Stop Orders for Registered Securities
The final piece of the registration and exemption picture is the Administrator's power to issue stop orders against registered securities. While exemptions allow securities to bypass registration, stop orders allow the Administrator to shut down registrations that have problems.
Grounds for Stop Orders
Under Section 306 of the Uniform Securities Act (USA), the Administrator may issue a stop order denying effectiveness to, or suspending or revoking the effectiveness of, any registration statement if the Administrator finds that:
- The order is in the public interest, AND
- One or more specific grounds exist
Both prongs must be satisfied: the order must serve the public interest AND at least one specific ground must exist.
Specific Grounds
| Ground | Description |
|---|---|
| Incomplete or misleading filing | The registration statement is incomplete in any material respect or contains a false or misleading statement of material fact (as of its effective date) |
| Willful violation | Any provision of the Act or any rule/order has been willfully violated in connection with the offering, by the filer, the issuer (or its officers/directors/controlling persons), or any underwriter |
| Subject to another stop order | The security is subject to a stop order or injunction under another federal or state act (but the Administrator may not institute proceedings more than 1 year after the other order) |
| Illegal business | The issuer's enterprise or method of business includes or would include activities that are illegal where performed |
| Fraud | The offering has worked or tended to work a fraud upon purchasers, or would so operate |
| Unfair terms | The offering is being made on terms that are unfair, unjust, or inequitable |
| Unreasonable compensation | The offering involves unreasonable underwriter/seller discounts, commissions, or other compensation, or promoters' profits or options |
| Ineligibility for filing method | A security sought to be registered by filing (Section 302) is not eligible for that method |
| Failed undertaking | A security registered by coordination (Section 303) has failed to comply with the undertaking to forward amendments |
| Unpaid filing fee | The applicant has failed to pay the proper filing fee (only a denial order may be entered, and it must be vacated when the deficiency is corrected) |
Summary Stop Orders
The Administrator may summarily postpone or suspend the effectiveness of a registration statement pending a final determination.
Upon entry of a summary order:
- The Administrator must promptly notify each affected person and state the reasons
- Within 15 days of receiving a written request, the matter must be set down for hearing
- If no hearing is requested or ordered, the summary order remains in effect until modified or vacated
Exam Tip: Gotchas
Stop orders can be entered BEFORE or AFTER a registration becomes effective. A pre-effective stop order denies effectiveness; a post-effective stop order suspends or revokes effectiveness. The Administrator can act summarily first and provide a hearing afterward.
Due Process Requirements
No stop order may be entered (except a summary order) without:
- Appropriate prior notice to the applicant/registrant, the issuer, and the person on whose behalf the securities are offered
- Opportunity for hearing
- Written findings of fact and conclusions of law
These requirements ensure that the issuer and other affected parties have a chance to present their case before a final order is issued. Summary orders are the exception; they allow the Administrator to act first and hear arguments later.
Modification and Vacation
The Administrator may vacate or modify a stop order if:
- The conditions that prompted it have changed, OR
- It is otherwise in the public interest
Stop orders are not necessarily permanent; if the issuer corrects the problem, the Administrator has the authority to lift the order.
Time Limitation
The Administrator may NOT institute a stop order proceeding against an effective registration statement based on a fact or transaction known to the Administrator when the statement became effective, unless the proceeding is instituted within the next 30 days.
What this means in practice:
- If the Administrator knew about a problem when the registration became effective and did nothing for more than 30 days, the Administrator cannot later use that fact as a basis for a stop order
- This prevents the Administrator from sitting on known issues and later using them to revoke registration
- New facts discovered after the effective date are not subject to this limitation
Exam Tip: Gotchas
The 30-day time limitation applies only when the Administrator KNEW about the issue at the time the registration became effective. If the Administrator discovers a problem after the effective date, there is no time limit for instituting proceedings based on that newly discovered information.