With the registration methods and common provisions covered, the next critical topic is the Administrator's enforcement tool under the Uniform Securities Act (USA): the stop order. Understanding stop orders is essential because they apply equally to all three registration methods.
Authority to Issue Stop Orders
The Administrator may issue a stop order that:
- Denies effectiveness to a registration statement
- Suspends a registration statement
- Revokes the effectiveness of a registration statement
Two requirements must be met: (1) the order must be in the public interest, AND (2) one or more statutory grounds must exist.
Grounds for Stop Orders
| Ground | Description |
|---|---|
| Incomplete or misleading statement | Registration statement, amendment, or report is incomplete in any material respect or contains a false or misleading material statement |
| Willful violation | Any provision of the Act, rule, order, or condition has been willfully violated in connection with the offering by the registrant, issuer (or its officers/directors/controlling persons), or underwriter |
| Other stop orders or injunctions | The security is subject to a stop order or injunction under any other federal or state act (limited to 1 year from the date of that order) |
| Illegal business activities | The issuer's enterprise or method of business includes activities that are illegal where performed |
| Fraud | The offering has worked or tended to work a fraud upon purchasers or would so operate |
| Unreasonable compensation | Unreasonable amounts of underwriters'/sellers' discounts, commissions, promoters' profits/participation, or unreasonable options |
| Filing ineligibility | Security sought to be registered by notification (filing) is not eligible for that method |
| Coordination undertaking failure | Failure to comply with the coordination-method undertaking to forward federal amendments promptly |
| Filing fee not paid | Applicant or registrant failed to pay the proper filing fee (denial order only; vacated when corrected) |
Time Limits
- The Administrator may not institute a stop order proceeding against an effective registration statement based on a fact known at the time of effectiveness unless the proceeding is instituted within the next 30 days
- For the "other stop orders or injunctions" ground: the Administrator may not institute proceedings more than 1 year from the date of the other order or injunction
- Facts the Administrator discovers after the effective date are not subject to the 30-day limit; the limit applies only to facts known when the statement became effective
Exam Tip: Gotchas
- The 30-day window protects registrants from delayed second-guessing. Once the Administrator makes a registration effective knowing the relevant facts, those same facts cannot be used as the sole basis for a stop order beyond 30 days.
Summary Suspension
The Administrator has expedited enforcement powers:
- May summarily postpone or suspend effectiveness pending a final determination
- Must promptly notify affected parties that the order has been entered and the reasons
- If a hearing is requested within 15 days, the matter will be set down for hearing
- If no hearing is requested and none is ordered by the Administrator, the order remains in effect until modified or vacated
Exam Tip: Gotchas
A stop order is NOT a penalty; it is an administrative tool to protect investors. The Administrator can summarily suspend FIRST and hold a hearing LATER (within 15 days of request). But a final stop order requires prior notice, hearing opportunity, and written findings. Know the difference between a summary suspension (immediate, no hearing required first) and a final stop order (requires due process).
Due Process Requirements
No stop order (except a summary suspension) may be entered without:
- Appropriate prior notice to the applicant, registrant, issuer, and person on whose behalf securities are offered
- Opportunity for hearing
- Written findings of fact and conclusions of law
Modification and Vacating
The Administrator may vacate or modify a stop order if conditions have changed or it is in the public interest. Stop orders are not permanent; they can be revisited.