DOB: Small Business: A Guide for Raising Capital

Small Business:
A Guide to Raising Capital

{Putting the Final Piece of A Puzzle Into Place}

What Is A Security? | When Does The Act Apply? | Federal Law
How Does The Act Work? | Exemptions | Securities Registration | More Help


Small Business and Securities Laws

Building a successful business takes planning and effort. There are many things to think about, whether you're just starting out or expanding. Drawing up a business plan, analyzing tax consequences and obtaining regulatory permits are just a few important tasks. Then there's the question of financing.

Traditionally, small businesses obtained financing through bank loans and lines of credit. For some small businesses, however, bank credit may be hard to obtain, forcing them to curtail expansion plans or to cut back on services and personnel.

Securities offerings are an alternative way for small businesses to raise capital. This publication will acquaint you, the small business person, with the securities laws of Connecticut. It is designed for businesses with no prior experience in this area.
The publication does not provide a comprehensive summary of the law. Any person wishing to raise capital through securities offerings should consult with legal counsel as well as accounting professionals.

Offers and sales of securities in Connecticut are governed by Chapter 672a of the Connecticut General Statutes, the Connecticut Uniform Securities Act (the “Act”).

Passed in 1977, the Act is administered by the Securities and Business Investments Division (the "Division") of the Connecticut Department of Banking. The Division regulates the offer and sale of securities in and from Connecticut, and licenses the people who are in the business of selling securities. Our aim is to protect the investing public while simultaneously recognizing the important role that securities offerings play in the capital formation process and in Connecticut’s economic growth.

Obtain a copy of the Act:

Copies of the Act, its regulations and the state forms referenced in this publication are available on our website.  If you do not have access to a computer, you may contact the Division to request free copies of those documents.


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What is a Security?

In deciding how to raise capital, many people only think of traditional securities such as equities (stock), which provide an ownership interest in a corporation, and debt securities such as bonds and debentures.

Under Connecticut and federal law, however, the term "security" also extends to notes, limited partnership interests, interests in a limited liability company, evidences of indebtedness, preorganization certificates or subscriptions, certificates of interest or participation in oil, gas or mining titles or leases or in payments out of production under such titles or leases, and to investment contracts - to name a few instruments. Many of these items have developed specialized meanings. Courts, for example, have construed "investment contract" to cover such unusual profit-making ventures as interests in an orange grove and chinchilla ranching.

As a rule of thumb, if you seek capital from investors and will provide them with a return on their investment depending on how your business performs, consider whether the state's securities laws apply. Consult an attorney or contact the Division with any questions you may have. Although we cannot give legal advice on structuring your business, we can provide you with information on how the state securities laws work.

Division staffers are also available to meet with you in Hartford should you have questions on the state’s securities laws.

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When Does the Act Apply?

The Act applies when offers and sales of securities are made in or from Connecticut. For example, the Act would apply where the offer of the security originates from Connecticut, regardless of where the seller and the buyer of the security are located. Thus, a Connecticut limited partnership offering securities from Connecticut to New York residents would be subject to the Act. The same would be true for a Connecticut corporation offering securities only to Connecticut residents. A Connecticut business making offers to out-of-state residents, however, would also have to be concerned about the other state's securities laws and about the federal securities laws. Out-of-state issuers offering securities to Connecticut residents are also subject to the Act.

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What Federal Laws Govern
Securities Transactions?

When a securities offering crosses state lines, whether through the mails or via interstate commerce, the federal securities laws apply. The federal system of securities regulation is complex. There are two main pieces of federal legislation: the Securities Act of 1933 (the "'33 Act") and the Securities Exchange Act of 1934 (the "'34 Act"). Both are administered by the Securities and Exchange Commission (the "SEC"). The '33 Act requires the registration of securities and creates exemptions from registration. The '34 Act regulates the securities markets and requires publicly held companies to provide periodic disclosures to shareholders. Both the '33 and the '34 Acts contain antifraud provisions.

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How Does the Act Work?

