Washington State Department of Financial Institutions

Securities Act Policy Statements

Table of Contents

Statement Topic
PS-01 Determination of the Filing Date
RCW 21.20.510 - Document Filed When Received
PS-03 RCW 21.20.240 - Use of Preliminary or Red Herring Prospectuses in Qualification Filings
PS-04 Registration on Form S-3
PS-05 Blind Pool/Blank Check Offerings - Duty to Disclose Material Facts
RCW 21.20.010 - Unlawful Offers, Sales
PS-06 Projections
RCW 21.20.010
PS-08 Government Bond Promotions by Retailers
RCW 21.20.005(10) - "Offer" and "Sale"
RCW 21.20.005(3) - "Broker-Dealer"
PS-10 WAC 460-16A-205(p) - Promotional Shares Rule - Three Year Limitation(Amended 5/31/96)
PS-16 Securities Offerings on the Internet
PS-20 Internet Advertising by Broker-Dealers, Investment Advisers, and their Representatives

Note: Policy statements that have been repealed have been removed.

Topical Index

Topic Where Found
Advertising on the Internet by Broker-Dealers, Investment Advisers and their Reps PS-20
Blank Check Offerings PS-05
Blind Pool Offerings PS-05
Bonds - Zero Coupon Bond Promotions PS-08
Broker-Dealers
Internet Advertising PS-20
Internet Offerings PS-16
Zero Coupon Bond Promotions PS-08
Date of Filing PS-01
Definitions
Blank Check/Blind Pool Offerings PS-05
Determination of Filing Date PS-01
Filing Date PS-01
Internet Advertising by Broker-Dealers, Investment Advisers and their Reps PS-20
Internet Offerings of Securities PS-16
Investment Advisers  
Advertising on the Internet PS-20
North American Securities Administrators Association (NASAA)
Securities Offerings on the Internet PS-16
Partnerships
Preliminary Prospectus - Use of Qualification Filings PS-03
Projections - Use of Projections in Prospectuses PS-06
Promotional Shares - Three Year Rule PS-10
Qualifications Filings - Use of Preliminary Prospectus PS-03
Red Herrings - Use of in Qualification Filings PS-03
Registration of Securities
Blind Pool/Blank Check Offerings PS-05
Form S-3 Registrations PS-04
Internet Offerings PS-16
Qualification Filings - Use of Preliminary Prospectus PS-03
Use of Projections in Prospectuses PS-06
S-3 Registrations PS-04
Underwriters
Zero Coupon Bonds PS-08

Citations in Policy Statements

Citation Where Found Topic
RCW's
21.20.005(3) PS-08 Government Bond Promotions by Retailers
21.20.005(10) PS-08 Government Bond Promotions by Retailers
21.20.010 PS-05 Blind Pool/Blank Check Offerings
21.20.010(2) PS-06 Use of Projections in Prospectuses
21.20.040 PS-20 Internet Advertising by Broker-Dealers, Investment Advisers and their Reps
21.20.140 PS-08 Government Bond Promotions by Retailers
21.20.190 PS-01 Determination of Filing Date
21.20.210 PS-03 Use of Preliminary Prospectuses
21.20.210 PS-03 Use of Preliminary Prospectuses
21.20.310(1) PS-08 Government Bond Promotions by Retailers
21.20.510 PS-01 Determination of Filing Date
WACs 460-
16A-205(p) PS-10 Promotional Shares - Three Year Limitation
21.20.310(1) PS-08 Government Bond Promotions by Retailers
44A-503(1) PS-01 Determination of Filing Date
Other Citations
Regulation S-K PS-06 Use of Projections
NASAA Reports North American Securities Administrators Association
No. 3201 PS-10 Promotional Shares
No. 7040 PS-16 Internet Offerings
No. 11122 PS-05 Blind Pool/Blank Check Offerings

SECURITIES ACT POLICY STATEMENT-01

RE: DETERMINATION OF THE FILING DATE RCW 21.20.510 - DOCUMENT FILED WHEN RECEIVED

Question presented:

For filings that become effective at a certain stated time after receipt by the Division, how is the "filing date" determined and when does the prescribed time period begin to run?

Statutes:

RCW 21.20.510 states that a "document is filed when it is received by the director or by a person as the director designates by rule or order." Various other statutes and rules, including, but not limited to, RCW 21.20.190 - REGISTRATION BY COORDINATION, RCW 21.20.230 - REGISTRATION BY QUALIFICATION, and WAC 460-44A-503(1)(a)(i)(B) - REGULATION D RULE 504, provide that a registration or other document will become effective a certain number of days after it is filed with the Division.

