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1 Indicates Matter Stricken 2 Indicates New Matter 3 4 AMENDED 5 May 24, 2005 6 7 S. 588 8 9 Introduced by Senators Martin, Thomas, Bryant, McConnell, 10 Alexander, Hayes and Malloy 11 12 S. Printed 5/24/05--H. 13 Read the first time April 12, 2005. 14 15

1 [588-1] 1 2 3 4 5 6 7 8 9 A BILL 10 11 TO AMEND CHAPTER 1 OF TITLE 35, CODE OF LAWS OF 12 SOUTH CAROLINA, 1976, RELATING TO THE UNIFORM 13 SECURITIES ACT, SO AS TO ENACT THE SOUTH 14 CAROLINA UNIFORM SECURITIES ACT OF 2005, 15 PROVIDING FOR AN ENHANCED ROLE OF THE STATE IN 16 SECURITIES REGULATION AND INVESTOR PROTECTION 17 INCLUDING REGISTRATION OF INITIAL PUBLIC 18 OFFERINGS BY ISSUERS AND CONTROL PERSONS; 19 REGISTRATION OF BROKER-DEALERS AND THEIR 20 AGENTS AND INVESTMENT ADVISORS AND THEIR 21 REPRESENTATIVES; EXPANDED INVESTIGATORY AND 22 ENFORCEMENT POWERS THROUGH SUBPOENA POWER, 23 CRIMINAL PENALTIES SET BY THE STATE, AND STATE 24 CIVIL AND ADMINISTRATIVE LIABILITY; FACILITATION 25 OF ELECTRONIC FILING; AND INVESTOR EDUCATION; 26 TO AMEND SECTION 31-13-200, RELATING TO HOUSING 27 AND REDEVELOPMENT NOTES AND BONDS; SECTION 28 35-6-10, AS AMENDED, RELATING TO DEFINITIONS FOR 29 PURPOSES OF THE UNIFORM TRANSFER ON DEATH 30 SECURITY REGISTRATION ACT; SECTION 37-1-202, 31 RELATING TO TRANSACTIONS NOT SUBJECT TO THE 32 CONSUMER PROTECTION CODE; SECTION 38-90-440, AS 33 AMENDED, RELATING TO THE STATE REGISTRATION OF 34 A CAPTIVE INSURANCE COMPANY; AND SECTION 35 41-44-60, RELATING TO THE PALMETTO SEED CAPITAL 36 FUND, ALL SO AS TO CONFORM CROSS-REFERENCES TO 37 THE UNIFORM SECURITIES ACT OF 2005. 38 Amend Title To Conform 39 40 Be it enacted by the General Assembly of the State of South 41 Carolina: 42

1 [588] 1 1 SECTION 1. Chapter 1 of Title 35 of the 1976 Code is amended 2 to read: 3 4 CHAPTER 1. 5 6 South Carolina Uniform Securities Act of 2005 7 8 Article 1 9 10 General Provisions 11 12 Section 35-1-10. This chapter may be cited as the Uniform 13 Securities Act. 14 15 Section 35-1-20. When used in this chapter, unless the context 16 otherwise requires: 17 (1) “Securities commissioner” means Attorney General, who 18 shall be ex officio securities commissioner. 19 (2) “Agent” means any individual, other than a broker-dealer, 20 who represents a broker-dealer or issuer in effecting or attempting 21 to effect purchases or sales of securities. A partner, officer or 22 director of a broker-dealer or issuer, or a person occupying a 23 similar status or performing similar functions, is an “agent” only if 24 he otherwise comes within this definition. 25 (3) “Broker-dealer” means any person engaged in the business 26 of effecting transactions in securities for the account of others or 27 for his own account. 28 (4) “Federal covered adviser” means a person who is registered 29 under Section 203 of the Investment Advisers Act of 1940 or who 30 is excluded from the definition of “investment adviser” under 31 Section 202(a)(11) of the Investment Advisers Act of 1940. 32 (5) “Federal covered security” means any security that is a 33 covered security under Section 18(b) of the Securities Act of 1933 34 or the rules and regulations promulgated thereunder. 35 (6) “Fraud”, “deceit” and “defraud” are not limited to 36 common-law deceit. 37 (7) “Guaranteed” means guaranteed as to payment of principal, 38 interest or dividends. 39 (8) “Investment adviser” means any person who, for 40 compensation, engages in the business of advising others, either 41 directly or through publications or writings, as to the value of 42 securities or as to the advisability of investing in, purchasing, or 43 selling securities or who, for compensation and as a part of a

