Continent Auto Retailers Inc. | Cross-Continent
Daimler-Benz | Daimler-Benz
Digitale Telekabel Aktiengesellschaft | DTA
Eltek Ltd. | Eltek
Exigent International, Inc. | Exigent
First Mariner Bancorp, Inc. | First Mariner
FirstSpartan Financial Corp. | FirstSpartan
Four Media Company | Four Media
Infonow Corp. | Infonow
Independent Capital Trust I (by Elias Matz Tiernan) | Independent Capital
Irwin Financial Corp. | Irwin Financial
GS Financial Corp. | GS Financial
General Bearing Corp. | General Bearing
Keystone Financial Inc. | Keystone
Kideo Productions, Inc. | Kideo
Kilroy Realty Corporation | Kilroy
Maxim Pharmaceuticals, Inc. | Maxim
Mechala Group Jamaica, Ltd. | Mechala
Medical Manager Corp. | Medical Manager
Mentor Funds | Mentor Funds
Metro Information Services, Inc. | Metro
Metropolitan Mortgage & Securities Co., Inc. | Metropolitan Mortgage
MoneyGram Payment Systems, Inc. | MoneyGram
NACI Telecommunications Inc. | NACI
Nationwide Advisory Services, Inc. | Nationwide
Norwest Asset Securities Corporation | Norwest Asset
Obie Media Corporation | Obie Media
Old Guard Group, Inc. | Old Guard
Powerwave Technologies, Inc. | Powerwave
Precision Response Corp. | Precision Response
Q Clubs, Inc. | Q Clubs
Rambus Inc. | Rambus
Rayovac Corp. | Rayovac
Simulations Plus | Simulations
Strayer Education, Inc. | Strayer
Summit Securities, Inc. | Summit Securities
Suncoast Motion Picture Company, Inc. | Suncoast
Sun Hill Industries, Inc. | Sun Hill
TEAMAmerica Corp. | TEAMAmerica
TeleTech Holdings, Inc. | TeleTech
Telco Communications Group | Telco
Trusted Information Systems, Inc. | Trusted Information
TV Azteca, S.A. de C.V., P. Manzurb | TV Azteca
Versatility Inc. | Versatility
Viisage Technology, Inc. | Viisage
Westfield America, Inc. | Westfield
West TeleServices Corp. | West TeleServices
World Heart Corp. | World Heart
WMS Industries Inc. | WMS
W.R. Grace & Co. | W.R. Grace
#### Other Respondents #### Associations
Securities Industry Association | SIA
#### Stock Exchanges
Boston Stock Exchange | BSE
#### Individuals Edward H. Hawkins Michael Rogawski Donald Sutherland ### I. Introduction On October 11, 1996, the National Securities Markets Improvement Act of 1996 ("NSMIA") was enacted into law. 1 Title I to that statute relating to "Capital Markets," amended Section 18 of the Securities Act of 1933 ("Securities Act") 2 to include significant provisions that realigned the regulatory partnership between federal and state regulators. NSMIA amended the Securities Act to preempt state blue-sky registration and review of specified securities and offerings. NSMIA also requires the U.S. Securities and Exchange Commission ("SEC" or "Commission") to conduct a study and submit a report to Congress by October 11, 1997 on the extent to which uniformity of state regulatory requirements for securities or securities transactions has been achieved for securities that are not preempted under NSMIA (the "Uniformity Study"). 3 NSMIA amended Section 18 of the Securities Act to preempt state blue-sky registration and review of offerings of "covered securities." 4 The term "covered securities" generally refers to issuer offerings of securities listed on the New York Stock Exchange ("NYSE"), the American Stock Exchange ("AMEX") and Nasdaq National Market System ("Nasdaq NMS"). Also preempted are issuer offerings of registered investment company securities, most exempt securities and many private placements, 5 although the states may still require certain notices and fees for these offerings. 6 Many issuer securities offerings, however, are not preempted and remain subject to state regulation. These offerings include, among others: securities listed on the Nasdaq SmallCap market or quoted on the NASD OTC Bulletin Board system; securities listed on regional exchanges; various debt securities, including asset-backed and mortgage-backed securities; securities issued in Section 4(2) of the Securities Act private placements that do not meet the exemptive safe harbor requirements of Rule 506 under Regulation D; and securities issued in Rule 504 7 and 505 8 offerings under Regulation D or pursuant to Regulation A 9 under the Securities Act. As part of the Uniformity Study, the Commission sent out a survey to state securities administrators, various issuers, broker-dealers and counsel concerning the extent to which uniformity of state regulatory requirements for securities or securities transactions has been achieved for securities that are not preempted by NSMIA (the "Surveys"). 10 The Surveys were also posted on the Commission's Internet Web Site which also generated responses. In addition, the Commission conducted its own review of certain blue-sky provisions. The following is a summary of the responses to the Uniformity Study Survey. This summary does not include the responses of the state securities administrators or NASAA. The state responses are summarized separately. ### II. Specific Questions and Responses #### A. Law Firms #### 1. Questions Law firms were asked to respond to five questions, which were: Question 1. Please tell us the name of your firm or organization. Question 2 . Please tell us about your securities offering experience during the past two years by indicating the following for each offering: The commencement date of the offering. What was your role in the offering? Was the offering registered with the SEC? Was the offering exempt from registration with the SEC? Please describe the exemption relied upon (e.g., Regulation D Rule 504, 505 or 506 or Regulation A). Was the offering registered in any state (which states?)? Was the offering exempt from registration in any state (which states?)