Discussion:

The Securities Administrator finds that the filing date is the date that the document is stamped with a revenue validation date or is otherwise date stamped as received by the Securities Division. Normally, that date is the day it is delivered to the Division by the State's Consolidated Mail Service or an express delivery service. However, due to internal control procedures in effect, documents which are delivered after 12 p.m. may be left unopened in their envelopes and placed in a secured facility. These documents will not be processed until the next business day, and will be stamped with that day's date.

The relevant time period will begin running the first business day after the date the document is stamped.

Adopted: January 1, 1991; As amended May 31, 1996

Replaces: Statements of Policy 83-31 and 86-67

Deborah R. Bortner, Securities Administrator

Prepared by: William M. Beatty and Nelda Shannon, Securities Examiners

 

SECURITIES ACT POLICY STATEMENT- 03

RE: RCW 21.20.240 - USE OF PRELIMINARY OR RED HERRING PROSPECTUSES IN QUALIFICATION FILINGS

Question Presented:

Under what circumstances will the Securities Administrator allow the use of a preliminary or "red herring" offering circular in filings for registration by qualification under RCW 21.20.210?

Statute:

RCW 21.20.240 allows the Securities Administrator to "permit the omission of any item . . . from any registration statement."

Discussion:

The Securities Administrator finds that in the circumstances set forth below, use of a preliminary offering circular by applicants for registration by qualification may be permissible.

  1. The offering is firmly underwritten and made only through Washington-registered broker-dealers.
  2. The purchaser must receive a final copy of the offering circular and be made aware of the specific material changes, if any, from the preliminary offering circular.
  3. The preliminary offering circular shall contain the following legend ( a "sticker" is permissible):

PRELIMINARY OFFERING CIRCULAR

REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE WASHINGTON STATE SECURITIES DIVISION, BUT IT IS SUBJECT TO COMPLETION AND/OR AMENDMENT. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS OFFERING CIRCULAR SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY.

  1. Prior authorization for use of a preliminary offering circular must be requested in writing from the Administrator. The Administrator retains the discretion to deny the use of a preliminary prospectus in the public interest.

Conclusion:

In registrations by qualification, the Administrator may allow the use of a preliminary offering circular if certain circumstances are present.

Adopted: January 1, 1991

Replaces: Statement of Policy 81 - 9

Jack L. Beyers, Securities Administrator

Prepared by: William M. Beatty, Securities Examiner

 

SECURITIES ACT POLICY STATEMENT - 04

RE: REGISTRATIONS ON FORM S-3

Question Presented:

What priority is given to the registrations by coordination of offerings of securities using Securities and Exchange Commission Form S-3?

Discussion:

To file on SEC Form S-3, an issuer must meet certain stringent eligibility standards. Among other requirements, an issuer utilizing the form must be a reporting company under the Exchange Act of 1934 which has:

  1. complied with all applicable filing requirements;
  2. neither failed to pay any dividend or sinking fund payment on preferred stock or defaulted on any material installment payment; and
  3. maintained a significant float (market value of voting stock of the issuer held by non-affiliates) for defined time periods or met alternative criteria such as having its securities listed on a national securities exchange or meeting certain rating categories established by nationally recognized statistical rating organizations.

Given that Form S-3 registrants must meet high eligibility standards, the Securities Administrator finds that the offerings of issuers that qualify and file on SEC Form S-3 do not need extensive review during the registration process.

Conclusion:

Registrants that file securities offerings on Form S-3 shall be given expedited review. Generally, the examiner handling the file shall issue the registration permit making the file effective on the day of receipt of the file by the examiner.

Adopted: January 1, 1991

Replaces: Statement of Policy 83-20

Jack L. Beyers, Securities Administrator

Prepared by: Brad Ferber, Securities Examiner

 

SECURITIES ACT POLICY STATEMENT - 05

RE: BLIND POOL/BLANK CHECK OFFERINGS - DUTY TO DISCLOSE MATERIAL FACTS - RCW 21.20.010 - UNLAWFUL OFFERS, SALES

Question Presented:

Will the Administrator grant a permit for the sale of equity securities in a blind pool or blank check program?

Statute:

RCW 21.20.010 makes "it unlawful for any person . . . (2) To make any untrue statement of material fact or to omit 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."