1 [588] 2 1 regular business, issues or promulgates analyses or reports 2 concerning securities. “Investment adviser” also includes financial 3 planners and other persons who, as an integral component of other 4 financially related services, provide the foregoing investment 5 advisory services to others for compensation and as part of a 6 business or who hold themselves out as providing the foregoing 7 investment advisory services to others for compensation. 8 “Investment adviser” does not include (a) an employee of an 9 investment adviser; (b) a bank, savings institution, or trust 10 company; (c) a lawyer, accountant, engineer, or teacher whose 11 performance of these services is solely incidental to the practice of 12 his profession; (d) a broker-dealer whose performance of these 13 services is solely incidental to the conduct of his business as a 14 broker-dealer and who receives no special compensation for them; 15 (e) a publisher of any bona fide newspaper, news column, 16 newsletter, news magazine, or business or financial publication or 17 service, whether communicated in hard copy form, or by electronic 18 means, or otherwise, that does not consist of the rendering of 19 advice on the basis of the specific investment situation of each 20 client; (f) any person that is a federal covered adviser; or (g) such 21 other persons not within the intent of this item as the securities 22 commissioner may by rule or order designate. Until October 10, 23 1999, the exclusions provided in Section 35-1-20(8)(f) shall not 24 apply to a person who fails to pay the fees required under Section 25 35-1-480(B) of this chapter. 26 (9) “Investment adviser representative” 27 (a) with respect to any adviser registered or required to be 28 registered under this chapter, means any partner, officer, director 29 of or person occupying a similar status or performing similar 30 functions or other individual, except clerical or ministerial 31 personnel, who is employed by or associated with an investment 32 adviser and, who does any of the following: 33 (i) makes any recommendations or otherwise renders 34 advice regarding securities, 35 (ii) manages accounts or portfolios of clients, 36 (iii) determines which recommendations or advice 37 regarding securities should be given, 38 (iv) solicits, offers, or negotiates for the sale of or sells 39 investment advisory services, or 40 (v) supervises employees who perform any of the 41 foregoing; or 42 (b) with respect to any person that is registered or required 43 to be registered under Section 203 of the Investment Advisers Act

1 [588] 3 1 of 1940 or that is excluded from the definition of an “investment 2 adviser” under Section 202(a)(11) of the Investment Advisers Act 3 of 1940, means any person who is defined as an investment adviser 4 representative’ under SEC Rule 203a-3 (17 CFR 275.203a-3) and 5 who has a place of business located in this State. 6 (10) “Issuer” means any person who issues or proposes to issue 7 any security, except that (a) with respect to certificates of deposit, 8 voting-trust certificates or collateral-trust certificates, or with 9 respect to certificates of interest or shares in an unincorporated 10 investment trust not having a board of directors or persons 11 performing similar functions or of the fixed, restricted 12 management or unit type, the term “issuer” means the person or 13 persons performing the acts and assuming the duties of depositor 14 or manager pursuant to the provisions of the trust or other 15 agreement or instrument under which the security is issued and (b) 16 with respect to certificates of interest or participation in oil, gas or 17 mining titles or leases or in payments out of production under such 18 titles or leases, there is not considered to be any “issuer”. 19 (11) “Nonissuer” means not directly or indirectly for the benefit 20 of the issuer. 21 (12) “Person” means an individual, a corporation, a partnership, 22 an association, a joint-stock company, a trust where the interests of 23 the beneficiaries are evidenced by a security, an unincorporated 24 organization, a government or a political subdivision of a 25 government. 26 (13)(a) “Sale” or “sell” includes every contract of sale of, 27 contract to sell, or disposition of, a security or interest in a security 28 for value. 29 (b) “Offer” or “offer to sell” includes every attempt or offer to 30 dispose of, or solicitation of an offer to buy, a security or interest 31 in a security for value. 32 (c) Any security given or delivered with, or as a bonus on 33 account of, any purchase of securities, or any other thing is 34 considered to constitute part of the subject of the purchase and to 35 have been offered and sold for value. 36 (d) A purported gift of assessable stock is considered to 37 involve an offer and sale. 38 (e) Every sale or offer of a warrant or right to purchase or 39 subscribe to another security of the same or another issuer, as well 40 as every sale or offer of a security which gives the holder a present 41 or future right or privilege to convert into another security of the 42 same or another issuer, is considered to include an offer of the 43 other security.

1 [588] 4 1 (f) The terms defined in this item (12) do not include (i) any 2 bona fide pledge or loan, (ii) any stock dividend, whether the 3 corporation distributing the dividend is the issuer of the stock or 4 not, if nothing of value is given by stockholders for the dividend 5 other than the surrender of a right to a cash or property dividend 6 when each stockholder may elect to take the dividend in cash or 7 property or in stock, (iii) any act incident to a class vote by 8 stockholders, limited partners, or members of a limited liability 9 company, pursuant to certificate of incorporation, partnership or 10 limited liability company agreement, or the applicable corporation, 11 limited liability company or partnership statute, on a merger, 12 consolidation, reclassification of securities, or sale of corporate 13 assets in consideration of the issuance of securities of another 14 entity, (iv) any act incident to a judicially approved reorganization 15 in which a security is issued in exchange for one or more 16 outstanding securities, claims or property interests, or partly in 17 such exchange and partly for cash or (v) a solicitation of interest 18 the response to which does not legally obligate the responding 19 person to purchase or pay for the securities and which conforms to 20 such other requirements as the securities commissioner may adopt 21 by rule, order, or statement of policy. 22 (14) “Securities Act of 1933”, “Securities Exchange Act of 23 1934”, “Public Utility Holding Company Act of 1935”, and 24 “Investment Company Act of 1940” mean the federal statutes of 25 those names as amended before or after June 14, 1961. 26 (15) “Security” means any note, stock, treasury stock, bond, 27 debenture, evidence of indebtedness, certificate of interest or 28 participation in any profit-sharing agreement, collateral-trust 29 certificate, preorganization certificate of subscription, transferable 30 share, investment contract, voting-trust certificate, certificate of 31 deposit for a security, certificate of interest or participation in an 32 oil, gas or mining title or lease or in payments out of production 33 under such a title or lease or, in general, any interest or instrument 34 commonly known as a “security”, or any certificate of interest or 35 participation in, temporary or interim certificate for, receipt for, 36 guarantee of, or warrant or right to subscribe to or purchase, any of 37 the foregoing. “Security” does not include any insurance or 38 endowment policy or annuity contract under which an insurance 39 company promises to pay money either in a lump sum or 40 periodically for life or for some other specified period. 41 (16) “State” means a state, territory, or possession of the United 42 States, the District of Columbia, and Puerto Rico. 43