? Please describe the exemptions relied upon. Describe the type of securities offered, (e.g., common stock, debt, asset-backed securities, etc.). Markets which the securities are traded upon, if any. [Note: If you have participated in more than just a few offerings during this time period, a representative sampling of offerings will suffice.] Question 3. For each offering, please describe similarities and differences in treatment by the states. Specific examples would be most helpful. The areas which you may wish to address include: Notice and other filing requirements. Disclosure requirements. Review by the states. Comments received from the states. Timing considerations. Sophistication or suitability standards for investors. Advertising and solicitation restrictions. Issuer undertakings or representations. Restrictions on the use of unlicensed or unregistered broker- dealers or sales agents. Limitations on broker-dealer compensation or offering expenses. Question 4. Have you noticed changes in state laws or regulations or the manner in which the states apply their laws and regulations since the adoption of NSMIA on October 11, 1996? If yes, please describe these changes. Question 5. Please make any additional comments with respect to uniformity of state regulation of securities offerings that you consider important or matters that should be considered for the NSMIA Uniformity Study. #### 2. Responses to Questions a. Question 1. Twenty-five law firms and lawyers provided responses to the survey. b. Question 2. Nine law firms reported substantial experience acting as counsel to issuers and underwriters in securities offerings registered and exempt from registration under the Securities Act. 11 These firms did not describe specific representative offerings. One attorney for Kutak Rock (Robert Bunton) indicated his experience was mainly in securities litigation, not securities offerings. Another three firms, Skadden Arps, Sullivan and Rushall, did not describe specific offerings in response to this question. Four law firms described Rule 506 exempt offerings as representative offerings. These offerings were primarily conducted at the state level in reliance upon state exemptions, including the Uniform Limited Offering Exemption ("ULOE"). These firms were Adler Pollock, Butler Snow, Crist, and Housley Kantarian. Pileggi indicated that its experience in the past two years was primarily with private offerings exempt from registration under Regulation D. Wohlforth also indicated that most of its experience involved offerings exempt under the Securities Act. Cadwalader described one representative offering - an offering of limited partnership interests in a commodity pool - and offerings of asset-backed securities generally. The commodity pool offering was registered with the SEC and in 48 states and the securities were not traded on any market. The asset-backed securities were issued in registered and unregistered offerings under the Securities Act and sold at the state level under institutional investor exemptions and through state registration. Housley Kantarian described two offerings registered under the Securities Act. The securities in one offering were quoted on Nasdaq NMS and the issuer relied on self-executing NMS exemptions in 20 states and registered as an issuer-dealer in New York. The second offering described by this respondent was an offering of securities traded on the NASD's OTC Bulletin Board. The offering was registered in eight states and exempt in several other states. The issuer registered as an issuer-dealer in New York. Krys Boyle described an equity offering by an oil and mining company registered with the SEC and registered in 14 states. The securities of the issuer were quoted on the Nasdaq SmallCap market. Malizia indicated that it specializes in the financial institution industry and works on transactional and regulatory matters. This respondent described an offering of holding company securities in connection with a conversion of a mutual savings and loan association to a stock association. The securities were traded on Nasdaq SmallCap market and the offering was registered in seven states and exempt in five others. Kirkpatrick indicated substantial experience in offerings by investment companies registered with the SEC and with the states. Pollitt for Schulte Roth indicated substantial experience in offerings by investment companies, including private investment partnerships. This firm described a pre-NSMIA closed-end investment company registered under the Investment Company Act of 1940 (the "1940 Act") whose securities were sold under Rule 506 of the Securities Act and various state exemptions, including institutional investor exemptions and ULOE, and a post-NSMIA investment company registered under the 1940 Act, sold under Rule 506 and registered in several state jurisdictions. Polsinelli, while indicating substantial general experience in securities offerings, described one offering under Rule 504 which was registered in Kansas and Missouri. c. Question 3 Rule 505 Offerings. Four law firm respondents (Drinker Biddle, Pollitt for Schulte Roth, Venture, and Waller Lansden) indicated that there is substantial non-uniformity among state exemptions used in connection with offerings exempt from federal registration under Rule 505 of Regulation D. Drinker Biddle reported non-uniformity among the states with respect to Rule 505 offerings in the following areas: states have pre-sale or pre-offer notice requirements which depart from Rule 505, which has a post-sale requirement; states require the filing of a special form instead of or in addition to Form D; some states require sales reports; states require suitability standards; states require specific legends; states have "bad person" disqualification provisions that differ from the ULOE provision; two states grant rescission rights to purchasers; two states impose holding periods on the securities acquired; four states require specific language in the subscription agreement; states restrict commissions and offering expenses; two states impose recordkeeping requirements; and two states restrict use of projections. The Venture law firm reported that significant non-uniformity remains among state limited offering exemptions and isolated purchaser exemptions after NSMIA. This respondent indicated, "[t]he criteria for such exemptions, and applicable disclosure and filing requirements, vary from state to state. Special difficulties are posed by pre-transaction requirements that can have the effect of delaying fast-paced transactions." Another firm, Pollitt for Schulte Roth, indicated that there have been few, if any, changes in the uniformity of treatment for non-covered securities. This firm indicated that the disparate treatment of Rule 506 offerings before NSMIA continues with respect to Rule 505 offerings after NSMIA. Waller Lansden, another law firm, agreed with this response although it noted that "some states now treat Rule 505 offerings the same as Rule 506 offerings." Registered Small Company Offerings. Housley Kantarian noted that, with respect to small company offerings, there have been no changes in the number or