Discussion:

A "blind pool" is a company whose stated business purpose is to search for a business opportunity (or similar purpose) in a specified industry. A "blank check blind pool" or "blank check" is a company that has specified no particular industry in which it will seek a business opportunity.

The Administrator finds that the duty imposed upon an issuer by the above-cited provision cannot be met without disclosure regarding the allocation of the funds raised to specific properties or uses. Therefore, "blank check" offerings will not be granted a permit. This position is consistent with the Resolution of the North American Securities Administrators Association (NASAA) Declaring Blank Check Blind Pool Offerings To Be Fraudulent Practices, CCH NASAA Reports, 7,025, which declares that sales of such offerings per se constitute fraudulent business practice and the failure to disclose material facts.

"Blind pool" offerings which provide an indication of the general industry or use in which the funds will be invested, however, may be granted a permit, but only under the following conditions:

  1. ALL of the funds raised in the offering must be escrowed until such time as the promoter is ready to purchase a specific property or embark on a specific project. At that time, the promoter must make supplemental disclosure of all material facts concerning the proposed use of proceeds and such disclosure must be passed upon by the Administrator.
  2. The investors must be given at least 10 business days after the supplemental disclosure, as approved by the Administrator, is provided to them to decide whether to continue in the program. Investors must be offered a complete refund of all consideration paid in lieu of continued participation.
  3. No investor will be allowed to invest more than the greater of 5% of his net worth or gross income. The issuer must take reasonable steps to insure compliance with this suitability standard.

Conclusion:

Blank check or blind pool programs generally involve sales which constitute failures to disclose material facts and, therefore, will not be granted registration permits. Such a program may be granted a registration permit only under certain conditions, which are intended to insure that the investors will receive disclosure of material facts as required under the statute.

Adopted: January 1, 1991

Replaces: Statement of Policy 84-59

Jack L. Beyers, Securities Administrator

Prepared by: William M. Beatty, Securities Examiner

SECURITIES ACT POLICY STATEMENT - 06

RE: PROJECTIONS - POLICY ON USE IN REGISTRATIONS AND OTHER FILINGS

Question presented:

The Securities Administrator is often asked about the Securities Division's position with regard to the use of projections, estimates, forecasts, and other forward looking information ("projections") in connection with offerings filed for review by the Division.

Discussion:

In general the Division follows the Securities and Exchange Commission's position on projections set out in Regulation S - K. Management's good faith projection or assessment of future economic performance of the issuer is allowed if the projection has a reasonable basis and is presented in a format suitable to the Division. For there to be a reasonable basis for the projection the issuer should have a history of operations or management should have experience on which to base it. Start-up and development stage companies should not normally attempt to produce projections because of the lack of operating history and experience.

It is the experience of the Division that many of the projections filed with the Division are misleading. For example, some issuers fail to disclose the key assumptions on which they base the projections. Others make unreasonable assumptions especially with respect to the growth rate of income or expenses. Many attempt to predict operating results in the distant future when it is clear that even the current results cannot be reasonably predicted.

All projections should disclose the basis and limitations of the projection and warn the investor not to place undue reliance on the certainty of the projection. Issuers and underwriters should also be aware of their obligation to up-date or correct projections. For additional support of the projections, the Division recommends that management obtain outside review of them. Usually this involves the review of the projections by a certified public accountant.

Substantial effort and expense are required to produce adequate projections. Issuers are encouraged to discuss the use of projections with the Division prior to the filing of the offering.

Adopted: January 1, 1991; Amended: May 17, 1991

Replaces: N/A

Jack L. Beyers, Securities Administrator

Prepared by: Michael E. Stevenson

SECURITIES ACT POLICY STATEMENT - 08

RE: GOVERNMENT BOND PROMOTIONS BY RETAILERS RCW 21.20.005(10) - "OFFER" AND "SALE" RCW 21.20.005(3) - "BROKER-DEALER"

Question Presented:

What requirements apply to a retailer who offers a government bond as a promotional item?

Statutes:

RCW 21.20.005(10) in part defines "offer" and "sale" as follows:

Any security given or delivered with, or as a bonus on account of, any purchase of securities or any other thing is considered to constitute part of the purchase and to have been offered and sold for value.

RCW 21.20.005(3) defines "broker-dealer" to mean:

Any person engaged in the business of effecting transactions in securities for the account of others or for that person's own account.