1 [588] 5 1 Section 35-1-30. This chapter shall be administered by the 2 Attorney General who shall be ex officio the securities 3 commissioner and who may employ such additional assistants as 4 he deems necessary. The securities commissioner may delegate 5 any or all of his duties pursuant to this act to members of his staff, 6 as he deems necessary or appropriate. 7 8 Section 35-1-40. It is unlawful for the securities commissioner 9 or any of his officers or employees to use for personal benefit any 10 information which is filed with or obtained by the securities 11 commissioner and which is not made public. No provision of this 12 chapter authorizes the securities commissioner or any of his 13 officers or employees to disclose any such information except 14 among themselves or when necessary or appropriate in a 15 proceeding or investigation under this chapter. Investigative 16 records and complaints filed with the securities commissioner shall 17 not be considered public information. Orders issued by the 18 commissioner, including complaints of the commission, are to be 19 considered public records. 20 21 Section 35-1-50. The securities commissioner by rule or order 22 may require the filing of any prospectus, pamphlet, circular, form 23 letter, advertisement or other sales literature or advertising 24 communication addressed or intended for distribution to 25 prospective investors, including clients or prospective clients of an 26 investment adviser, unless the security or transaction is exempted 27 by Section 35-1-310 or 35-1-320, or the security is a federal 28 covered security or the transaction is with respect to a federal 29 covered security. 30 31 Section 35-1-60. The securities commissioner may make, 32 amend, and rescind those rules, forms, and orders, including cease 33 and desist orders, as are necessary to carry out the provisions of 34 this chapter, including rules and forms governing registration 35 statements, applications, and reports and defining any terms, 36 whether or not used in this chapter, insofar as the definitions are 37 not inconsistent with the provisions of this chapter. For the 38 purpose of rules and forms, the securities commissioner may 39 classify securities, persons, and matters within his jurisdiction and 40 prescribe different requirements for different classes. 41 No rule, form, or order may be made, amended, or rescinded 42 unless the securities commissioner finds that the action is 43 necessary or appropriate in the public interest or for the protection

1 [588] 6 1 of investors and consistent with the purposes fairly intended by the 2 policy and provisions of this chapter. In prescribing rules and 3 forms, the securities commissioner may cooperate with the 4 securities administrators of the other states and the Securities and 5 Exchange Commission with a view to effectuating the policy of 6 this chapter to achieve maximum uniformity in the form and 7 content of registration statements, applications, and reports 8 wherever practicable. 9 All rules and forms of the securities commissioner must be 10 published. 11 12 Section 35-1-70. The securities commissioner may by rule or 13 order prescribe (a) the form and content of financial statements 14 required under this chapter, (b) the circumstances under which 15 consolidated financial statements shall be filed and (c) whether any 16 required financial statements shall be certified by independent or 17 certified public accountants. All financial statements shall be 18 prepared in accordance with generally accepted accounting 19 practices. 20 21 Section 35-1-80. No provision of this chapter imposing any 22 liability applies to any act done or omitted in good faith in 23 conformity with any rule, form, order or policy statement of the 24 securities commissioner, notwithstanding that the rule, form, order 25 or policy statement may later be amended or rescinded or be 26 determined by judicial or other authority to be invalid for any 27 reason. The burden of proving good faith rests on the person 28 claiming reliance. 29 30 Section 35-1-90. Every hearing in an administrative proceeding 31 shall be public unless the securities commissioner in his discretion 32 grants a request that the hearing be conducted privately. 33 34 Section 35-1-100. A document is filed when it is received by 35 the securities commissioner. 36 37 Section 35-1-120. The information contained in or filed with 38 any registration statement, notice filing, application, or report may 39 be made available to the public as the securities commissioner 40 prescribes. 41 42 Section 35-1-130. Upon request and at such reasonable charges 43 as he prescribes, the securities commissioner shall furnish to any