1. Antifraud
Section 36b-4 of the Act prohibits any individual or entity offering or selling a security from omitting or misstating a material fact in connection with the offer, sale or purchase of the security.

2. Licensing of Securities Industry Personnel
The Act provides for the licensing of securities brokerage firms (broker-dealers) and investment advisers. In addition, the Act covers the licensing of agents. An individual may be an agent of a broker-dealer, an investment adviser or an issuer. Many small businesses offer and sell their securities through an officer, director, partner or other representative. For this reason, you should ask whether agent of issuer registration may be required.

Agent of issuer registration is not necessary in all cases, such as where the securities qualify for certain registration exemptions, or where the offers and sales will only be made by an officer, director or partner of the issuer on an uncompensated basis. Of course, where an issuer does use a broker-dealer to offer or sell the securities, that broker-dealer would have to be registered under the Act. Issuers do not have to be licensed as broker-dealers under the Act.

3. Securities Registration
The Act not only regulates the licensing of persons involved in offering or selling securities, but the registration of the securities themselves. Section 36b-16 of the Act prohibits any individual or entity from offering or selling any security in Connecticut unless 1) the security is registered; 2) the security or transaction is exempt from registration; or the security is a "covered security" as that term is defined in the '33 Act. The aim of securities registration is to ensure that investors receive full disclosure of all material facts necessary for them to make an informed investment decision.

The Division conducts a "disclosure review" of applications for securities registration. By contrast, other states may conduct a so-called "merit review" of offerings within their borders. Before a securities offering may proceed in those states, the securities agency must determine that the offering is fair, just and equitable.

The Act does not require that the securities be registered in all instances. If the issuer can show that an exemption from registration applies, registration is not necessary. There are two general categories of exemptions: securities exemptions and transactional exemptions.

Securities exemptions, contained in Section 36b-21(a) of the Act, exempt certain classes of securities from registration and extend not only to the initial offering of the securities by the issuer but to offers and sales by the purchaser to other purchasers. Examples include insurance company securities and government securities. The transactional exemptions, set forth in Section 36b-21(b) of the Act, apply to particular offers and sales. Their applicability must be viewed on a transaction by transaction basis. Examples include offers and sales to institutional buyers such as banks (Section 36b-21(b)(9)) and to existing security holders of the issuer (Section 36b-21(b)(12)).

Some securities exemptions are self-executing which means that the issuer does not have to make a formal filing (other than a Consent to Service of Process) to claim the exemption. Still others require that the issuer file specific documentation with the Division.

Regardless of whether the offering is registered or exempt from registration under the Act, or whether the securities involved are "covered securities", the antifraud provisions in Section 36b-4 of the Act still apply.

Covered securities include 1) securities listed on a nationally regulated exchange such as the New York Stock Exchange; 2) securities exempt from federal registration under Rule 506 of federal Regulation D; and 3) investment company securities. Since the federal National Securities Markets Improvement Act was enacted in 1996, states such as Connecticut are preempted from reviewing offerings of covered securities. However, certain covered security offerings such as those involving Rule 506 transactions and investment companies do require a notice filing under the Act.

4. Remedial Provisions
Violations of the Act may result in administrative or civil action by the Division under Section 36b-27 of the Act, civil suits by purchasers under Section 36b-29 of the Act or, where wilful misconduct is involved, criminal penalties under Section 36b-28 of the Act. Therefore, careful attention to compliance becomes important.


Securities Registration Exemptions
Frequently Used By Small Businesses

{One Piece of the Puzzle}

"Start-Up" Or "De Minimis" Exemption

The "de minimis" exemption in Section 36b-21(b)(15) of the Act was designed to help start-up ventures to raise capital and to accommodate very small offerings. Although the Act does not require that a disclosure document be furnished to purchasers, the issuer may wish to draft one as a precautionary measure should disagreements with investors arise in the future.

Remember: Even though the offering may be exempt from registration, the antifraud provisions of the Act still apply.

What Are the Requirements for the De Minimis Exemption?

1. The issuer must effect the offer and sale.
The exemption is only available to issuers who offer and sell the securities themselves and do not use a broker-dealer. There is no dollar limitation on the amount of capital to be raised.

