HD24 - The Exemption of Certain Securities from the Registration Requirements of the Virginia Securities Act

  • Published: 1989
  • Author: State Corporation Commission
  • Enabling Authority: House Joint Resolution 179 (Regular Session, 1988)

Executive Summary:
The 1988 Session of the General Assembly adopted House Joint Resolution 179 which requested the State Corporation Commission to study several exemptions from the securities registration requirements of the Virginia Securities Act and determine if revisions are necessary to enhance the goal of the Virginia Securities Act of protecting investors. The following exemptions are the subject of this study:

1. The "Exchange" Exemption (§ 13.1-514(a) (8)), which waives registration requirements for securities listed on the New York, American, and Midwest stock exchanges;

2. The "Criteria Based" Exemption (§ 13.1-514(a) (13)), which waives registration requirements for securities listed on exchanges or quoted on automated quotation systems approved by the Commission; and

3. The "Manual" Exemption (§13.1-514(b) (2)), which waives registration requirements for secondary trading in securities of firms listed in any approved securities manual.

The Exchange Exemption

This study concludes that competition for listings and the development of new securities have significantly changed the marketplace since this exemption was enacted. These changes present potential conflicts with the purpose of the Virginia Securities Act. There is a need to amend the Exchange Exemption.

The State Corporation Commission recommends the following:

• Delete the Midwest Stock Exchange from the exemption. The listing criteria of the Midwest Stock Exchange are significantly lower than the criteria used by the New York and American stock exchanges.

• Amend the statute to exclude Initial Public Offerings (IPO's) from the exemption. Substantive review of initial public offerings is at the heart of effective state regulation and it is difficult to provide adequate investor protection if new security offerings are exempted from effective state review.

• Amend the statute to exclude securities of a listed corporation that are "...senior or substantially equal rank [to the listed security]; any security called for by subscription rights or warrants admitted to trading in any of said exchanges; or any warrant or right to subscribe to any of the foregoing securities..." Senior securities, rights, and warrants should not be exempted, largely because investors cannot determine the investment risks of all of a company's securities by relying solely on the fact that the issuing company is listed on an exchange.

The Criteria Based Exemption

The Criteria Based Exemption is based on regulations adopted by Commission order which provide the standards and criteria for exempting securities from state registration requirements. The broad purpose of the Criteria Based Exemption is to establish uniform standards in place of the diverse and changing standards in force among the various exchanges and the National Association of Securities Dealers Inc. (NASD).

The Criteria Based Exemption has a number of advantages over the Exchange Exemption. The primary advantage is that it allows the Commission to establish the criteria used for the exemption of securities. The Commission may modify the criteria in order to strike a proper balance between the legitimate needs of the national marketplace and adequate protection of the Virginia investor.

This is an effective, workable exemption that provides an adequate level of protection to the Virginia investor and places no unreasonable burden on the industry. No changes to this statute are recommended.

The Manual Exemption

The Manual Exemption provides an exemption for transactions involving securities of any company listed in an approved securities manual, such as Standard and Poor's Corporation Records. This exemption provides brokerage firms an easy way of determining whether a particular security may be traded in the secondary market without registration. Unfortunately, the exemption also provides an easy way for unscrupulous promoters to make use of legitimate manuals for an improper purpose -- to sell questionable securities in Virginia without registration.

This study concludes that the Manual Exemption is inconsistent with the purpose of the Virginia Securities Act. Unregistered securities of little or no value may be promoted and sold in Virginia due to their listing in the securities manuals, a situation that the Act was designed to prevent. Secondary trading in quality securities will not suffer if the Manual Exemption is repealed. The State Corporation Commission recommends the repeal of the Manual Exemption.