type of blue-sky filings or the approach by the states toward these offerings. Kelly Drye reported substantial non-uniformity among the states in an offering by a small company registered under the Securities Act and with 20 larger market states. This respondent noted a wide variety of reviews with the merit review states applying non-uniform standards regarding such issues as cheap stock and escrow requirements. This respondent believes these different standards may cause withdrawal of state registrations. Krys Boyle indicated that, in a registered offering of securities traded on the Nasdaq SmallCap market, three of 15 states issued merit comments and the offering had to be withdrawn in two of the three states. Two of the three states issued comments more than a month after filing and all three sought to impose suitability or sophistication standards. In a registered offering of securities quoted on the Nasdaq SmallCap market, Malizia reported that, among the seven states in which the offering was registered, the length of review time differed greatly with some states taking a month to issue comments. This respondent noted that some states didn't clear the offering in time and the issuer had to withdraw the registration in those states. Small Company Offering Registration ("SCOR"). Wohlforth reported no significant differences or delays in state registrations other than one state which questioned whether the SCOR form could be used for limited liability company interests. Polsinelli indicated that, with respect to a Rule 504 offering registered in Kansas and Missouri and processed under a joint review agreement, Kansas acted as the lead state and the review process was extremely professional and timely. Asset-Backed Securities. Cadwalader commented on asset-backed securities with respect to several issues. Although the Commission permits the shelf registration of investment grade asset-backed securities, many states do not recognize shelf offerings. This respondent noted that several states do not recognize shelf offerings and require separate filings and fees for each series that is offered under the shelf. Cadwalader also noted that NASAA's Statement of Policy regarding asset-backed securities applies in part to investment grade securities which may add substantial review time and costs to an offering. Miscellaneous Areas. Drinker Biddle noted that NSMIA provides that no filing or fee under state registration requirements is permitted with respect to securities listed on the NYSE, AMEX or Nasdaq NMS. This firm indicated that interests in the employee benefit plans of these issuers, however, are not covered securities, and the states may require notice and fees under exemptions for these securities. With respect to the issuance of securities listed on the NYSE, AMEX or Nasdaq NMS, which are covered securities under NSMIA, some states are requiring issuer-dealer or agent registration of the issuer in mergers and acquisitions, noted Drinker Biddle. Gardner Carton reported that, in conduit financings in which a municipal security is issued to provide funds for charitable entities, partial preemption does not prevent the states from requiring notice and fees. Gardner Carton also said that New York has imposed issuer-dealer registration in a merger of a NYSE-listed company. Petillon noted that there are substantial differences among state exemptions for offerings to existing security holders both as to the availability of and conditions to the exemptions. Some of these exemptions require notices while others are self-executing. This respondent also observed inconsistencies among the interpretation of the 90 day period in the model exemption adopted by most states. The Venture law firm noted that there is still significant non-uniformity in non-covered securities transactions after NSMIA, including limited offering exemptions, isolated purchaser exemptions and state exemptions for Rule 701 offerings. This respondent indicated that the availability and criteria of state exemptions vary with respect to Rule 701 offerings. Rule 506 Offerings. Adler Pollock noted no significant differences among the states with respect to Rule 506 except that New York required the registration of the issuer as an issuer-agent. Likewise, Butler Snow reported that in Rule 506 offerings, most of the states follow NSMIA and require notice filings and fees. Most of the states still require consent to service of process filings. Housely Kantarian indicated that NSMIA has made a big improvement in uniformity among the states in Rule 506 offerings. Petillon reported a significant change in Rule 506 notice filing requirements. Ten law firms observed non-uniformity among the states with respect to Rule 506 offerings. These firms were: Cadwalader, Drinker Biddle, Kelley Drye, McDermott, Reid, Rushall, Seward, Skadden Arps, Venture and Waller Lansden. Seward reported that there remains a lack of uniformity with respect to Rule 506 offerings. This respondent noted differences in the following areas: some states require annual sales reports; some states require state legends; some states require Form D filings if there are sales; some states require broker-dealer registration if the issuer sells securities, even if no commissions are paid; fees have increased or states have adopted new fees; some states ask for offering materials; and there is confusion as to whether other exemptions may be used. Rushall also indicated differences among Rule 506 offerings. This firm reported that four states require Form D to be filed in a time period different than Regulation D, three states require the filing of offering materials, and New York requires a special state filing, consent to service of process and Form D before offers and sales can be made in the state. Cadwalader, although noting a favorable trend among the states to conform to NSMIA, observed the following differences: certain states require Form D filings pre-sale; New York requires pre-sale filing of Form D plus a special state form and submission of offering materials; state notice requirements after NSMIA are unclear because the NASAA proposed model amendments to effect NSMIA permit the administrator to require filings "by rule or otherwise;" some states are increasing filing fees; certain states require agent registration of issuer personnel who sell the offering even though no commissions are paid to them; and states