2. The total number of purchasers of all securities of the issuer cannot be more than ten.
The key word here is "all." Count every purchaser - those who bought their securities prior to the offering and those not located in Connecticut.

In addition, consider all classes of the issuer's securities in counting purchasers. Remember that the aim of the exemption is to cover very small ventures. There is no limitation, however, on the number of offerees (vs. purchasers).

In counting the number of purchasers, consider as one purchaser: 1) a husband and wife, 2) a child and his or her parent or guardian where the parent or guardian holds securities for the benefit of the child, and 3) a corporation, partnership, association, other unincorporated entity, joint stock company or trust if the entity was not formed for the purpose of buying the security.

If the entity was formed for the purpose of buying the security, it would not be considered a single purchaser.

3. No commissions.
An issuer cannot use the exemption if any commissions, discounts or other remuneration are paid or given directly or indirectly in connection with the offer and sale.

4. Expense limitations.
The total expenses (excluding legal and accounting fees) in connection with the sale cannot exceed 1% of the total sales price of the securities.

5. No advertising.
No advertisement, article, notice or other communication published in the print media or broadcast over television or radio or any other general solicitation (including Internet solicitation) may be used in connection with the sale of the securities.

Is Any Filing Required?

The only document that must be filed to claim the Section 36b-21(b)(15) exemption is a Consent to Service of Process (Form U-2). You can download the form from the agency’s website.  If you do not have a computer, you can also obtain the form from the Division. There is no charge for making the filing.

Private Placement Exemption

What is the Private Placement Exemption?

The private placement, or limited offering exemption, is available to issuers offering securities to a comparatively small number of investors. Generally, no advertising or general solicitation can be used in connection with the offering. The exemptions, found in Section 36b-21(b)(10) and Section 36b-21(e) of the Act, are based on federal law. Both state and federal law prescribe specific requirements regarding use of the exemption.

What Federal Law Applies to Private Placements?

The '33 Act and its rules and regulations apply to private placements.

Section 4(2) of the '33 Act exempts from federal securities registration any transaction not involving a public offering. Since the '33 Act does not define what a public offering is, a body of judicial decisions and SEC administrative interpretations has developed in this area. Generally speaking, a public offering would not be involved where 1) there is no public solicitation or general advertising in connection with the offering; and 2) the issuer ensures that purchasers of the securities have sufficient knowledge and experience in financial and business matters such that they are capable of evaluating the risks and merits of the offering, have access to information normally available only in a prospectus and agree not to resell their securities.

What Is Regulation D?

To help small issuers comply with federal private placement exemption requirements, the SEC promulgated an agency regulation in 1982. That regulation is known as Regulation D. Regulation D consists of several rules. Rules 501 through 506 are important in understanding Connecticut's private placement exemption.

1. Rule 501
Rule 501 is a definitional rule.

Among the most important definitions in Rule 501 is the definition of "accredited investor."

Rule 501 of federal Regulation D provides an extensive listing of those investors who are considered “accredited.”  These include:  1) banks and other financial institutions; 2) broker-dealers registered under federal law; 3) insurance companies; 4) directors, executive officers or general partners of the issuer; 5) directors, executive officers or general partners of a general partner of the issuer; 6) persons whose individual net worth (or joint net worth with their spouse) exceeds $1 million at the time of the purchase; 7) persons having an income of over $200,000 in each of the two most recent years (or joint income with their spouse of over $300,000 in each of the two most recent years) and who reasonably expect to reach the same income level during the current year; and 8) any business entity whose equity owners are all accredited investors.

2. Rule 502
Rule 502 includes provisions on "integration" and on how the offering must be conducted. Rule 502(b) tells you what information must be furnished to prospective investors and when that information must be furnished.  Rule 502(c) prohibits general solicitation or advertising. Rule 502(d) prohibits securities sold in reliance on Regulation D from being resold unless they are registered or unless another exemption is available under federal law.