1 [588] 7 1 person photostatic or other copies, certified under his seal of office 2 if requested, of any document which is a matter of public record. 3 In any proceeding or prosecution under this chapter, any copy so 4 certified is prima facie evidence of the contents of the entry or 5 document certified. 6 7 Section 35-1-140. The securities commissioner in his discretion 8 may honor requests from interested persons for interpretative 9 opinions. 10 11 Section 35-1-150. Fees for examinations, filings under Section 12 35-1-50, and other miscellaneous filings for which no fees are 13 otherwise specified by law shall be set by the securities 14 commissioner. 15 16 Section 35-1-160. It is unlawful for any person to make or 17 cause to be made, in any document filed with the securities 18 commissioner or in any proceeding under this chapter, any 19 statement which is, at the time and in the light of the circumstances 20 under which it is made, false or misleading in any material respect. 21 22 Section 35-1-170. (1) Neither (a) the fact that an application for 23 registration under Article 5 of this chapter or a registration 24 statement under Article 7 of this chapter or a notice filing under 25 Article 8 of this chapter has been filed nor (b) the fact that a person 26 or security is effectively registered or a notice of filing has been 27 made constitutes a finding by the securities commissioner that any 28 document filed under this chapter is true, complete, and not 29 misleading. Neither any such fact nor the fact that an exemption 30 or exception is available for a security or a transaction means that 31 the securities commissioner has passed in any way upon the merits 32 or qualifications of, or recommended or given approval to, any 33 person, security, or transaction. 34 (2) It is unlawful to make, or cause to be made, to any 35 prospective purchaser, customer, or client any representation 36 inconsistent with subsection (1) of this section. 37 38 Section 35-1-180. (1) Sections 35-1-170, 35-1-410, 35-1-810, 39 35-1-1210, and 35-1-1490 to 35-1-1560 apply to persons who sell 40 or offer to sell when (a) an offer to sell is made in this State or (b) 41 an offer to buy is made and accepted in this State.

1 [588] 8 1 (2) Sections 35-1-170, 35-1-410 and 35-1-1210 apply to persons 2 who buy or offer to buy when (a) an offer to buy is made in this 3 State or (b) an offer to sell is made and accepted in this State. 4 (3) For the purpose of this section, an offer to sell or to buy is 5 made in this State, whether or not either party is then present in 6 this State, when the offer (a) originates from this State or (b) is 7 directed by the offeror to this State and received at the place to 8 which it is directed, or at any post office in this State in the case of 9 a mailed offer. 10 (4) For the purpose of this section, an offer to buy or to sell is 11 accepted in this State when acceptance (a) is communicated to the 12 offeror in this State and (b) has not previously been communicated 13 to the offeror, orally or in writing, outside this State, and 14 acceptance is communicated to the offeror in this State, whether or 15 not either party is then present in this State, when the offeree 16 directs it to the offeror in this State reasonably believing the 17 offeror to be in this State and it is received at the place to which it 18 is directed, or at any post office in this State in the case of a mailed 19 acceptance. 20 (5) An offer to sell or to buy is not made in this State when (a) 21 the publisher circulates or there is circulated on his behalf in this 22 State any bona fide newspaper or other publication of general, 23 regular, and paid circulation which is not published in this State, or 24 which is published in this State but has had more than two-thirds 25 of its circulation outside this State during the past twelve months 26 or (b) a radio or television program originating outside this State is 27 received in this State. 28 (6) Sections 35-1-420 and 35-1-1220 to 35-1-1240, as well as 29 Section 35-1-170 so far as investment advisers are concerned, 30 apply when any act instrumental in effecting prohibited conduct is 31 done in this State, whether or not either party is then present in this 32 State. 33 34 Section 35-1-200. All effective registrations under prior law, 35 all administrative orders relating to such registrations, and all 36 conditions imposed upon such registrations remain in effect so 37 long as they would have remained in effect if this chapter had not 38 become effective. They are considered to have been filed, entered, 39 or imposed under this chapter, but are governed by prior law. 40 41 Section 35-1-220. (A) The Attorney General may retain the 42 first one million five hundred thousand dollars from fee revenues 43 collected pursuant to this chapter to be used for the operations of

1 [588] 9 1 the Securities Division. The Attorney General is authorized to 2 transfer to the South Carolina Law Enforcement Division two 3 hundred thousand dollars after retaining the first one million five 4 hundred thousand dollars collected pursuant to this chapter to be 5 retained, expended, and carried forward for the provision of 6 investigators for the State Grand Jury. The funds transferred to the 7 State Law Enforcement Division must be used only for purposes of 8 the State Grand Jury, and may not be transferred to any other 9 program or used for any other purpose. 10 (B) The Attorney General may retain the first two hundred fifty 11 thousand dollars received by the Division of Securities in a fiscal 12 year in settlement of litigation enforcement action and 13 reimbursements of expenses arising from violations under this 14 chapter to offset investigative, prosecutorial, and administrative 15 costs of enforcing this chapter. 16 17 Article 3. 18 19 Exempt Securities and Transactions 20 21 Section 35-1-310. The following securities are exempted from 22 Sections 35-1-50, 35-1-810, and 35-1-1100: 23 (1) Domestic government securities. Any security, including a 24 revenue obligation, issued or guaranteed by the United States, any 25 state, any political subdivision of a state or any agency or 26 corporate or other instrumentality of one or more of the foregoing, 27 or any certificate of deposit for any of the foregoing; 28 (2) Foreign government securities. Any security issued or 29 guaranteed by Canada, any Canadian province, any political 30 subdivision of any such province, any agency or corporate or other 31 instrumentality of one or more of the foregoing or any other 32 foreign government with which the United States currently 33 maintains diplomatic relations, if the security is recognized as a 34 valid obligation by the issuer or guarantor; 35 (3) Securities of banks, trusts and savings institutions. Any 36 security issued by and representing an interest in or a debt of, or 37 guaranteed by, any bank organized under the laws of the United 38 States or any bank, savings institution, or trust company organized 39 and supervised under the laws of any state; 40 (4) Securities of federal savings and loan and similar 41 associations. Any security issued by and representing an interest 42 in or a debt of, or guaranteed by, any federal savings and loan 43 association, or any building and loan or similar association,