Discussion and Conclusion:

In accordance with RCW 21.20.005(10), a retailer that offers a government bond as a "bonus" or "free gift", along with its retail products, is offering and selling securities for value. RCW 21.20.140 requires every offering of a security to be either registered or exempt. While the sale of a government bond is normally exempt under RCW 21.20.310(1), the sale of a government bond in conjunction with the sale of a retail product or service will not qualify for the RCW 21.20.310(1) exemption. In addition, because the retailers involved in the bond promotions are engaged in effecting repeated transactions in securities, the retailers must register as broker-dealers.

RCW 21.20.010 makes it unlawful for any person to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading. To protect the public from misleading advertising, the Securities Administrator has determined that all advertising and promotional materials for securities offered with retail products must disclose material information about the security. For example, promotions involving government bonds must disclose information concerning the bonds' interest rate, market value, tax consequences and maturity date.

Adopted: January 1, 1991

Replaces: Statement of Policy 85 - 61

Jack L. Beyers, Securities Administrator

Prepared by: Janet G. McKinney, Securities Examiner

SECURITIES ACT POLICY STATEMENT-10

RE: WAC 460-16A-205(p) - PROMOTIONAL SHARES RULE - THREE YEAR LIMITATION

Question presented:

When will the Securities Administrator apply the "promotional shares" treatment to shares issued more than three years ago?

Rules:

WAC 460-16A-205(p) adopts the September 3, 1987 NASAA Statement of Policy on promotional shares:

except that the term promotional shares shall be limited to those equity securities which were issued within the last three years and that all promotional shares in excess of twenty-five percent of the shares to be outstanding upon completion of the offering may be required to be deposited in escrow absent adequate justification that escrow of such shares is not in the public interest and not necessary for the protection of investors. . . .

The Introduction to the NASAA Statement of Policy (CCH NASAA Reports 3201) provides that NASAA:

has determined it to be in the public interest, and consistent with the goals of investor protection in public offerings of EQUITY SECURITIES, to provide guidelines to ensure that the potential rewards to public investors and to PROMOTERS bear a reasonable relationship to the respective risks assumed. . . . Nothing contained in these guidelines shall prevent a state Securities Administrator from considering variations in the application of any, or all, of the standards when such variations are justified in light of all the facts and circumstances surround a particular public offering.

Discussion:

Normally, under the above-cited provision in WAC 460-16A-205, shares issued more than three years before the date of the public offering will not be considered "promotional shares". Issuers should note, however, that the Statement of Policy allows for a State Administrator to consider variations in the application of its standards. The Securities Administrator has determined there are certain circumstances which justify waiver of the three year limitation. These circumstances may include situations where the issuer has not conducted operations or had significant operations for the last three years; where the issuer's operations and earnings, although significant, are not in the same type of business that is the subject of the propose public offering; or, where the proposed public offering is of such a large scale that the issuer's past earnings and operations are insubstantial in comparison to the business to be conducted.

Conclusion:

The Administrator may extend promotional shares treatment to shares which were issued more than three years before the proposed public offering in certain situations.

Adopted: January 1, 1991; As amended: May 31, 1996

Replaces: Statement of Policy 84-55

Deborah R. Bortner, Securities Administrator

Prepared by: William M. Beatty and Nelda Shannon, Securities Examiners

 

 

SECURITIES ACT POLICY STATEMENT - 16

RE: SECURITIES OFFERINGS ON THE INTERNET

Question presented:

Is an issuer permitted to make the offer and sale of unregistered securities in this state via the Internet?

Discussion:

NASAA Resolution

The North American Securities Administrators Association (NASAA) adopted, effective January 7, 1996, a resolution that encourages states to take appropriate steps to exempt from securities registration offers of securities over the Internet (Internet Offers). (See NASAA Reports 7,040)

Analysis

As pointed out in the NASAA resolution, the Internet is essentially a broad-based electronic communications system. For state securities regulators, the issues presented by such a system are not dissimilar to those inherent in other methods of communication that cross state boundaries. Advertisements for securities offerings not registered in the State of Washington frequently appear in national publications such as the Wall Street Journal. The Division typically takes no action with respect to these advertisements so long as the offering is registered in this state or the advertisement indicates, directly or indirectly, that the offering is not available to Washington residents. The resolution adopted by NASAA is consistent with this approach.

