Blue Sky Issues

TO: Attendees, Securities Transfer Association 1995 Annual Meeting

FROM: Dan W. Schneider

SUBJECT: Considerations Under State Securities Laws ("Blue Sky": Laws) Regarding Shareholder Services Programs in the Direct Registration Context

DATE: October 15, 1995

The attached outlines summarize key aspects of state securities laws in respect of the implementation of securities purchase and sale programs organizedby issuers and transfer agents. The first outline summarizes statutory provisions concerning securities registeration and broker-dealer registration in relation to offers and sales of securities through programs registered by issuers under the federal securities laws. The second outline summarizes the same or similar statutory provisions in relation to offers and sales of securities through purchase and sale service programs originated by a bank transfer ageent without need under federal law for registration of the securities and transactions

In addition to the registration provisions summarized in the attached outlines, blue sky laws in some states also regulate advertising and communications materials, including service brochures and participation letters to shareholders, used in connection with public offers and sales of securities. These requirements are not addressed in the attachments.

The outlines generalize across a very large body of state law. While I believe the outlines usefully organize that law by providing a workable framework for analysis, the outlines are general by definition. No single formula works universally for every type of services program or every category of security.

GENERAL COMMENT: 53 different bodies of law and interpretive supplements create a crazy quilt that changes regularly. Generalizations across various types of plans for various categories of securities are difficult to make. The analysis can vary depending on whether the issuer, or another entity, is the program administrator, whether the transactions are open-market purchases or direct sales of issuer securities, and whether the transactions involve existing security holders. In addition, when a through review is completed for a given plan, frequent "update" reviews will be important

A. REGISTRATION OF SECURITIES/EXEMPTIONS FROM REGISTRATION

1. NYSE/AMEX/NASDAQ-NMS Securities

   • Exemptions from the securities registration requirements exist in nearly every state.

     a. security exemptions exist in most states for NYSE/AMEX/NASDAQ-NMS securities; and

     b. transactional exemptions exist in many states for offers and sales by issuers (or for the issuer's benefit) to existing shareholders.

   • In some states -- Arizona, Nevada, New York -- the issuer must pay a fee and file a notice covering, as applicable, a form of registration or a claim to exemption.

   • The security exemptions generally cover offers and sales to both current holders and new oferees; however, offers and sales to new offerees through an issuer's service plan may not have either a security exemption or a transactional exemption in Florida (unless the sale is through a registered broker-dealer) and Oklahoma (unless an independent third party is used to effect an open-market purchase).

2. OTHER SECURITIES (OTC SECURITIES AND SECURITIES LISTED ON SECONDARY EXCHANGES). EXERCISE PARTICULAR CARE FOR PLANS INVOLVING THESE SECURITIES.

   • Exemptions exist in some states for securities listed on certain "regional"exchanges.

   • Exemptions exist in some states for (a) "blue chip" or "seasoned issuer" securities or securities included in certain designated securities manuals or (b) transactions in the foregoing securities.

   • Transactional exemptions exist in some states for offers and sales by an issuer to existing shareholders. This exemption may not be available for an independent agent that executes an open-market purchase (though some other exemption may apply).

   • Transactional exemptions exist in many states for sales made in response to an unsolicited order to purchase, but in most states this exemption is available only if the order is processed by a "licensed broker-dealer".

     For any security -- if a broad securities exemption is not available, and if a transactional exemption is not available for sales to new offerees under the law of a particular state, issuers should consider the following alternative approaches:

     a. Require new offerees to purchase their initial shares outside the program, and so state in the prospectus;

     b. Register the securities in the problem states (time and expense involved);

     c. Register as a broker-dealer or use a registered broker-dealer to process orders and mailings and to conduct communications about the Program in that state, which may expand the available set of exemptions;

     d. Consider using open-market purchases only, through an agent, for new offerees,which may expand the available set of exemptions. This will not be effective in certain states unless a registered broker-dealer is employed to process the orders and the transactions.

     e. In addition to the foregoing, encourage industry associations and the SEC to work to cause coordination of policy at the state level through the North American Securities Administrators' Association.

B. BROKER-DEALER REGISTRATION/EXEMPTIONS

• Even if the security or transaction is exempt from registration, the entities involved in processing orders and mailing materials may be required to be registered as "dealers" or "broker-dealers" and, depending on the facts, issurer personnel may be required to be registered as "agents".

  1. In most states, issuers are excluded from the definition of "dealer" or "broker-dealer", or otherwise are exempt from registration.

  2. In some states, issuers may be excluded from the broker-dealer registration requirement only with respect to transactions with, and plan-related communications with, existing shareholders. In those states, a different exemption would be necessary for sales to new offerees. Consider having new offerees purchase through a designated registered broker-dealer. (More restrictive states: Arizona, Florida, New Jersey, New York, North Carolina, North Dakota, Oklahoma, Vermont.) Appointing a bank or trust company to purchase for new offerees in the secondary market may provide a separate basis for an exemption in some of these states.

  3. In some states, special requirements exist with respect to issuer recordkeeping or sales agent qualifications.

  4. Note that the issuer transaction exemption may apply only to offers and sales of the issuer's securities, not to plan sales of securities issued by affiliated companies.

Prepared by:

Dan W. Schneider October 15, 1995