1 [588] 10 1 organized under the laws of any state and authorized to do 2 business in this State; 3 (5) Securities of federal or state credit unions. Any security 4 issued or guaranteed by any federal credit union or any credit 5 union, industrial loan association, or similar association organized 6 and supervised under the laws of this State; 7 (6) Securities of public service companies. Any security issued 8 or guaranteed by any railroad, other common carrier, public utility 9 or holding company which is (a) subject to the jurisdiction of the 10 Interstate Commerce Commission, (b) a registered holding 11 company under the Public Utility Holding Company Act of 1935 12 or a subsidiary of such a company within the meaning of that act, 13 (c) regulated in respect of its rates and charges by a governmental 14 authority of the United States or any state or (d) regulated in 15 respect of the issuance or guarantee of the security by a 16 governmental authority of the United States, any state, Canada or 17 any Canadian province; 18 (7) Securities listed on stock exchanges. Any security listed or 19 approved for listing upon notice of issuance on the New York 20 Stock Exchange, the American Stock Exchange, the Midwest 21 Stock Exchange, the NASDAQ/National Market System, or that 22 other securities exchange as the securities commissioner by 23 regulation may designate, any other security of the same issuer 24 which is of senior or substantially equal rank, any security called 25 for by subscription rights or warrants so listed or approved, or any 26 warrant or right to purchase or subscribe to any of the foregoing; 27 (8) Securities of religious, charitable, and trade organizations. 28 Any security issued by any person organized and operated not for 29 private profit but exclusively for religious, educational, 30 benevolent, charitable, fraternal, social, athletic, or reformatory 31 purposes, or as a chamber of commerce or trade or professional 32 association; 33 (9) Short-term commercial paper. Any commercial paper which 34 arises out of a current transaction or the proceeds of which have 35 been or are to be used for current transactions and which evidences 36 an obligation to pay cash within nine months of the date of 37 issuance, exclusive of days of grace, or any renewal of such paper 38 which is likewise limited, or any guarantee of such paper or of any 39 such renewal; 40 (10) Employees’ investment plans. Any investment contract 41 issued in connection with an employees’ stock purchase, savings, 42 pension, profit-sharing, or similar benefit plan if the securities

1 [588] 11 1 commissioner is notified in writing thirty days before the inception 2 of the plan; and 3 (11) Securities of state cooperatives. Any security issued by a 4 cooperative association organized under the laws of this State. 5 6 Section 35-1-320. The following transactions are exempted 7 from Sections 35-1-50, 35-1-810, and 35-1-1100: 8 (1) Isolated nonissuer transactions. Any isolated nonissuer 9 transaction, whether effected through a broker-dealer or not; 10 (2) Distributions of outstanding securities. Any nonissuer 11 distribution of an outstanding security if (a) a recognized securities 12 manual contains the names of the issuer’s officers and directors, a 13 balance sheet of the issuer as of a date within eighteen months and 14 a profit and loss statement for either the fiscal year preceding that 15 date or the most recent year of operations or (b) the security has a 16 fixed maturity or a fixed interest or dividend provision and there 17 has been no default during the current fiscal year or within the 18 three preceding fiscal years, or during the existence of the issuer 19 and any predecessors if less than three years, in the payment of 20 principal, interest, or dividends on the security; 21 (3) Nonissuer transactions with broker-dealers. Any nonissuer 22 transaction effected by or through a registered broker-dealer 23 pursuant to an unsolicited order or offer to buy; but the securities 24 commissioner may by rule or otherwise require that the customer 25 acknowledge upon a specified form that the sale was unsolicited 26 and that a signed copy of each such form be preserved by the 27 broker-dealer for a specified period; 28 (4) Underwriting transactions. Any transaction between the 29 issuer or other person on whose behalf the offering is made and an 30 underwriter, or among underwriters; 31 (5) Mortgage bonds sold as unit. Any transaction in a bond or 32 other evidence of indebtedness secured by a real or chattel 33 mortgage or deed of trust or by an agreement for the sale of real 34 estate or chattels, if the entire mortgage, deed of trust or 35 agreement, together with all the bonds or other evidences of 36 indebtedness secured thereby, is offered and sold as a unit; 37 (6) Transactions by fiduciaries, etc. Any transaction by an 38 executor, administrator, sheriff, marshal, receiver, trustee in 39 bankruptcy, guardian or conservator; 40 (7) Transactions by pledgees. Any transaction executed by a 41 bona fide pledgee without any purpose of evading this chapter; 42 (8) Transactions with banks, and other financial institutions or 43 institutional buyers. Any offer or sale to a bank, savings