3. Rule 503
Rule 503 describes federal filing requirements for Regulation D offerings.

4. Rule 504
Under federal Rule 504, offers and sales of the securities cannot exceed $1 million in any 12 month period. In addition, the Connecticut regulations require that the total number of non-accredited investors in Connecticut cannot exceed 35. The Connecticut regulations look to federal law in determining who is an accredited investor.

While Rule 502(c) prohibits general solicitation or advertising and Rule 502(d) imposes limitations on resale, these restrictions do not apply to Rule 504 offerings at the federal level. where the offers and sales are made 1) exclusively in one or more states that provide for the registration of the securities, and require the public filing and delivery to investors of a substantive disclosure document before sale, and are made in accordance with those state provisions; 2) in one or more states that have no provision for the registration of the securities or the public filing or delivery of a disclosure document before sale, if the securities have been registered in at least one state that provides for such registration, public filing and delivery before sale, offers and sales are made in that state in accordance with such provisions, and the disclosure document is delivered before sale to all purchasers (including those in the states that have no such procedure); or 3) exclusively according to state law exemptions from registration that permit general solicitation and general advertising so long as sales are made only to "accredited investors" as defined in Rule 501(a) of Regulation D.

As a result, if an issuer registers the offering under state law, the prohibition against general solicitation contained in Rule 504 would not apply. However, if the issuer chooses to use the Connecticut exemption for Rule 504 offerings rather than register the securities in Connecticut, 1) the general solicitation prohibition in Rule 502(c) would continue to apply; 2) Connecticut law imposes limitations on resale for the securities; and 3) Connecticut law also disqualifies certain issuers from claiming an exemption under Rule 504.

Although the disclosure provisions in Rule 502(b) do not apply to Rule 504 offerings at the federal level, the regulations under the Act contain disclosure requirements where an issuer is relying on the Connecticut exemption for Rule 504 offerings rather than opting to register the securities. A Connecticut disclosure document must be provided to each Connecticut offeree, whether or not accredited, prior to sale.

The Connecticut disclosure document must contain 1) the name, address and state of organization of the issuer, 2) the names and residence addresses of the issuer's officers, directors or general partners, 3) a brief description of the offering, including the securities being offered and how the proceeds of the offering will be used, 4) the issuer's balance sheet dated within 120 days of the start of the offering, and the issuer's profit and loss statement for the most recent fiscal year and for any period between the close of the last fiscal year and the date of the balance sheet, 5) a discussion of risk factors, and 6) a Connecticut legend on the front cover. Note that the financial statements in the Connecticut disclosure document do not have to be audited.

5. Rule 505
Under federal law, Rule 505 exempts offers and sales of securities not exceeding $5 million during any 12 month period. While an issuer may sell to an unlimited number of accredited investors, it is limited to 35 non-accredited purchasers. Federal and Connecticut law disqualify certain issuers from claiming an exemption under Rule 505. Under Connecticut and federal law, if an issuer relies on Rule 505 and only sells securities to accredited investors, no disclosure document is required. However, under the Connecticut regulations, if an issuer sells to one non-accredited investor, then all Connecticut purchasers, whether or not they are non-accredited, must receive a disclosure document.

6. Rule 506
Federally, Rule 506 exempts offers and sales without regard to the dollar amount of the offering. Under Rule 506, an issuer can raise over $5 million. An issuer may sell to an unlimited number of accredited investors, but is limited to 35 non-accredited purchasers. Unlike Rule 505, however, a non-accredited investor must, either alone or with his or her purchaser representative, have such knowledge and experience in financial and business matters that he or she is able to evaluate the merits and risks of the investment. Under federal law, if an issuer relies on Rule 506 and only sells securities to accredited investors, no disclosure document is required. However, if an issuer sells to one non-accredited investor, then all purchasers, whether they are non-accredited or not, must receive a disclosure document.

Can Any Issuer Use Regulation D in Connecticut?