may amend or delete exemptions because they perceive the exemptions overlap covered securities although some state exemptions are broader. Drinker Biddle reported that 29 states require filing of Form D in accordance with NSMIA, i.e., no later than 15 days after the first sale. However, this firm also noted the following departures from NSMIA: three states require pre-sale or pre-offer Form D filings; three states require Form D filings other than within the 15 day period after the first sale; two states required notices other than Form D or in addition to Form D; four states require filing of disclosure documents; five states may require issuer-dealer registration and seven states may require agent registration in Rule 506 offerings. Kelley Drye noted that certain states are requiring broker-dealer registration of an issuer or its personnel in self-underwritten Rule 506 offerings. This firm also stated that some states are slow to conform with NSMIA's notice and fee requirements. McDermott reported that New York does not comply with NSMIA because it requires the filing of Form 99 which is not "substantially similar" to Form D. Several other states continue to request pre-sale filings of Form D notices in Rule 506 offerings. McDermott also noted that the states appear to be more narrowly construing their broker-dealer exemptions after NSMIA. Reid reported substantial diversity among the states in Rule 506 offerings. The "substantially similar" notice filing requirement in Section 18 is unclear which has led to non-uniform state responses. Some states still require pre-sale and post-closing Forms D, and some states require issuers to register as issuer-dealers although before NSMIA these issuers were exempt from such registration. Skadden Arps reported that certain states are requiring agent registration of an issuer's employees in Rule 506 offerings. This respondent also noted that one state requires registration of Rule 506 offerings. The Venture law firm noted that New York requires issuer-dealer registration and imposes notice filing requirements different than Regulation D. This respondent also indicated that some states are requiring additional forms and documentation besides Form D. Waller Lansden said that Rule 506 offerings are generally uniform except as to timing of filings and fees. This respondent said that New York does not recognize federal preemption. It noted that certain states are requiring notice filings for transactions previously conducted under exemptions which had no notice requirements. Investment Companies. Pollitt for Schulte Roth indicated that, in the case of an offering by an investment company under Rule 506, because fees after NSMIA are required on the same schedule as before NSMIA, issuers made Form D filings and paid fees pre-offer in six states and pre-sale in 14 states. However, it was noted that some of these jurisdictions are now requiring notices to be filed after sale. Issuers also have to register as issuer-dealers in New York. d. Question 4 Securities That Are Not "Covered Securities". Many commenters observed differences between the states regarding non-covered securities, including offerings of Nasdaq SmallCap market securities and other over-the-counter traded securities, offerings exempt under the Securities Act but registered with the states, and Rule 505 offerings which are exempt from registration with the states. These differences are summarized above under Question 3. "Covered Securities". Several respondents cited differences among the states in treatment of Rule 506 offerings. These respondents generally noted differences with respect to the type and timing of filing requirements and requirements for issuer-dealer or agent registration. These comments are summarized above under Question 3. Skadden Arps observed that some states are imposing notice requirements and new or increased fees with respect to covered securities which are either exempt securities under Section 3(a) or sold in exempt transactions under Section 4(1), 4(3) or 4(4) of the Securities Act. Nationwide surveys still have to be conducted to determine the jurisdictions that impose fee requirements for these covered securities. This respondent asserted that NSMIA permits the states to impose filing or registration fees only for offerings by mutual funds and for Rule 506 offerings, not for other types of covered securities. In acquisitions, Venture law firm noted that NSMIA has had some detrimental effect because the Section 3(a)(10) exemption under the Securities Act based on a state fairness hearing is no longer available. The unavailability of the exemption has required registration under the Securities Act. e. Question 5. Butler Snow reported that Rule 504 was generally useless unless issuers were able to "test the waters" to determine that there is sufficient interest in their securities to justify the time and expense of registering securities. Small issuers can not afford state registration if no sales can be made in a state, argued this respondent. Polsinelli has observed an increase in the development of regional registration review arrangements for SCOR and Regulation A offerings. Housley Kantarian advocated extending preemption to transactions with existing security holders, reorganizations and mergers because some states require fees and notices for these exemptions although no substantive reviews are performed by the states. Because no state review is conducted, investor protection is not heightened. Three law firms asserted that small issuers are hurt more than larger issuers by non-uniformity among state laws. Krys Boyle said small issuers have limited access to public markets because their offering expenses are higher relative to the amount of the offering, the states impose arbitrary rules against small issuers and the inclusion fees for Nasdaq are higher. Malizia asserted that Nasdaq SmallCap market securities should be covered securities because smaller companies may spend large amounts on registration fees only to encounter state delays in processing or inability to sell the securities. This respondent also recommended that the states publish tables or charts showing the requirements for each state exemption. Petillon asserted that non-uniformity results in substantial delays and significant legal fees for smaller start-up or developmental stage companies, which can not afford these delays and