1 [588] 12 1 institution, trust company, insurance company, investment 2 company as defined in the Investment Company Act of 1940, 3 pension or profit-sharing trust or other financial institution or 4 institutional buyer or to a broker-dealer, whether the purchaser is 5 acting for itself or in some fiduciary capacity; 6 (9) Limited offerings. Any transaction pursuant to an offer 7 directed by the offeror to not more than twenty-five persons, other 8 than those designated in item (8) of this section, in this State 9 during any period of twelve consecutive months, whether or not 10 the offeror or any of the offerees is then present in this State, if (a) 11 the seller reasonably believes that all the buyers in this State, other 12 than those designated in item (8) of this section, are purchasing for 13 investment and (b) no commission or other remuneration is paid or 14 given directly or indirectly for soliciting any prospective buyer in 15 this State, other than those designated in item (8) of this section; 16 but the securities commissioner may by rule or order, as to any 17 security or transaction or any type of security or transaction, 18 withdraw or further condition this exemption, increase or decrease 19 the number of offerees permitted or waive the conditions in clauses 20 (a) and (b) with or without the substitution of a limitation on 21 remuneration and the securities commissioner, further, may require 22 persons claiming this exemption to notify him in writing of the 23 claim of exemption, the number of offers extended and to whom 24 made at any point during the offering process; 25 (10) Limited preorganization subscriptions. Any offer or sale of 26 a preorganization certificate or subscription if (a) no commission 27 or other remuneration is paid or given directly or indirectly for 28 soliciting any prospective subscriber, (b) the number of subscribers 29 does not exceed twenty-five and (c) no payment is made by any 30 subscriber prior to filing of the articles of incorporation, or limited 31 partnership, limited liability partnership, or limited liability 32 company agreement with the Secretary of State; 33 (11) Conversions and exercise of warrants. Any transaction 34 pursuant to an offer to existing security holders of the issuer, 35 including persons who at the time of the transaction are holders of 36 convertible securities, if (a) no commission or other remuneration, 37 other than a standby commission, is paid or given directly or 38 indirectly for soliciting any security holder in this State or (b) the 39 issuer first files a notice specifying the terms of the offer and the 40 securities commissioner does not by order disallow the exemption 41 within the next five full business days; 42 (12) Offers after registration statements filed. Any offer, but not 43 a sale of a security for which registration statements have been

1 [588] 13 1 filed under both this chapter and the Securities Act of 1933 if no 2 stop order or refusal order is in effect and no public proceeding or 3 examination looking toward such an order is pending under this 4 chapter. 5 6 Section 35-1-330. The securities commissioner may by order 7 deny or revoke any exemption specified in item (8) or (10) of 8 Section 35-1-310 or in Section 35-1-320 with respect to a specific 9 security or transaction. No such order may be entered without 10 appropriate prior notice to all interested parties, opportunity for 11 hearing and written findings of fact and conclusions of law, except 12 that the securities commissioner may by order summarily deny or 13 revoke any of the specified exemptions pending final 14 determination of any proceeding under this section. Upon the 15 entry of a summary order, the securities commissioner shall 16 promptly notify all interested parties that it has been entered and of 17 the reasons therefor and that within fifteen days of the receipt of a 18 written request the matter will be set down for hearing. If no 19 hearing is requested and none is ordered by the securities 20 commissioner, the order will remain in effect until it is modified or 21 vacated by the securities commissioner. If a hearing is requested 22 or ordered, the securities commissioner, after notice of an 23 opportunity for hearing to all interested persons, may modify or 24 vacate the order or extend it until final determination. No order 25 under this section may operate retroactively. No person may be 26 considered to have violated Section 35-1-50 or Section 35-1-810 27 by reason of any offer or sale effected after the entry of an order 28 under this section if he sustains the burden of proof that he did not 29 know, and in the exercise of reasonable care could not have 30 known, of the order. 31 32 Section 35-1-340. In any proceeding under this chapter the 33 burden of proving an exemption or an exception from a definition 34 is upon the person claiming it. 35 36 Article 5. 37 38 Broker-Dealers, Agents, Investment Advisers, and Investment 39 Adviser Representatives 40 41 Section 35-1-410. It is unlawful for any person to transact 42 business in this State as a broker-dealer or agent unless he is 43 registered under this chapter or exempt from licensing under this

1 [588] 14 1 chapter. It is unlawful for any broker-dealer or issuer to employ an 2 agent unless the agent is registered or exempt. The registration of 3 an agent is not effective during any period when he is not 4 associated with a particular broker-dealer registered under this 5 chapter, or a particular issuer. When an agent begins or terminates 6 a connection with a broker-dealer or issuer, or begins or terminates 7 those activities which make him an agent, the agent as well as the 8 broker-dealer or issuer shall promptly notify the securities 9 commissioner. 10 11 Section 35-1-415. (1) The following broker-dealers are exempt 12 from the licensing requirements of Section 35-1-410: 13 (a) a broker-dealer who either is registered or, except as 14 provided in subsection (2), is not required to be registered under 15 the Securities Exchange Act of 1934 and who has no place of 16 business in this State if: 17 (i) the transactions effected by the broker-dealer in this 18 State are exclusively with the issuer of the securities involved in 19 the transactions, other broker-dealers licensed or exempt under this 20 section, and financial or institutional investors; 21 (ii) the broker-dealer is licensed under the securities act of a 22 state in which the broker-dealer maintains a place of business and 23 the broker-dealer offers and sells in this State to a person who is an 24 existing customer of the broker-dealer and whose principal place 25 of residence is not in this State; or 26 (iii) the broker-dealer is licensed under the securities law of 27 a state in which the broker-dealer maintains a place of business and 28 the broker-dealer during any twelve consecutive months does not 29 effect transactions with more than five persons in this State in 30 addition to transactions with the issuers of the securities involved 31 in the transactions, financial or institutional investors, or 32 broker-dealers, whether or not the offeror or an offeree is then 33 present in this State; and 34 (b) other broker-dealers the commissioner, by rule or order, 35 exempts. 36 (2) The exemption provided in subsection (1)(a)(i) is not 37 available to a broker-dealer who deals solely in government 38 securities and is not registered under the Securities Exchange Act 39 of 1934 unless the broker-dealer is subject to supervision as a 40 dealer in government securities by the Federal Reserve Board. 41 (3) The following agents are exempt from the licensing 42 requirements of Section 35-1-410:

