Sale of Securities

The sale of securities is governed by both federal and state law. While the legislatures and regulators responsible for drafting, implementing and enforcing the securities law constantly seek to make the federal and state systems compatible, there nonetheless remain two distinct sets of securities laws.

The federal scheme of securities regulation relies on “disclosure”; that is, a company or other entity (called the “Issuer”) seeking to sell its securities must disclose to prospective investors all material information about the securities being offered. Section 17(a)(2) of the Securities Act of 1993 provides, in relevant part:

“It shall be unlawful for any person in the offer or sale of any securities ... to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading ...”
Florida is a “notification” state. This means that an Issuer which registers its securities with the SEC under the 33 Act may sell those securities in Florida if it files a “notification” of the federal registration with Florida, together with the applicable filing fee. Securities that are subject to a federal registration statement do not undergo an independent review by the staff of the Florida Division of Securities.

Securities that are “exempt” from registration under federal law that are offered and sold in Florida must register with Florida unless the offering or the security is specifically exempt from registration under Florida law. The major exception to this rule is a private placement that complies with Rule 506 of Regulation D of the 33 Act.

Although an over-simplification, the term “public offering” means the sale or offer of sale of securities by an Issuer by means of general advertising or general solicitation and the term “private placement” means the sale or offer of sale of securities not involving a public offering, i.e. not made through general advertising or general solicitation. By virtue of the federal law enacted in 1996, all state securities laws, including those of Florida, touching upon Rule 506, Private Placement, have been pre-empted by federal law, other than state filing fees and state anti-fraud laws. All other offerings, including those made under federal registration exemptions, must still comply with Florida law. While not identical, Florida’s private placement exemption is very similar to those found in Rules 505 and 506 of Regulation D of the 33 Act and, as a practical matter, a carefully structured private placement offering that is exempt under the federal private placement safe-harbor rules should also be eligible for exemption from registration under the Florida law.

Because of the foregoing considerations, the registration provisions of Florida law primarily apply to small public offerings that are governed by the SEC’s Regulation A for Rule 504 of Regulation D, adopted under the 33 Act. While the SEC provides small offerings “a free ride” from all registration requirements under Rule 504 of Regulation D, Florida does not.

Like the federal law, Florida requires “disclosure” of material information by issuers to prospective investors to allow investors to make an informed investment decision. Additionally, Florida law prescribes a “merit” review of all securities registration statements filed with the state. This means that Florida imposes very specific standards, regarding the structure of a transaction and the health of a company, that must be met by issuers seeking to register their securities in Florida. Florida law requires the Department of Banking and Finance to find that “the terms of the sale of such securities would be fair, just, and equitable, and that the enterprise or business of the issuer is not based upon unsound business principles .... ”. This statutory provision is implemented by the requirements contained in Chapter 3(E)-700 of the Florida Administrative Code. These rules set forth requirements regarding the ratio of equity investment held by the company’s “promoters” to the aggregate dollar amount of the public offering, requirements for voting rights except in specific situations, limitations on the granting of options or warrants to underwriters and to officers and employees, requirements that the proceeds of the sale of securities be placed in escrow, limitations on the issuance of preferred stock or debt securities, requirements on the offering price of equity securities, prohibitions on the registration of securities of issuers in unsound financial condition, and requirements regarding loans and material transactions with affiliates of the issuer.

Effective October, 1997, Florida’s version of the small corporate offering registration, better known as “SCOR”, became law. While providing a modicum of liberalization to the Florida registration requirements, a SCOR offering must still fulfill Florida’s “merit” requirements.

Because of the significant restrictions and burdens placed upon issuers seeking to register a small public offering in Florida, it is imperative that a prospective issuer carefully review the applicable Florida statutes and rules before commencing any work on a proposed offering to confirm that the securities will be eligible for registration in Florida. Alternative approaches should also be evaluated, including a private placement or even a public offering registered with the SEC, to determine the most cost-effective approach for the prospective issuer.



Provided as an educational service by John Raymond Dunham, III, Esq..

This publication is intended to serve you. If you would like certain topics covered, or have any questions or comments, you are invited to contact Mr. Dunham at: 941.951.1800, Ext. 250, Facsimile: 941.366.1603, E-Mail: jrd@jrdlaw.com, Web site: www.jrdlaw.com or write him at LUTZ, BOBO, TELFAIR, DUNHAM & GABEL, Two North Tamiami Trail, SARASOTA, FLORIDA 34236.

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered and report on issues and developments in the law. It is not intended as legal advice, and should not be relied upon without consulting an attorney.