The answer is “no” for Rule 504 and Rule 505 offerings.  Under the Connecticut regulations, if the issuer is subject to the disqualification provisions of SEC Regulation A under the '33 Act, the issuer cannot rely on Rule 504 or 505 in Connecticut. Similarly, if certain principals or affiliates of the issuer have been convicted of a felony involving the purchase or sale of a security within five years before the offering commences, the Connecticut exemption for Rule 504 or 505 would not be available. The Connecticut exemption for Rule 504 or 505 would also not be available where certain principals or affiliates of the issuer are currently subject to an order or judgment entered or procured by the securities administrator of a sister state within five years before the offering commences if the order was based on grounds that would be sufficient for the issuance of an order under the Act. An exception exists where the person subject to the order or judgment is currently licensed to conduct securities-related business in the jurisdiction where the administrative order or judgment was entered.

A careful reading of Regulation A, together with the regulations under the Act, is required to fully understand the disqualification provisions. In addition, if the issuer is a blank check, shell or dormant company, as those terms are defined in Section 36b-3 of the Act, the issuer cannot rely on Rule 504 or 505 in Connecticut.

What Other Connecticut Requirements Apply to Regulation D Offerings?

1. Commission restrictions for Rule 504 and Rule 505 Offerings
For Rule 504 and Rule 505 offerings, the regulations under the Act limit the amount of commissions, discounts or other similar remuneration payable in connection with the sale to 15% of the initial offering price. The initial offering price is determined by multiplying the number of securities sold by the offering price for those securities. In calculating the amount of commissions and similar remuneration, do not include legal, accounting and printing fees. The 15% commission restriction does not apply where a statement itemizing the commissions, discounts and other similar remuneration is 1) filed with the Commissioner before the first sale of securities in Connecticut and 2) given to each Connecticut purchaser before a sale to that purchaser.

2. Restrictions on Transferability for Rule 504 and Rule 505 Offerings
Like federal Rule 502(d), the Connecticut regulations require that the issuer exercise reasonable care to ensure that the securities will not be sold by the purchaser absent securities registration or an exemption from registration. The issuer must inquire into whether the purchaser is acquiring the securities for himself or for someone else; disclose to each purchaser in writing before the sale that the securities have not been registered under Section 36b-16 of the Act and cannot be resold unless they are so registered or an exemption from registration is available; and place a legend on the certificate or other document evidencing the securities indicating that the securities have not been registered under the Act and referring to the restrictions on transferability. 

What Must I File to Claim a Regulation D Exemption in Connecticut?

Form D
When filing Form D with the SEC, you must file electronically through the SEC’s online EDGAR system.

Currently, Connecticut does not have an online filing system for private placements.  Therefore, you must file the Form D that you filed with the SEC (and any additional state-required information) with Connecticut in paper form.

You may download copies of Form D from the SEC’s website or the department’s website.  If you do not have a computer, contact the Division for a printed copy of the form.

For offerings made in reliance on Rule 504 or 505, a Form D must be filed with the Division prior to the first sale of the securities in Connecticut. For Rule 506 offerings, a Form D must be filed with the Division within 15 days of the first sale of securities in Connecticut.

Filing Fee
A non-refundable filing fee of $150 is required. Checks should be made payable to "Treasurer, State of Connecticut."

Consent to Service of Process
Since Form D includes a Consent to Service of Process, no separate form must be filed with Connecticut.

Information on the Plan of Distribution

A) If the issuer uses a broker-dealer to procure potential investors in Connecticut, identify the broker-dealer in Item 12 of Form D. The broker-dealer must be registered in Connecticut.

B) If the issuer will not use a broker-dealer (e.g. the issuer uses a “finder”), identify that individual in Item 12 of Form D and include the amount of finder’s fees in Item 15 of Form D.  If Form D does not accurately capture information on the plan of distribution, complete the Connecticut Broker-dealer/Sales Agent Questionnaire and file it in paper form with the Division.

Must an Issuer Follow Regulation D to Use the Private Placement Exemption?

No. In Connecticut, if an issuer relies on the exemption under Section 4(2) of the '33 Act, it need not elect to follow Regulation D. The issuer, however, has the burden of proving that it has complied with regulatory requirements. In addition, a filing would still have to be made with the Division.