fees. Pollitt for Schulte Roth suggested that the phrase "substantially similar" in Section 18(b)(4)(D) should be clarified that it does not include the state signature page of Form D. States should clarify that issuer employees representing issuers in offerings are not agents, as recommended by NASAA. The term "Qualified Purchaser" under Section 18(b)(3) should be defined to increase uniformity among state institutional exemptions and for exclusions from registration for both broker-dealers and investment advisors. Polsinelli noted that state regulation serves an important function in protecting investors but that the lack of uniformity has created unnecessary costs in raising capital. This respondent believes that coordinated review programs will greatly enhance uniformity. This firm also believes that the SEC and the states should have uniform definitions of securities so that instruments are treated consistently under federal and state laws. Sullivan made several comments on Rule 506 offerings including: states should not require the state signature page or appendix; Form D notices should be filed the same time as Form D is filed with the Commission; and states should not indirectly regulate Rule 506 offerings by requiring agent registration of issuers or their employees. This respondent also said states should include QIBs under Rule 144A as institutional investors under their exemptions for these investors and should eliminate notice and fee requirements for secondary trading in securities of reporting companies since these securities are "covered securities" in secondary trading. Waller Lansden recommended that Rule 505 offerings be included as "covered securities" in the same manner as NSMIA treats Rule 506 offerings. Wohlforth noted that the SCOR form shows considerable promise for small businesses to raise capital in a public offering without using a broker-dealer. #### B. Broker-dealers #### 1. Questions Broker-dealers were asked the same questions as were asked to law firms. Please refer to Section III.B.1. above for the text of these questions. #### 2. Responses to Questions a. Question 1. Fifteen broker-dealers and the SIA responded to the survey. b. Question 2 . Eleven broker-dealers described offerings in which they acted as sole or co-managing underwriter or placement agent. 12 Some of these offerings were registered under the Securities Act and some were exempt from registration under Regulation D, Regulation A or Section 4(2) of the Securities Act. Certain securities in these offerings were traded on the Nasdaq NMS or SmallCap markets, the AMEX, the BSE or the Pacific Stock Exchange. These offerings were registered in the states or conducted under available state exemptions, including exchange exemptions. J.C. Bradford limited its underwriting activities to offerings of securities either listed on an exchange or quoted on Nasdaq NMS, in order to qualify for exemptions from state securities registration. One broker-dealer, Federated Investors, limited its sales activities to mutual fund offerings which were always registered with the SEC and registered in all states except one, in which a "Blue Chip" exemption was relied upon. Three broker-dealers said they had not participated in offerings during the past two years as an underwriter. 13 One respondent indicated that her experience primarily involved investment company securities which are covered securities under NSMIA and not the subject of the Uniformity Study. 14 c. Question 3. Paragon observed that the majority of states, except for about 11, review on a full merit or semi-merit basis. Most states follow NASAA's merit guidelines. This broker-dealer indicated that it sought to avoid state review by selling to only persons meeting "super suitability" standards. Federated Investors, which deals only with mutual funds, reported that two states had requested affidavits or letters. The states were informed that they could not require those documents and the states dropped their requests. Capital West reported that, in an offering registered under the Securities Act and in 21 states, ten states required escrow of offering proceeds with various escrow time periods. The securities in that offering were quoted on the Nasdaq SmallCap market. Nine broker-dealers did not respond or indicated that they had insufficient experience to respond to this question. d. Question 4. Federated Investors noted that one state substantially increased its fees for mutual fund registrations following NSMIA. Other changes observed by this respondent following NSMIA included changes in prospectus filing requirements with the states and changes in the registration periods. Paragon Capital reported that most states after NSMIA require non-merit post-sale filings in private placements, instead of merit-reviewed, pre-sale filings. Two broker-dealers indicated that they had not observed changes since NSMIA. Ten broker-dealers indicated that they had insufficient experience to answer this question or gave no response to this question. The SIA noted that NSMIA preserves the states' rights to impose fees and notices for most covered securities and that it is unclear whether those rights extend to secondary transactions involving covered securities. Because of this uncertainty, the securities industry has continued to rely on non-uniform state law exemptions for secondary trading, rather than Section 18(b)(4)(A). The SIA noted that one state has adopted a new statutory provision requiring filing of a notice and a consent to service of process and pay a $500 filing fee, among other requirements, in order to rely on the preemption afforded by Section 18(b)(4)(A). The SIA observed that state requirements such as the new provision effectively nullify the federal preemption for these transactions. This respondent also noted that 12 other states have adopted legislation authorizing filing requirements by rule or order. In addition, the SIA encouraged uniformity among state exemptions for secondary trading in securities of companies that do not report under the Securities Exchange Act of 1934. The SIA also indicated that new state requirements (regarding notice, other filings and fees) effectively nullify the preemption provided by Section 18(b)(4)(C) for certain Section 3(a) securities. In addition, this respondent expressed concern that the states would attempt to diminish the usefulness of federal preemption of offers and sales to "Qualified Purchasers" under Section 18(b)(3) if notices, consents, other filings or fees are imposed by the states in these transactions. e. Question 5. Four broker-dealers indicated that state registration and review of offerings is very expensive for small companies. 