Registration by Qualification
Registration by Qualification
The most comprehensive state securities registration method under the Uniform Securities Act, used when a security is not registered with the SEC. The state Administrator sets the effective date (the only registration method with this authority) and has the broadest grounds to deny registration, including unconscionable offering costs, fraudulent schemes, and misleading statements. Requires detailed disclosure including issuer information, use of proceeds, sales literature, and specimen certificates. Commonly used for intrastate offerings, small company offerings, and securities not subject to federal registration.
A small technology startup in Colorado raising $3 million exclusively from Colorado residents through a direct public offering must use registration by qualification because the offering is not registered with the SEC. The Colorado securities administrator will review the complete offering materials, can require additional disclosures about the company's limited operating history, may mandate an escrow account for investor funds, and will determine when the registration becomes effective.
Students often confuse when to use qualification vs. coordination vs. notice filing. Use qualification when there is NO SEC registration (Administrator has most authority, including broadest grounds for denial). Use coordination when filing with SEC simultaneously (becomes effective with SEC). Use notice filing only for federal-covered securities like mutual funds (automatic effective date, minimal state authority). Only qualification gives the Administrator the authority to set the effective date and the most comprehensive review authority.
How This Is Tested
- Identifying when registration by qualification is required based on whether SEC registration exists
- Understanding that the Administrator sets the effective date (the only method where this occurs)
- Recognizing the Administrator can deny registration based on substantive grounds including unconscionable offering costs under qualification
- Determining what documents are required (sales literature, specimen certificates, detailed issuer information)
- Distinguishing between qualification (no SEC registration), coordination (with SEC registration), and notice filing (federal-covered securities)
Regulatory Limits
| Description | Limit | Notes |
|---|---|---|
| Effective date authority | When Administrator orders | Only registration method where state Administrator sets the effective date (coordination becomes effective with SEC; notice filing is automatic) |
| Registration effectiveness period | One year from effective date | Can be extended if unsold shares remain, offered at original price by issuer or underwriter |
| Quarterly reporting frequency | Maximum 4 times per year | Administrator may require progress reports on offering, but no more than quarterly |
| Consent to service of process | Required for all registrations | Once filed, remains on file indefinitely and does not need to be refiled for subsequent registrations |
Example Exam Questions
Test your understanding with these practice questions. Select an answer to see the explanation.
Gemstone Industries, a Wyoming-based mining company with no prior SEC filings, plans to raise $5 million by selling common stock exclusively to Wyoming and Montana residents. The company has filed all required documents with both state securities administrators, who are reviewing the offering materials. Montana's administrator has concerns about the fairness of the offering price given the company's limited reserves. Which statement is most accurate regarding this offering?
B is correct. Registration by qualification is required because the securities are not registered with the SEC (no federal registration exists). Under qualification, state Administrators have the broadest authority to deny registration, including the power to prevent offerings with unconscionable costs or terms. While administrators cannot "approve" securities on their merit, they can deny registrations that would operate as a fraud on investors. Montana's administrator can request additional disclosures or even deny the registration if offering costs are unconscionable or the filing is misleading.
A is incorrect because the number of states involved does not determine the registration method. Coordination requires simultaneous SEC registration, which does not exist here. C is incorrect because notice filing is only available for federal-covered securities (like mutual funds), not for a mining company's common stock offering. D is incorrect because while administrators cannot "approve" securities merit, they can deny registrations on substantive grounds under qualification.
The Series 65 exam tests your ability to identify the correct registration method based on whether SEC registration exists and to understand the comprehensive regulatory authority that state Administrators have under registration by qualification. This distinguishes qualification (broadest grounds for denial, Administrator sets effective date) from coordination (SEC-driven timing) and notice filing (minimal state review).
Under the Uniform Securities Act, which registration method gives the state Administrator the authority to set the effective date of the securities registration?
C is correct. Registration by qualification is the only method where the state Administrator determines when the registration becomes effective. The Administrator reviews the complete filing and issues an order making the registration effective.
A (notice filing) is incorrect because notice filing applies to federal-covered securities and becomes effective automatically without state approval. B (registration by coordination) is incorrect because coordination becomes effective simultaneously with the SEC registration, not when the state Administrator orders. The state Administrator can issue a stop order to prevent effectiveness, but cannot independently set the effective date. D is incorrect because only qualification grants this authority.