Section 4(2) Filings Not Made Pursuant to Regulation D

Can Any Issuer Use Section 4(2) in Connecticut?

No. If the issuer is a blank check, dormant or shell company, as those terms are defined in Section 36b-3 of the Act, the issuer cannot rely on Section 4(2) in Connecticut.

Notice
The issuer must file a written notice with the Division reflecting the claim of exemption. There is no special form. The notice may take the form of a cover letter, and must include: the issuer's name and address; the names of the issuer's officers, directors, general partners or persons occupying a similar status; a brief description of the securities to be sold; and an undertaking by the issuer to furnish the Commissioner, upon the Commissioner's written request, with any offering materials used in connection with the sale of the securities in Connecticut.

Filing Fee
A non-refundable filing fee of $150 is required. Checks should be made payable to "Treasurer, State of Connecticut."

Consent to Service of Process (Form U-2)
Consent to Service of Process forms may be downloaded from the agency’s website.  If you do not have a computer, you may contact the Division for a copy of Form U-2.

Information on the Plan of Distribution

A) If the issuer uses a broker-dealer to procure potential investors in Connecticut, identify the broker-dealer in your filing and/or complete a Broker-dealer Sales Agent Questionnaire. The broker-dealer must be registered in Connecticut.

B)  If the issuer will not use a broker-dealer, include the following information in the cover letter accompanying your filing or complete the Connecticut Broker-dealer/Sales Agent Questionnaire:

  • Name and address of the individual who will offer or sell the securities in Connecticut;
  • Whether that individual will receive any direct or indirect remuneration related to his or her offers or sales of the securities; and
  • Whether that individual is in the business of effecting securities transactions.

How Far in Advance Should a Private Placement Filing Under Section 4(2), Rule 504 or Rule 505 Be Made?

Although no time frame is provided in the regulations under the Act, the Division suggests that offerings made in reliance on Rule 504, Rule 505, or Section 4(2) be filed approximately five days before the offering commences to enable the Division to conduct its review. Note that a document is not considered "filed" until the Division receives it.

Will I Receive Any Filing Confirmation from the Division?

By law, the burden of proving an exemption or a claim of “covered security” status (“covered securities” include Rule 506 offerings but not offerings made pursuant to Rule 504, Rule 505 or Section 4(2)) is on the person claiming it. You will receive a letter from the Division acknowledging receipt of your filing. If deficiencies exist in your filing, you will be notified in writing.

Other Exemptions for Offers and Sales Exclusively to “Accredited Investors”

1. Section 4(6) of the ’33 Act

Section 36b-21(b)(14) of the Act exempts from state registration offers and sales made in compliance with Section 4(6) of the ’33 Act. An issuer relying on Section 4(6) and claiming the corresponding Connecticut exemption must file with the Division before offering or selling securities in or from Connecticut.  Section 4(6) of the ’33 Act exempts from federal securities registration transactions involving offers or sales by an issuer solely to one or more accredited investors provided that 1) the aggregate offering price does not exceed $5 million; and 2) there is no advertising or public solicitation in connection with the transaction by the issuer or anyone acting on the issuer's behalf.  Issuers relying on Section 4(6) federally must file Form D electronically through the SEC’s online EDGAR system.  Since Connecticut does not have an electronic filing procedure, Form D must be filed with the state in paper form.

Issuers relying on Section 4(6) must submit the following to the Division:  1) a non-refundable filing fee of $150 payable to “Treasurer, State of Connecticut”; 2) a Form D; and 3) information on the plan of distribution.  If the issuer uses a broker-dealer to procure potential investors in Connecticut, identify the broker-dealer in Item 12 of Form D. The broker-dealer must be registered in Connecticut.  If the issuer will not use a broker-dealer (e.g. the issuer uses a “finder”), identify that individual in Item 12 of Form D and include the amount of finder’s fees in Item 15 of Form D.  If Form D does not accurately capture information on the plan of distribution, complete the Connecticut Broker-dealer/Sales Agent Questionnaire and file it in paper form with the Division.