15 Argent suggested that securities quoted on the Nasdaq SmallCap market be included as federally covered securities so that the states would be preempted from registration of these offerings. Spelman indicated that it may withdraw from underwriting offerings of less than $10 million because of the cost and difficulty in obtaining approval from all securities regulators. Eight respondents did not answer this question or indicated "Not Applicable." The SIA urged uniformity among state registration requirements for investment grade, asset-backed securities offerings and encouraged the states to adopt NASAA's Statement of Policy for these offerings. The SIA recommended that the definition of "covered security" be expanded to include rights and warrants for the purchase of securities listed on the NYSE, AMEX or Nasdaq NMS. States also should strive to increase uniformity for offerings by foreign companies. NASAA's World Class Issuer Exemption should be revised to lessen the exemption's "excessively restrictive criteria." #### C. Companies #### 1. Questions Companies were asked to respond to six questions, as follows: Question 1 . Please tell us the name of your company. What is its principal business and what markets are its securities traded upon? Question 2. Has your company engaged, in the past two years, in one or more offerings of securities that are NOT preempted under NSMIA (i.e., securities offerings which remain subject to state registration and review)? Question 3. If yes, please indicate the following for each offering: Describe the type of securities offered, (e.g., common stock, debt, asset-backed securities, etc.). The commencement date of the offering. Whether the offering was registered with the SEC. Whether the offering was exempt from registration with the SEC. Please describe the exemption relied upon (e.g., Regulation D Rule 504, 505 or 506, or Regulation A). Whether the offering was registered in any state (which states?). Whether the offering was exempt from registration in any state (which states?). Please describe the exemptions relied upon. Question 4. For each offering, please describe similarities and differences in treatment by the states. Specific examples would be most helpful. The areas which you may wish to address include: Notice and other filing requirements. Disclosure requirements. Review by the states. Comments received from the states. Timing considerations. Sophistication or suitability standards for investors. Issuer undertakings or representations. Advertising and solicitation restrictions. Question 5. Have you noticed changes in state laws or regulations or the manner in which the states apply their laws and regulations since the adoption of NSMIA on October 11, 1996? If yes, please describe these changes. Question 6. Please make any additional comments with respect to uniformity of state regulation of securities offerings that you consider important or matters that should be considered for the NSMIA Uniformity Study. #### 2. Responses to Questions Nine companies indicated that they were unable to respond to the survey for various reasons. 16 An additional 28 companies indicated that, during the past two years, they had not offered securities that would be subject to registration and review by the states after NSMIA and either responded negatively or "Not Applicable" to the remaining questions. 17 These companies have been excluded from the discussion of the responses which follows. a. Question 1 . Twenty-four companies provided substantive responses to the survey questions. The securities of one company, BellSouth, were traded on the NYSE plus a few regional exchanges. One company, Cragar, had securities traded on the BSE and the Nasdaq SmallCap market. Five companies had securities quoted on the Nasdaq NMS. 18 The securities of three companies were quoted on Nasdaq (Old Guard, Rambus and Trusted Information) without specifying whether NMS or SmallCap. The securities of five companies were quoted on the Nasdaq SmallCap market (General Bearing, Kideo, Obie Media, Simulations and World Heart) and the securities of two companies were quoted on the NASD's OTC Bulletin Board (Exigent and Infonow). Four respondents or their affiliates issued mortgage- or asset-backed securities that were traded on the over-the-counter market. These companies were Bank of America, Metropolitan Mortgage, Norwest Asset and Summit Securities. One respondent was a mutual fund family whose securities were traded on the over-the-counter market, Mentor Funds. One respondent was an investment advisor to mutual funds, Nationwide. First Mariner, a bank holding company, did not specify the market on which its securities were traded, if any. b. Question 2. Seventeen of the 24 companies indicated that they had engaged in a non-preempted offering in the past two years. 19 c. Question 3. Six companies described the offering of common equity in an initial public offering ("IPO") registered under the Securities Act within the past two years. 20 Three of these offerings were registered in several states; one offering was registered in four states. One offering of securities approved for quotation on the Nasdaq NMS which occurred before NSMIA was conducted pursuant to state registration exemptions based on the Nasdaq NMS listing. Another four companies described common equity offerings registered under the Securities Act, although they did not characterize the offerings as IPOs. 21 Two companies (BellSouth and Exigent) described offerings of participations or interests in employee benefit plans that were registered under the Securities Act. Two companies described offerings registered under the Securities Act of debt and preferred stock backed by mortgages and other receivables. Two respondents described offerings of mortgage-backed pass-through trust certificates registered under the Securities Act. The offerings of one company were registered in a number of states. The offerings of the other respondent were generally exempt from state registration under the Secondary Mortgage Market Enhancement Act of 1984 or sold under institutional investor