1 [588] 15 1 (a) an agent acting for a broker-dealer exempt under 2 subsection (1); 3 (b) an agent acting for an issuer in effecting transactions in a 4 security exempted by Section 35-1-310(1), (2), (3), (9), or (10); 5 (c) an agent acting for an issuer effecting offers or sales of 6 securities in transactions exempted by Section 35-1-320; 7 (d) an agent acting for an issuer effecting offers or sales of 8 securities that are covered securities under Section 18(b)(3) or 9 Section 18(b)(4)(D) of the Securities Act of 1933, provided that no 10 commission or other remuneration is paid or given directly or 11 indirectly for soliciting any person in this State; 12 (e) an agent acting for an issuer effecting transactions with 13 employees, partners, officers, or directors of the issuer, a parent or 14 a wholly-owned subsidiary of the issuer, if no commission or other 15 similar compensation is paid or given directly or indirectly to the 16 sales representative for soliciting an employee, partner, officer, or 17 director in this State; 18 (f) an agent whose transactions in this State are limited to 19 only those transactions set forth in Section 15(h)(2) of the 20 Securities Exchange Act of 1934; and 21 (g) other agents the securities commissioner, by rule or order, 22 exempts. 23 24 Section 35-1-420. (1) It is unlawful for any person to transact 25 business in this State as an investment adviser or investment 26 adviser representative unless he is registered under this chapter or 27 exempt from licensing under this chapter. The following 28 investment advisers are exempt from the licensing requirements of 29 Section 35-1-420: 30 (a) an investment adviser if: 31 (i) it has as its only clients in this State other investment 32 advisers, federal covered advisers, broker-dealers or financial or 33 institutional investors; or 34 (ii) it has no place of business in this State and the 35 investment adviser during the preceding twelve-month period has 36 not had more than five clients, other than those specified in 37 sub-subitem (i), who are residents of this State; and 38 (b) other investment advisers the commissioner, by rule or 39 order, exempts. 40 (2)(a) It is unlawful for any person required to be registered as 41 an investment adviser under this chapter to employ an investment 42 adviser representative unless the investment adviser representative 43 is registered under this chapter. The registration of an investment

1 [588] 16 1 adviser representative is not effective during any period when he is 2 not employed by an investment adviser registered under this 3 chapter or a federal covered adviser not required to be registered. 4 (b) It is unlawful for an investment adviser representative of a 5 federal covered adviser to transact business unless such investment 6 adviser representative is registered under this chapter, or is exempt 7 from registration. 8 (c) When an investment adviser representative begins or 9 terminates employment with an investment adviser or a federal 10 covered adviser, the investment adviser, in the case of Section 11 35-1-420(2)(a) and the investment adviser representative in the 12 case of Section 35-1-420(2)(b), shall promptly notify the securities 13 commissioner. 14 15 Section 35-1-430. Every broker-dealer and investment adviser 16 registration, and every federally-covered adviser notice filing, 17 expires at midnight on the last day of the calendar year in which it 18 became effective unless renewed. Unless renewed prior to 19 expiration, every broker-dealer agent and investment adviser 20 representative registration expires at the same time the registration 21 or notice filing of the associated broker-dealer, investment adviser, 22 or federally-covered adviser would expire if not renewed. 23 24 Section 35-1-440. A broker-dealer, agent, investment adviser, 25 or investment adviser representative may obtain an initial or 26 renewal registration by filing with the securities commissioner an 27 application together with a consent to service of process pursuant 28 to Section 35-1-1410. The application must contain whatever 29 information the securities commissioner by rule or order requires 30 concerning such matters as (a) the applicant’s form and place of 31 organization, (b) the applicant’s proposed method of doing 32 business, (c) the qualifications and business history of the 33 applicant, (d) in the case of a broker-dealer or investment adviser, 34 the qualifications and business history of any partner, officer or 35 director, any person occupying a similar status or performing 36 similar functions or any person directly or indirectly controlling 37 the broker-dealer or investment adviser, (e) in the case of an 38 investment adviser, the qualifications and business history of any 39 employee, (f) any injunction or administrative order or conviction 40 of a misdemeanor involving a security or any aspect of the 41 securities business and any conviction of a felony, (g) the 42 applicant’s financial condition and history and (h) information to

