State securities laws are often called "Blue Sky" laws. It is not enough to comply with US Federal securities laws in Canada or the US. All applicable Blue Sky and provincial securities laws must also be complied with when issuing or reselling securities. In order to purchase or sell securities you must either register those securities or transactions with each applicable securities regulator or be able to rely on an exemption from registration. This requirement includes all secondary trades of securities acquired under
a private placement or a registered offering. This article will discuss the resale or secondary trades of securities and the significance of being registered with Standard & Poor if you are a Pink Sheet or OTCBB.
Lets start with a fairly straight forward example.
Let us assume an issuer registered a securities offering with the SEC and the state of Washington and New York. The issuer would be able to freely sell the securities registered to residents of the state of Washington and New York. The issuer would not be able to sell these securities to anyone outside of those two states. The individuals or entities purchasing the securities would be able to resell the securities they acquired to other residents of New York and Washington for one year from the date of clearance of the registered offering. They would not be able to sell these securities to residents of other jurisdictions unless they were able to rely on an exemption from the securities laws of that other jurisdiction.
What happens after one year? Secondary trades or resales after that initial year must be made on reliance of an exemption from the registration requirements on a state by state, province by province basis. Individual sellers would need to ensure that there is a registration and distribution exemption where they reside as seller and where the purchaser resides. This requirement is easily accommodated if the securities are listed or quoted on a recognized exchange.
The securities laws in every state and province exempt secondary trades of securities listed on a recognized exchange from registration requirements. US and Canadian securities regulators recognize the following exchanges for this purpose:
- New York Stock Exchange;
- Boston Stock Exchange (10 States);
- the American Stock Exchange;
- the Pacific Coast Stock Exchange;
- the Midwest Stock Exchange;
- NASDAQ; and
- the Philadelphia-Baltimore-Washington Stock Exchange.
Canadian securities regulators also recognize the:
- TSX;
- TSX Venture;
- Montreal Stock Exchange;
- CNQ; and
- the London Stock Exchange.
It should be noted that the state exemption of secondary trades of securities listed on recognized exchanges is driven by the preemption of state registration requirements under section 18(b)(4)(A) of the Securities Act of 1933. Section 18(b)(4)(A), however, 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.
In April of 2002, the National Association of Securities Dealers recommended that state securities regulators add the TSX as a recognized exchange for the purpose of this exemption. In August of 2004, they sought public comment on expanding this recommendation to include the TSX Venture Exchange. |
The effect of the adoption by individual States of the exemption would be to enable residents of that State to trade securities listed on the TSX and TSX Venture Exchange without restrictions or in reliance on other exemptions. Although both efforts are a step forward, the original recommendation has yet to be implemented by individual state regulators. Until that time, trades of TSX and TSX Venture Exchange companies will be subject to the same limitations as OTCBB and Pink Sheet listed companies in the US.
The OTCBB and Pink Sheets are not considered recognized exchanges for secondary trading in Canada or the US and it is doubtful that they will be added in the future.
If the securities to be sold are quoted on the OTCBB or Pink Sheets or listed on a Canadian exchange such as the TSX, TSX Venture Exchange or CNQ a seller must rely on the various non-issuer exemptions available under US State securities laws.
In the US, non-issuer exemptions that could be relied on include the following:
- Manual exemption. This exemption is available if the issuer of the securities publishes certain continuous disclosure information on an ongoing basis in a recognized manual. The recognized
manuals vary among the 38 states that have this exemption, the most commonly recognized being Standard & Poor's and Mergent (fka Moody's).
- Exchange Act exemption. Approximately 20 states exempt the secondary trading of securities registered under Section 12(g) of the Securities and Exchange Act of 1934 and a smaller number
of states exempt issuers that file reports under Section 15(d) of the Securities and Exchange Act
of 1934 . In addition, several states exempt issuers that satisfy the information supplying
requirements of Rule 12g3-2(b) under the Securities and Exchange Act of 1934 .
- Isolated sales. This exemption is available if the number of transactions is limited to one or two transactions in the state in a year.
- Debt securities not in default. Approximately 35 states have a non-issuer exemption for debt securities. The securities must not be in default. The no default requirement varies state to state
as being no default during the current fiscal year, no default during the three preceding fiscal years
or no default during the existence of the issuer or any predecessor.
- Non-issuer transactions. A few states generally exempt sales of securities by non-issuers.
- Sales to institutional investors. Almost all states exempt sales to institutional investors.
This is an issuer and non-issuer exemption.
- Dealer trades. Assuming the seller was a dealer, trades between dealers to domestic dealers
as well as dealers to international dealers are exempt from the Blue Sky laws.
The foregoing exemptions are the same exemptions which would be relied on if the securities had been acquired in a private placement and the securities had been held for the required federal seasoning period (Rule 144) and the stockholder was now were looking to sell those securities.
It is our opinion that the manual exemption offers the best coverage for secondary trades. As stated above, the manual exemption services, offered by both Standard & Poors and Mergent, currently "Blue Sky" securities up to 38 states. An issuer with securities quoted on the OTCBB or Pink Sheets would be well advised to engage one of the manual services in order to offer its stockholders a clear secondary trading exemption. Arguably, it is the stockholder who bears the legal responsibility for ensuring an available exemption exists for his secondary trading activity. The issuer, however, could find the company embroiled in a regulatory matter it could have easily avoided if it provided a clear harbour from the registration requirements for the secondary trades of its stockholders.
A chart of the various state manual exemptions is attached below. We have included for informational purposes the actual blue sky rules on a separate web page entitled Blue Sky Manual Exemptions.
If you are interested in the Canadian resale rules click here.
This information was last updated on December 14, 2004. |
Blue Sky - Secondary Trade Manual Listing Exemptions
(always check for current rule - laws are constantly changing)
|
| State |
Manual Listing Section |
Recognized Securities Manuals |
Filing Required |
Alabama |
N/A |
N/A |
N/A |
Alaska |
45.55.900(b)(17)
R3 AAC 08.910 |
Standard & Poor's;
Moody's Investors Service, Inc.;
Financial Communications Company, Inc., (which were formerly known as "Moody's Manuals"); and
Fitch Investors Service, LP; |
No |
Arizona |
44-1844(A)11
R14-4-114 |
Standard & Poor's Corporation Records;
Mergent's Industrial Manual;
Mergent's Municipal and Government Manual;
Mergent's Transportation Manual;
Mergent's Public Utility Manual; and
Mergent's Bank and Finance Manual. |
No |
Arkansas |
23-42-504(a)(2)
R504.01(A)(2) |
Standard & Poor's Corporation Records;
Moody's Industrial Manual;
Moody's Bank and Finance Manual;
Moody's Municipal and Government Manual;
Moody's Transportation Manual;
Moody's Public Utility Manual;
Moody's OTC Industrial Manual; and
Moody's International Manual. |
No |
California |
N/A |
N/A |
N/A |
Colorado |
11-51-308(b)(l)(I)
R51-3.9 |
Standard & Poor�s Standard Corporation Descriptions;
Moody's Industrial Manual;
Moody's Municipal and Government Manual;
Moody's Transportation Manual;
Moody's Public Utility Manual;
Moody's Bank and Finance Manual;
Moody's OTC Industrial Manual
Moody's International Manual; and
Periodic supplements to each recognized securities manual. |
No |
Connecticut |
36b-21(b)(2)
R36b-31-21b-2 |
Standard & Poors Standard Corporation Descriptions;
Standard & Poors Corporation Records;
Moody's Industrial Manual;
Moody's Bank and Finance Manual;
Moody's Transportation Manual;
Moody's OTC Industrial Manual;
Moody's Public Utility Manual; and
Moody's International Manual. |
No |
Delaware |
7309(b)(2)
R508 |
Standard & Poor's Corporation Records;
Moody's Industrial Manual;
Moody's Transportation Manual;
Moody's Public Utility Manual;
Moody's Bank and Finance Manual;
Fitch's Individual Stock Bulletin;
Moody's OTC Industrial Manual. |
No |
District of Columbia |
31-5604.02(2)
R1900.11 and 12 |
Standard & Poor's Standard Corporation Descriptions;
Mergent's Industrial Manual;
Mergent's Transportation Manual;
Mergent's Public Utility Manual;
Mergent's Bank and Finance Manual;
Mergent's International Manual;
Fitch's Individual Stock Bulletin; and
Mergent's OTC Industrial Manual. |
No |
Florida |
517.061(20)
R69W-500.010 |
Securities manuals published by Standard & Poor's; and Moody's |
No |
Georgia |
N/A |
N/A |
N/A |
Guam |
46402(12)(b)(2) |
Standard & Poor's Corporation Records; and Moody's Manuals |
No |
Hawaii |
485-6(2) |
Standard & Poor's Corporation Records; and Moody's Manuals |
No |
Idaho |
30-14-202(2)
0.56 |
Standard & Poors Corporation Records;
Bests Insurance Reports- Life-Health;
Mergents Industrial Manual;
Mergents International Manual; and
Walkers Manual of Western Corporations. |
No |
Illinois |
N/A |
N/A |
N/A |
Indiana |
23-2-1-(b)(3)
IC23-2-1-2(b)(3)(C)(i) |
Securities manuals published by Standard & Poor's, Moody': and Best's Insurance Reports |
No |
Iowa |
502.203(2)(a) |
Securities manuals published by Standard & Poor's, Moody's; and Best's Insurance Reports |
No |
Kansas |
17-1262(b)
Order #2001E028 |
Standard & Poor's Standard Corporation Descriptions; and
Mergent's manuals. |
No |
Kentucky |
N/A |
N/A |
N/A |
Louisiana |
N/A |
N/A |
N/A |
Maine |
10502(2)(C)
Order 09/2401 |
Securities manuals published by Standard & Poor's, Moody's; and Fitchs. |
No |
Maryland |
11-602(2) |
Standard & Poor's Corporation Records; and
Moody's Manuals |
No |
Massachusetts |
110-402(b)(2)
Policy Statement |
Securities manuals published by Standard & Poor's, and Mergent. |
No |
Michigan |
451.802-402(2)
R451.808.2 |
Standard and Poor's Corporation Records;
Moody's Industrial Manual;
Moody's Transportation Manual;
Moody's Public Utility Manual;
Moody's Bank and Finance Manual;
Moody's Municipal and Government Manual;
Moody's OTC Industrial Manual;
Best's Life Insurance Reports; and
Best's Insurance Reports (fire and casualty). |
No |
Mississippi |
75-71-203(2)
R709 |
Standard & Poor's Standard Corporate Descriptions or Records;
Mergent�s Industrial Manual;
Mergent�s Municipal and Government Manual;
Mergent's Transportation Manual;
Mergent's Public Utility Manual;
Mergent's Bank and Finance Manual;
Mergent's OTC Industrial Manual;
Mergent's International Manual; |
No |
Missouri |
409.2-202(2)
15 CSR 30-54.100 |
Fitch's Rating Registrar |
No |
Montana |
N/A |
N/A |
N/A |
Nebraska |
8-1111(2)(b) |
Securities manuals published by: Standard & Poor�s Corporation |
No |
Nevada |
90.530.3
R NAC 90.510 |
Standard & Poor's Standard Corporate Descriptions or Records.