2. The Connecticut “Accredited Investor Exemption”

The Connecticut accredited investor exemption was implemented by Order of the Commissioner under Section 36b-21(b)(17) of the Act.

To use this exemption, 1) securities sales must only be made to persons whom the issuer reasonably believes are accredited investors under Rule 501(a) of Regulation D; and 2) the issuer must reasonably believe that all purchasers are buying for investment and not with the view to a distribution of the security.

Development stage issuers with no specific business purpose or who have indicated that their business plan is to engage in a merger or acquisition with a "blank check company", "shell company" or "dormant company" cannot use the exemption.

Certain issuers whose principals or affiliates have disciplinary records cannot use the exemption.

Issuers relying on the accredited investor exemption may (but are not required to) use a "general announcement" to communicate information about the offering.  The "general announcement" is similar to a "tombstone ad" in that the items it contains are limited.  No telephone solicitation is allowed unless, prior to placing the call, the issuer reasonably believes that the prospective purchaser to be solicited is an accredited investor.

Issuers relying on the accredited investor exemption must file with the Division 1) a Model Accredited Investor Exemption Uniform Notice of Transaction; 2) a Consent to Service of Process (Form U-2); and 3) a copy of the general announcement, if any.  The filing must be made within 15 days after the first sale of securities in this state.

There is no filing fee.


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Registration of Securities

{A Piece of the Puzzle}

What Are the Types of Connecticut Securities Registration?

Connecticut has two forms of securities registration: registration by coordination and registration by qualification. To register securities by coordination, an issuer also files a registration statement with the SEC under the '33 Act for the same offering. This procedure is commonly referred to as "going public." Few small businesses seek to raise capital in this manner because of the costs involved and the continuous disclosure obligations subsequently imposed under the '34 Act.

Registration by qualification is commonly used by small businesses doing an exclusively intrastate offering and those relying on the federal Regulation A exemption. Regulation A permits an issuer to raise a limited dollar amount in an offering of securities. Although technically an exemption from registration under the '33 Act, Regulation A requires that an issuer prepare an offering statement which is filed with and reviewed by the SEC. The offering statement must be furnished to any potential investor. If an issuer is subject to certain disqualification provisions in Rule 252 under the '33 Act, it may not rely on the Regulation A exemption. Registration by qualification under Connecticut law allows the issuer to use general solicitation or advertising to raise capital.

How Does Registration Affect Transferability of Securities?

Investors acquiring securities in a private placement face restrictions concerning transfer of the securities. Other nonissuer distributions also require that an exemption from securities registration be used or that the securities be registered prior to transfer. If an offering of securities is registered, investors already holding the same class of the issuer's securities are free to transfer them without registration. The issuer's registration covers the transfers as long as the registration is effective.

How Much Does Registration Cost?

The fees for securities registration range from $300 to $1,500 depending on the maximum aggregate offering price. Small businesses should also plan on budgeting for legal, accounting and other expenses such as printing costs involved in preparing an offering circular or prospectus.

Small Corporate Offering Registration (SCOR)

Issuers pursuing registration by qualification may wish to consider using the Small Corporate Offering Registration form (or SCOR). SCOR was designed for United States based corporations whose offerings of securities would be exempt from federal registration under Rule 504 of Regulation D but who choose to register their offerings at the state level.

Remember that if a Rule 504 offering is registered with the state, the normal restrictions on resale and the prohibition against public solicitation do not apply. SCOR is not available where the issuer has a history of securities regulatory violations. SCOR is also not available where the issuer is a blank check, shell or dormant company. A major advantage to SCOR is that it doubles as a disclosure document and has an easy to complete question and answer format. Copies of the SCOR form (Form U-7) are available from the department’s website or from the Division.  Also available for free download from the department’s website is the Issuer's Manual on How to Complete the Question and Answer Disclosure Document for SCOR Filings.