exemptions, except in New York where the offerings were registered under the New York Real Estate Syndicate Act. One company (Infonow) described a selling securityholder offering following a private placement under section 4(2) of the Securities Act. Powerwave described a Section 4(2) private placement offering not registered in any state. d. Question 4. With respect to the IPO common equity offerings, the companies had the following responses: One company (Cragar) said the states registration requirements were very different. The time for review varied greatly, from days to weeks. The comments raised were different based on divergent disclosure issues and disparate sophistication and suitability requirements. However, this respondent noted that the issuer undertakings and representations were not dissimilar. Kideo indicated that New Jersey had denied secondary trading based on the company's insolvency before its IPO. Another company, Simulations, said two of 20 states where the offering was registered required responses. Fees and response times varied widely. Two IPO issuers did not respond to this question. One company in the other common equity offerings noted that certain states requested more disclosure changes than other states. One company (Obie Media) said the state requirements were very different. This issuer said some states seem to approach an offering with the perspective that the offering would never go effective. Review times were different among the states and the offering was withdrawn from several states since comments could not be resolved. With respect to state blue-sky regulation of interests in employee benefit plans, BellSouth noted that one state required registration and one state required application for an exemption. This respondent indicated that there was a significant delay in the state registration and exemption approval process. Exigent said that all states had self-executing exemptions for offerings in connection with employee benefit plans, except for one state (Maryland). Metropolitan Mortgage and Summit Securities, issuers of debt and preferred stock backed by mortgages and other receivables, indicated that the states followed different suitability guidelines and that they do not register in certain western states due to overly burdensome requirements. One mortgage-backed trust certificate sponsor (Norwest Asset) which had registered its offerings in several states indicated that the states had requested similar documents and reviewed the filings in timely fashion. The other issuers (sponsored by Bank of America) were able to rely on exemptions at the state level except in New York which required registration. Infonow, which registered the selling security holder offering, reported that California had required proof of viability in light of the auditor's going concern opinion and also required several changes in the company's by-laws. The company was unable to comply with these requirements and withdrew the offering from California. Mentor Funds, a mutual fund family, indicated that, although most states accept uniform Form NF, New York does not recognize the date of receipt as the effective date. Also, two states requested broker-dealer information and one state required an affidavit that no sales had occurred. Five companies reported no significant similarities or differences in response to this question. e. Question 5. One respondent (Norwest Asset) noted that several states have changed requirements calling for the filing of final documents or closing reports in offerings of asset-backed securities. In these offerings, some states only require notice filings and do not require a review. One company (Old Guard) said some states have not revised their statutes and rules for NSMIA and that it was still necessary to conduct a blue-sky survey to ensure compliance with state requirements. Two issuers (Powerwave Technologies and Rambus) noted significant changes from pre-NSMIA requirements. One mutual fund respondent noted the elimination of merit review (Mentor Funds) and another reported that the majority of states accept uniform Form NF (Nationwide). One company noted that there appears to be an easing of secondary market trading restrictions (Obie Media). Thirteen respondents indicated that there have been no changes since NSMIA. Another three indicated that they did not have sufficient knowledge and experience to respond to this question. f. Question 6. Exigent asserted that interests in employee benefit plans should be exempted from state registration and review by self-executing exemptions, i.e., exemptions not requiring notice filings or fees. BellSouth, whose securities are quoted on the NYSE and are therefore "covered securities" and exempt from state registration requirements, recommended that interests in employee benefit plans should be "covered securities" and exempt from state registration and review if the employer's securities are "covered securities." Simulations asserted that state blue-sky costs decrease the assets of securities issuers to the detriment of investors. Strayer noted that some states appear to be motivated economically by requiring fees and filings. This respondent suggested that all states should follow the same laws with respect to registration of securities. With respect to investment companies, Nationwide recommended that all registration periods terminate two months following the end of the fiscal year and that fees should be paid on sales from the previous year. Mentor Funds questioned whether New York could fail to recognize the date of receipt of Form NF as the effective date. Regarding asset-backed securities, Norwest Asset suggested that the states should be encouraged not to require closing reports at the end of each reporting period. Thirteen companies gave no response to this question. #### D. Other Commenters The BSE noted the application of coordinated review procedures by the states after NSMIA. Mr. Edward Hawkins, an individual respondent, was formerly the Secretary and a director of Eyre Trading Group, Ltd., a start-up company which is not a reporting company and whose securities are traded on the OTC Electronic Bulletin Board. He indicated that Eyre conducted a Rule 504 offering sold in Colorado and to foreign nationals in August 1996. He noted some changes in state blue-sky law since NSMIA but none involving small issuers. Mr. Hawkins believed that the state