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Covered Securities
Practical Law Glossary Item 0-612-0586 (Approx. 4 pages)
Glossary
Covered Securities
For purposes of the federal securities laws, a category of securities set out in Section 18 of the Securities Act of 1933 (Securities Act), as amended by the National Securities Markets Improvement Act of 1996 (NSMIA).
Under NSMIA, US states and their political subdivisions are preempted from requiring state-level registration or qualification of covered securities. Though covered securities are exempt from US state registration and qualification requirements, states may require notice filings and filing fees with respect to offerings of covered securities, subject to certain exceptions for national securities exchange-listed covered securities. In addition, NSMIA does not preempt states' anti-fraud enforcement authority with respect to covered securities.
Under NSMIA, covered securities include securities:
- Listed or approved for listing on certain national securities exchanges.
- Of an issuer that has securities listed or approved for listing on certain national securities exchanges, where those securities are senior to the listed securities (for example, bonds issued by a NASDAQ-listed company) or equal in rank to the listed securities.
- Issued by an investment company registered under the Investment Company Act of 1940.
- Sold only to qualified purchasers, as defined by the SEC. The SEC has not created a general definition of "qualified purchaser" for purposes of NSMIA. However, as part of 2015 amendments to Regulation A, the SEC defined qualified purchaser to include all offerrees and purchasers in Tier 2 Regulation A offerings (Rule 256, Securities Act).
- Exempted from Securities Act registration under most provisions of Section 3(a) of the Securities Act, including Section 3(a)(3) and Section 3(a)(2), except that a municipal security exempt under Section 3(a)(2) is not a covered security with respect to offers or sales in the issuer's home state. Notably, securities exempt under Section 3(a)(4) of the Securities Act are not covered securities.
- With respect to that transaction, sold in a transaction exempt from Securities Act registration under:
- the safe harbor provided by Rule 506 of Regulation D, which relates to the exemption under Section 4(a)(2) of the Securities Act;
- Section 4(a)(1) or 4(a)(3) of the Securities Act, but only if the issuer is a reporting company (since Rule 144A is a safe harbor related to the Section 4(a)(1) exemption, reporting company securities sold in Rule 144A offerings are covered securities);
- Section 4(a)(4) of the Securities Act;
- Section 4(a)(6) of the Securities Act, the exemption for certain crowdfunding offerings;
- Section 4(a)(7) of the Securities Act;
- Section 3(a)(9) of the Securities Act. Notably, securities sold in exempt transactions under Section 3(a)(10) and Section 3(a)(11) are not covered securities; and
- subject to certain additional conditions, Section 3(b)(2) of the Securities Act (the statutory provision authorizing the SEC to promulgate the 2015 amendments to Regulation A). Note that the SEC used another provision of Section 18 (described above) to bring securities sold in Tier 2 Regulation A offerings within the definition of covered securities.