Conclusion:

Following the approach of the NASAA resolution, the Administrator will take no action to enforce the securities registration provisions of the Washington Securities Act, Ch. 21.20 RCW, in connection with an offering on the Internet where:

  1. The offer is made while the offering is registered in Washington or is made pursuant to an available and perfected exemption from such registration; or
  2. The Internet Offer:
  3. (1) Indicates, directly or indirectly, that the securities are not being offered to the residents of Washington; and
  4. (2) Is not otherwise specifically directed to any person in this state by, or on behalf of, the issuer of securities.

No sales of securities shall be made in the State of Washington pursuant to an offering on the Internet until the offering has been registered and declared effective and the final prospectus or offering circular has been delivered to the investor prior to such sale; or the sale is exempt from registration under the Securities Act of Washington.

Issuers are cautioned that this position pertains only to securities registration issues. Internet offerings are still subject to the anti-fraud and other sections of the Securities Act. Any offering involving material misstatement of facts or fraud is subject to regulatory enforcement action by the Division.

Adopted: May 23, 1996

Deborah R. Bortner, Securities Administrator

Prepared by: William M. Beatty, Senior Securities Examiner

SECURITIES ACT POLICY STATEMENT - 20

RE: INTERNET ADVERTISING BY BROKER-DEALERS, INVESTMENT ADVISERS, AND THEIR REPRESENTATIVES

Question presented:

Is a broker-dealer, investment adviser, securities salesperson, or investment adviser representative "transacting business in this state" by disseminating general information over the Internet that is available to residents of this state?

Statute:

RCW 21.20.040 states that "it is unlawful for any person to transact business in this state" as a broker-dealer, salesperson, investment adviser, or investment adviser representative unless he or she is registered under this chapter.

Discussion:

The Internet, the World Wide Web, and similar proprietary or common carrier electronic systems (collectively, the "Internet") have facilitated greatly the ability of broker-dealers, investment advisers, and their agents and representatives to advertise and otherwise disseminate information on products and services to prospective customers and clients. Certain communications made on the Internet are directed generally to anyone, including residents of this state, having access to the Internet and may be transmitted through postings on Bulletin Boards, displays on "Home Pages" or similar methods (hereinafter, "Internet Communications").

Conclusion:

Broker-dealers, investment advisers, and their representatives who use the Internet to distribute information on available products and services through communications directed generally to anyone having access to the Internet shall not be deemed to be "transacting business" in this state for purposes of RCW 21.20.040, based solely on that fact, if the following conditions are observed:

A. The Internet Communication contains a legend which clearly states that:

(1) the broker-dealer, investment adviser, salesperson or representative in question may not transact business in Washington unless appropriately registered, or excluded or exempted from such registration; and

(2) follow-up, individualized responses to persons in this state by such persons that involve either the effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made absent compliance with the appropriate registration requirements, or an applicable exemption or exclusion;

B. The Internet Communication contains a mechanism including, without limitation, technical "firewalls" or other implemented policies and procedures, designed to reasonably ensure that prior to any direct communication with prospective customers or clients in this state, said broker-dealer, investment adviser, salesperson, or representative is first registered in this state or qualifies for an exemption or exclusion from such requirement. Nothing in this paragraph shall be construed to relieve a state registered broker-dealer, investment adviser, BD agent or representative from any applicable securities registration requirement in this state;

C. The Internet Communication does not involve either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation in this state, but is limited to the dissemination of general information on products and services; and

D. In the case of a securities salesperson or investment adviser representative:

(1) the name of the broker-dealer or investment adviser with whom the salesperson or representative is affiliated is prominently disclosed within the Internet Communication;

(2) the broker-dealer or investment adviser with whom the salesperson or representative is associated is responsible for reviewing and approving the content of any Internet Communication ;

(3) the broker-dealer or investment adviser with whom the salesperson or representative is associated first authorizes the Internet Communication; and

(4) in disseminating information through the Internet Communication, the salesperson or representative acts within the scope of the authority granted by the broker-dealer or investment adviser.

The position expressed in this Policy extends to state broker-dealer, investment adviser, salesperson and representative registration requirements only, and does not excuse compliance with applicable securities registration, antifraud or related provisions.

Nothing in this Policy shall be construed to affect the activities of any broker-dealer, investment adviser, salesperson, or representative that is not subject to the jurisdiction of the Administrator as a result of the National Securities Markets Improvements Act of 1996, as amended.

Adopted: September 8, 1997

Deborah R. Bortner, Securities Administrator

Prepared by: William M. Beatty, Senior Securities Examiner