The Series 65 exam frequently tests the critical distinction between when registrations become effective: qualification (Administrator orders), coordination (when SEC registration is effective), and notice filing (automatic). Understanding who controls timing reveals the extent of state regulatory authority over each method.
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Access Free BetaCascade Beverages is registering securities in Oregon using registration by qualification. The Oregon securities administrator has requested to review all sales materials before approving the offering. Which of the following documents would the company be required to provide under this registration method?
B is correct. Registration by qualification requires comprehensive documentation including: all sales literature (prospectuses, pamphlets, circulars), specimen security certificates, detailed issuer information (name, address, business description, 10%+ owners), use of proceeds, and any additional information the Administrator requests. This gives the Administrator complete information to evaluate whether to issue a stop order based on substantive grounds.
A is incomplete because qualification requires much more than just sales materials and specimen certificates. C is incorrect because qualification is used when there is NO SEC registration, so there would be no SEC registration statement to provide. D describes notice filing requirements for federal-covered securities, not qualification requirements.
The Series 65 exam tests your knowledge of the extensive documentation requirements under registration by qualification, which reflect the Administrator's comprehensive review authority. This contrasts with coordination (where SEC documents can be referenced) and notice filing (minimal documentation required).
All of the following statements about registration by qualification under the Uniform Securities Act are accurate EXCEPT
C is correct (the EXCEPT answer). Registration by qualification does NOT become effective simultaneously with SEC registration. In fact, qualification is used specifically when there is NO SEC registration. The registration becomes effective only when the state Administrator issues an order.
Statement C describes registration by coordination (simultaneous effectiveness with SEC), not qualification. A is accurate: The Administrator has the broadest grounds to deny registration under qualification, including unconscionable offering costs and fraudulent schemes. While administrators cannot "approve" securities on their merit, they have comprehensive authority to prevent unfair offerings. B is accurate: The Administrator determines the effective date under qualification, making it the only method where the state controls timing. D is accurate: Qualification requires extensive documentation including specimen certificates and all sales materials.
The Series 65 exam tests your ability to distinguish between the three registration methods. Understanding that qualification is used when NO SEC registration exists (and thus cannot become effective with SEC registration) is fundamental to identifying the correct registration method in exam scenarios.
Valley Properties is a real estate development company offering limited partnership interests in a new commercial project. The company is evaluating its state registration options. Which of the following statements about registration by qualification are accurate?
1. Qualification can be used for any security, including limited partnership interests
2. The state Administrator can require escrow of investor funds if securities were issued to promoters at favorable prices
3. The registration remains effective indefinitely once approved by the Administrator
4. The Administrator can deny the registration if underwriting costs are unconscionable
B is correct. Statements 1, 2, and 4 are accurate.
Statement 1 is TRUE: Registration by qualification can be used for any security. The Uniform Securities Act explicitly states that qualification is available for all types of securities, making it the most flexible registration method. This includes limited partnership interests, common stock, bonds, and any other security.
Statement 2 is TRUE: The Administrator can require escrow for securities issued within the past 3 years, particularly if they were sold to promoters at prices substantially different from the public offering price or issued for consideration other than cash. This protects investors from immediate resale by insiders at inflated prices.
Statement 3 is FALSE: Registrations under qualification (like all state registrations) are effective for one year from the effective date, not indefinitely. The registration can continue beyond one year only if unsold shares remain and are offered at the original price by the issuer or underwriter.
Statement 4 is TRUE: The Administrator can issue a stop order to deny or revoke a registration if offering costs (including underwriting fees) are unconscionable. This is one of the substantive grounds on which the Administrator can deny registration under qualification to protect investors from excessive fees that reduce the value of their investment.
The Series 65 exam tests your comprehensive understanding of registration by qualification, including its flexibility (any security), protective mechanisms (escrow requirements), time limits (one year effectiveness), and the Administrator's broad authority to deny registrations based on fairness concerns. This demonstrates the full scope of state regulatory power under qualification.
💡 Memory Aid
Think of qualification as "The Full State Quality Check": When there is NO SEC registration, the state Administrator becomes the gatekeeper with the most comprehensive authority. Picture the Administrator holding a clipboard, examining every detail, and deciding when the offering is Qualified to proceed (sets effective date). Remember: Qualification = Administrator controls WHEN (effective date) and CAN SAY NO (broadest grounds for denial). The "Q" stands for Questions answered (complete disclosure required) AND Question mark (only the Administrator decides when it becomes effective).
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Where This Appears on the Exam
This term is tested in the following Series 65 exam topics: