What is a Registered Security?

John Kinsellagh

In the United States, under the provisions of the Securities Act of 1933, securities offered for sale to the public must either be registered with the Securities and Exchange Commission (SEC), or exempted from the registration requirements of the Act. A registered security is a financial instrument whose issuer has complied with the registration requirements of the Act. An issuer of a registered security must file a comprehensive registration statement with the SEC prior to offering the securities for sale to the public. The purpose of the registration statement is to provide potential investors with sufficient information about the company offering — the securities for sale — so that they can make an informed investment decision.

Businessman with a briefcase
Businessman with a briefcase

The issuer of a registered security must comply with the mandatory disclosure requirements of the Act. A corporate issuer must provide, in the registration statement, detailed information about the company, its business, and any risks associated with the company and the securities being offered. Audited financial statements must be provided, as well as information about executive salaries and any grants of stock options to executive officers or directors. Approval of the registration statement by the SEC is not an endorsement of the registered security however. If the registration statement contains material misstatements or misrepresentations concerning the offering, the issuer can be subject to liability for fraud pursuant to the provisions of the Act.

There are several exemptions available from the registration requirements of the Act. Securities offered for sale exclusively to residents of one state are exempt. A private or limited offering of securities to a small group of sophisticated investors is exempt as well. Most issuers who rely on the private offering exemption will offer securities for sale only to accredited investors. An accredited investor is an individual who, by virtue of his investment sophistication or business experience, is capable of independently ascertaining the underlying merits of the offering, and any associated risks.

In order to qualify as an accredited investor, an individual must demonstrate that he has a certain net worth as well as sufficient investment experience, such that he is capable of ascertaining the merits of the offering. Even though they are not required to file a detailed registration statement with the SEC, most issuers who rely on one of the exemptions from the registration provisions of the Act will nonetheless provide investors with a private offering memorandum. The private offering memorandum will typically describe the business, and any inherent risks associated with the offering of securities.

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