Connecticut participates in the SCOR regional review program. A company intending to conduct a SCOR offering in two or more states in the New England region (i.e., CT, ME, MA, NH, RI, VT) may consider filing for regional review.  In a regional review, the issuer would confer with a lead state that would coordinate the review and relay comments from all participating states in which the offering will be made. Once the process is completed, the offering would become registered in those participating states in which the issuer has applied.

What Do I File to Register By Qualification?

[Download forms]

1. Application to Register Securities (Form U-1)
Forms U-1, available on the department’s website and from the Division, is a uniform form which is acceptable in multiple states and is also used for registrations by coordination.

2. Consent to Service of Process (Form U-2)

3. Corporate Resolution (Form U-2A)
This form only applies to corporations.

4. Filing Fee
Checks should be made payable to "Treasurer, State of Connecticut."  The fee is based on the aggregate offering amount of the securities to be sold in Connecticut. Note that the filing-fee is non-refundable.

5. Disclosure Document
Be careful when preparing the disclosure document since investors will rely on it in deciding whether to invest. The disclosure document should present an unbiased picture of the issuer.  Section 36b-18 of the Act tells you what items the disclosure document must contain. Included is information on the issuer's directors, officers and holders of ten percent or more of its securities; material conflicts of interest; capitalization of the issuer; the kind and amount of securities to be offered; the offering price; the plan of distribution and related expenses; use of the offering proceeds; risk factors; and pending litigation and proceedings. The disclosure document must also contain financial statements of the issuer. If you are using SCOR, much of the above information is covered in Form U-7.

6. Copy of any prospectus, pamphlet, offering circular, form letter, advertisement, or other sales literature

7. Specimen or copy of the security to be registered

8. Subscription agreement

9. Limited partnership documents (if applicable), such as the certificate of limited partnership and a copy of the partnership agreement.

10. Signed or conformed copy of an opinion of counsel stating whether the security, when sold, will be legally issued, fully paid and nonassessable.

11. Consent of any accountant, engineer, appraiser or other person named as having prepared or certified a report or valuation.

12. Additional information concerning the amount of securities to be offered; other states where the registration statement was or will be filed in connection with the same offering; the name of the Connecticut registered broker-dealer or Connecticut registered agent of issuer who may offer the securities in Connecticut; and any adverse order, judgment or decree entered in connection with the offering by a court or administrative agency of a sister state or by the SEC.

The Division has also released online Securities Registration Disclosure Tips to help you along the way.

How Soon Can I Begin Offering Securities After I File For Registration?

A registration is considered effective when the Commissioner so orders. Allow 2 to 3 weeks for the Division to complete its disclosure review of the information submitted.

If the filing is complete, you will receive an "effectiveness order" from the Division  You can then start offering and selling the securities. If the filing is deficient, the Division will provide you with a written "comment letter" outlining the problem areas and giving you an opportunity to correct or explain them.

Generally, the more complete the disclosure, the smoother the registration review process will be.

How Long is a Registration Effective?

A registration is good for one year. After that, if the offering has not been "sold out" and additional offers are contemplated, the registration must be renewed or an exemption from registration claimed.

Does the Issuer Have Any Continuing Obligations After the Registration is Effective?

While the registration is in effect, the issuer must notify the Division of any material changes in the application for registration. In addition, written notice must be provided concerning the completion date of the initial distribution of the registered securities and the amount of securities sold in Connecticut. A balance sheet as of the close of the issuer's most recent fiscal year and an income statement for that fiscal year must also be furnished.

A Not So Final Word

Just because you have completed your securities offering and made all required state securities filings does not mean that your responsibilities end. You will now have obligations to your new security holders, and you must make sure that you comply with all other statutes and regulations not administered by the Division that affect your business. As always, it's a good idea to consult with a professional advisor, like an attorney, on such matters.

While we've tried to give you an overview of Connecticut's securities laws, remember that securities regulation is a complicated area that is constantly changing. Not every issue is addressed in this publication. With perseverance and appropriate guidance, however, you may well be on your way to a new stage in capital formation and business success.

Need More Help?

For additional information:

Securities Division | Connecticut Bar Association
North American Administrators AssociationSecurities and Exchange Commission

Publication last revised February 2010.