laws are "absolutely non-uniform." He recommended the complete preemption of state blue-sky law except for intra-state offerings. Michael Rogawksi, M.D., responded as an individual investor and indicated that the SEC should have solicited investor input for the Uniformity Study. He indicated that he has participated in thousand of exempt and non-exempt offerings over the past 15 years. He advocated that Nasdaq SmallCap securities be exempted from state registration. In his view, the full disclosure requirements under the Securities Act provide adequate investor protection. The non-uniformity of state laws raises the costs of issuers and unnecessarily limits investor's access to investment opportunities. Donald Sutherland, an environmental management systems consultant, indicated that there is an overall mixed practice of enforcement and knowledge of environmental GAAP to be followed by reporting companies. A "devolution" in the SEC's regulatory and enforcement authority to "state bodies will bring about regional mixed practice and a wider scope for accounting departure." ### Footnotes for Appendix C 1 Public Law 104-290, 110 Stat. 3416 (October 11, 1996). 2 15 U.S.C. 77a. et seq. 3 NSMIA requires the Commission to "conduct a study, after consultation with the states, issuers, brokers, and dealers, on the extent to which uniformity of state regulatory requirements for securities or securities transactions has been achieved for securities that are not covered securities..." [Section 102(b) of Title I of NSMIA]. 4 NSMIA replaced the pre-existing Section 18 of the Securities Act that preserved the jurisdiction of the states with a new Section 18 that preempts most state authority to regulate many securities offerings. With respect to "covered securities," the states are prohibited from requiring registration or qualification, from imposing any conditions on the use of any offering document prepared by the issuer, or engaging in any merit regulation. 5 NSMIA preempts state registration requirements with respect to certain transactions exempt under the Securities Act, including (i) transactions exempt under Section 4(1) [15 U.S.C.§77d(3)(1994] (i.e., by persons other than an issuer, underwriter or dealer) and Section 4(3)(i.e., dealer transactions) [15 U.S.C. § 77 d(3)(1994)] in securities of reporting issuers; (ii) transactions exempt under Section 4(4) [15 U.S.C. §77 d(4) (1994)] (i.e., brokers' transaction); (iii) transactions in securities exempt under Section 3(a) [15 U.S.C. §77 c(a)(1994)], except for securities of religious or charitable organizations, securities issued in intrastate offerings, and municipal securities insofar as they are offered in the state in which the issuer of such security is located; and (iv) private placements pursuant to rules issued under Section 4(2) [15 U.S.C. §77d (2)(1994)] (i.e., transactions exempt under Rule 506 of Regulation D [17 C.F.R. § 230.506 (1996)]. 6 NSMIA preserves the authority of the states to require notice filings and fees with respect to filings (except for those relating to listed securities), and to suspend the offer and sale of securities within a state as a result of the failure to submit a required filing or fee. 15 U.S.C. 77r (c)(2)(1997). 7 17 C.F.R. § 230.504 (1996). 8 17 C.F.R. § 230.505 (1996). 9 17 C.F.R. § 230.251-263 (1997). 10 The Commission prepared three separate Surveys for state securities administrators, issuers, and broker-dealers and counsel, respectively. Surveys were sent out to all 51 securities administrators, 1083 issuers, 220 broker-dealers and 587 law firms. The Commission received responses from 46 securities administrators, 60 issuers, 15 broker-dealers, 25 law firms, 3 individuals, the Boston Stock Exchange, the North American Securities Administrators Association ("NASAA") and the Securities Industry Association ("SIA"). NASAA is an association of securities administrators from each of the 50 states, the District of Columbia, Puerto Rico, Mexico and several of the Canadian provinces. The SIA is an association representing about 700 securities firms, including investment banks, broker-dealers, specialists and mutual funds. The responses to the Survey are available for inspection and copying in the Commission's public reference room. Refer to File No. S-7-20-97. 11 Drinker Biddle, Gardner Carton, Kelley Drye, McDermott, Pettilon, Seward, Reid, Venture, and Waller Lansden. 12 Argent, Capital West, Federated Investors, McFarland, Josephthal, J.C. Bradford, Paragon, Paulson, RAF, Smartwood and Spelman. 13 Hanifen Imhoff, Lloyd Wade and Millennium. 14 PaineWebber. 15 Argent, Capital West, Smartwood and Spelman. 16 ARCO, BA Mortgage, Biosense, Bowlin, FirstSpartan, Mechala, Q Clubs, Sun Hill, and TV Azteca. 17 Asia Satellite, BEA Systems, BIORA, Bouygues, Cross-Continent, Daimler-Benz, DTA, Eltek, Four Media, Irwin Financial, GS Financial, Keystone, Kilroy, Medical Manager, Maxim, MoneyGram, NACI, Rayovac, Suncoast, TEAMAmerica, TeleTech, Telco, Versatility, Viisage, Westfield, West TeleServices, Midway and W.R. Grace. 18 Independent Capital, Metro, Powerwave, Precision Response and Strayer. 19 The companies which indicated that they had not engaged in offerings were First Mariner, Independent Capital, Mentor Funds, Metro and Old Guard. Rambus did not respond to this question. 20 Cragar, General Bearing, Precision Response, Rambus, Simulations and Strayer. 21 General Bearing, Obie Media, Trusted Information and World Heart. The materials in appendices D, E, and F are not available electronically. They are part of the hard copy of the Uniformity Study, which may be obtained from the SEC's Public Reference Room: tel. 292-942-8090; electronic mail publicinfo@sec.gov ## Appendix D ### Survey of State Survey Responses ## Appendix E ### Materials with respect to NASAA's Coordinated Equity Review Program ## Appendix F ### Copy of NASAA Model Accredited Investor Exemption The materials in appendices G and H are not available electronically. They may be found in Comment File S7-20-97, which may be obtained from the SEC's Public Reference Room: tel. 292-942-8090; electronic mail publicinfo@sec.gov ## Appendix G ### Survey Response of Rushall & McGeever ## Appendix H ### Memorandum of Joseph J. Kornblum Regarding "Current State Filing Requirements for SEC Rule 506 Offerings" http://www.sec.gov/news/studies/uniformy.htm
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