Mergent�s Industrial Manual;
Mergent�s Municipal and Government Manual;
Mergent Public Utility Manual;
Mergent Transportation Manual;
Mergent's Bank and Finance Manual; and
Mergent's International Manual. |
No |
New Hampshire |
421-B:17(II)(b) |
Securities manuals published by Standard & Poor's, Moody's; and Fitch�s. |
No |
New Jersey |
49:3-50(b)(2) |
Standard & Poor's Corporation Records; and
Moody's Manuals |
No |
New Mexico |
58-13B-27C(1)
R12.11.12.10 |
Standard & Poor Corporation Records
Mergent�s Bank & Finance Manual
Mergent�s Industrial Manual
Mergent�s Public Utility Manual
Mergent�s Transportation Manual
Mergent�s Municipal and Government Manual
Mergent�s International Manual and
Mergent�s OTC Industrial Manual |
No |
New York |
N/A |
N/A |
N/A |
North Carolina |
78A-17(2)
R18 NAC-06-1202 |
Standard and Poor's Corporation Records;
Mergent's Industrial Manual;
Mergent's Over the Counter Industrial Manual;
Mergent's International Manual; and
Periodic supplements to each recognized securities manual. |
No |
North Dakota |
10-04-06(8) |
Standard and Poor's;
Mergent's Industrial Manual:
Mergent's Bank and Finance Manual;
Mergent's Transportation Manual;
Mergent's Public Utility Manual; or
Fitch's Individual Stock Bulletin. |
No |
Ohio |
1707.03(M)(3) |
Ohio does not define "recognized securities manuals". Burden of proof of exemption is upon the issuer. |
No |
Oklahoma |
1-202(2)
R660-11-11-40 |
Standard & Poor�s Corporation Records |
No |
Oregon |
59.035(10)
R441-035-0030 |
Securities manuals published by Standard & Poor's, Moody's; and Fitch�s. |
No |
Pennsylvania |
N/A |
N/A |
N/A |
Rhode Island |
7-11-402(3)
R402(3)-1 |
Securities manuals published by:
Standard & Poor�s Corp
Fitch Investor Services, Inc.;
Moody Investor Services; and
Mergent, Inc. |
No |
South Carolina |
35-1-320(2)
R113-17 |
Standard & Poor's Corporation Records; and
Moody's Manuals |
No |
South Dakota |
47-31B-202(2)
R20:08:07:30 |
Standard and Poor's Standard Corporation Descriptions;
Mergent's Industrial Manual;
Mergent's Bank and Finance Manual;
Mergent's Public Utility Manual;
Mergent's Municipal and Governmental Manual;
Mergent's Transportation Manual;
Mergent's OTC Industrial Manual;
Mergent's OTC Unlisted Manual; and
Mergent's International Manual. |
N/A |
Tennessee |
N/A |
N/A |
N/A |
Texas |
5.O
R109.7 |
Standard and Poor's Corporation Records (incl. the Daily News Section);
Best's Insurance Reports Life-Health;
Mergent's Bank and Finance Manual and News Reports;
Mergent's Industrial Manual and News Reports;
Mergent's Public Utility Manual and News Reports;
Mergent's Transportation Manual and News Reports;
Mergent's Municipal and Government Manual and News Reports;
Mergent's International Manual and News Reports; and
Mergent's OTC Industrial Manual. |
N/A |
Utah |
61-1-14(2)(b)
R164-14-2b |
Standard and Poor's Corporation Records;
Mergent's Industrial Manual;
Mergent's Bank and Finance Manual;
Mergent's Transportation Manual;
Mergent's OTC Industrial Manual;
Mergent's Public Utility Manual;
Mergent's OTC Unlisted Manual; and
Mergent's International Manual. |
N/A |
Vermont |
N/A |
N/A |
N/A |
Virginia |
N/A |
N/A |
N/A |
Washington |
RCW 21.20.320(2)
WAC 460-44A-100
WAC 460-10A-160 |
Standard & Poor�s Corporation Record;
Fitch's Investors Service; and
Moodys Investors Service. |
No |
West Virginia |
32-4-402(b)(2)
R32-15.02 |
Standard & Poor�s Corporation Reports;
Moody's Industrial Manual;
Moody's Transportation Manual;
Moody's Public Utility Manual;
Moody's Bank and Finance Manual;
Moody's Municipal and Government Manual;
Moody's OTC Industrial Manual;
Best's Life Insurance Reports; and
Best�s Insurance Reports (Fire & Casualty) |
No |
Wisconsin |
N/A |
N/A |
N/A |
Wyoming |
517-4-114(b)(ii)
R6-(2)(b) |
Securities manuals published by Standard and Poors, Moodys, Fitch and Value Line. |
No |
 Alixe B. Cormick
Venture Law Corporation
618 - 688 West Hastings Street
Vancouver, B.C, V6B 1P1
Phone: 604-659-9188
Fax: 604-659-9178
E-mail Us
|
|