1 [588] 17 1 be furnished or disseminated to any client or prospective client, if 2 the applicant is an investment adviser. 3 For all applicants who are not members of the National 4 Association of Securities Dealers (NASD), a criminal record 5 history must be obtained, at the rate set by law, from the South 6 Carolina Law Enforcement Division on an applicant’s initial 7 application for registration under this section. All convictions of 8 misdemeanors involving a security or any aspect of the securities 9 business and all felonies recorded within ten years of the date of 10 the application must be noted on the registration. 11 12 Section 35-1-450. The securities commissioner may by rule or 13 order require an applicant for initial registration to publish an 14 announcement of the application in one or more specified 15 newspapers published in this State. 16 17 Section 35-1-460. Registration becomes effective when the 18 securities commissioner so orders. 19 20 Section 35-1-470. Registration of a broker-dealer automatically 21 constitutes registration of any agent who is a partner, officer or 22 director, or a person occupying a similar status or performing 23 similar functions. Registration of an investment adviser or a notice 24 filing by a federal covered adviser automatically constitutes 25 registration of any investment adviser representative who is a 26 partner, officer, or director, or a person occupying a similar status 27 or performing similar functions. 28 29 Section 35-1-480. (A) Every applicant for initial or renewal 30 registration as a broker-dealer, broker-dealer agent, investment 31 adviser, or investment adviser representative shall pass one or 32 more examinations, pay a registration fee, and meet other 33 requirements as required by the securities commissioner. 34 (B) Except with respect to federally-covered advisers whose 35 only clients are those described in Section 35-1-420(1)(a), a 36 federally-covered adviser shall file with the commissioner, prior to 37 acting as a federally-covered adviser in this State, such documents 38 filed with the Securities and Exchange Commission or such other 39 notice filing document, as the commissioner may by rule or 40 otherwise require, together with the notice fee and consent to 41 service of process as the commissioner, by rule or otherwise, 42 requires. The notice filing provisions under this subsection expire 43 as provided in Section 35-1-430.

1 [588] 18 1 (C) The following filing fees remain in effect for all initial, 2 renewal, and notice filings described in subsections (A) and (B) of 3 this section unless and until the securities commissioner 4 promulgates a rule or order establishing different fees: 5 (1) broker-dealer: three hundred ten dollars; 6 (2) agent: one hundred ten dollars; 7 (3) investment adviser and federally-covered adviser: two 8 hundred ten dollars; 9 (4) investment adviser representative: fifty-five dollars. 10 (D) When an application is denied or withdrawn, the filing fee 11 must not be refunded. 12 13 Section 35-1-490.A registered broker-dealer or investment 14 adviser may file an application for registration of a successor, and 15 a federal covered adviser may file a notice filing for a successor, 16 whether or not the successor is then in existence, for the unexpired 17 portion of the year. There shall be no filing fee. 18 19 Section 35-1-500. The securities commissioner, by rule or 20 order, may require a minimum capital for registered broker-dealers 21 not to exceed the limitations of Section 15 of the Securities 22 Exchange Act of 1934, and establish minimum financial 23 requirements for investment advisers, subject to the limitations 24 provided in Section 222 of the Investment Advisers Act of 1940, 25 which may include different requirements for those investment 26 advisers who maintain custody of clients’ funds or securities or 27 who have discretionary authority over clients’ funds and those 28 investment advisers who do not. 29 30 Section 35-1-510. The securities commissioner, by rule or 31 order, may require registered broker-dealers, agents, and 32 investment advisers who have custody of or discretionary authority 33 over client funds or securities, to post surety bonds in amounts as 34 the securities commissioner may, by rule or otherwise, prescribe, 35 and may determine their conditions, subject to the limitations of 36 Section 15 of the Securities Exchange Act of 1934 for 37 broker-dealers and Section 222 of the Investment Advisers Act of 38 1940 for investment advisers. The bond may be so drawn as to 39 cover the original registration and any renewal of the registration. 40 Any appropriate deposit of cash or securities shall be accepted in 41 lieu of any bond so required. No bond may be required of any 42 registrant whose net capital, or, in the case of an investment 43 adviser, whose minimum financial requirements, which may be

1 [588] 19 1 defined by rule, exceeds the amounts required by the securities 2 commissioner. Every bond shall provide for suit thereon by any 3 person who has a cause of action under Section 35-1-1210 and, if 4 the securities commissioner by rule or order requires, by any 5 person who has a cause of action not arising under this act. Every 6 bond must provide that no suit may be maintained to enforce any 7 liability on the bond unless brought within three years after the 8 sale or other act upon which the suit is based. 9 10 Section 35-1-520. (1) The securities commissioner may by 11 order deny, suspend, or revoke any registration if he finds (a) that 12 the order is in the public interest and (b) that the applicant or 13 registrant or, in the case of a broker-dealer or investment adviser, 14 any partner, officer, or director, any person occupying a similar 15 status or performing similar functions, or any person directly or 16 indirectly controlling the broker-dealer or investment adviser: 17 (i) has filed an application for registration which as of its 18 effective date, or as of any date after filing in the case of an order 19 denying effectiveness, was incomplete in any material respect or 20 contained any statement which was, in light of the circumstances 21 under which it was made, false or misleading with respect to any 22 material fact; 23 (ii) has wilfully violated or wilfully failed to comply with any 24 provision of this chapter or a predecessor law or any rule or order 25 under this chapter or a predecessor law; 26 (iii) has been convicted, within the past ten years, of any 27 misdemeanor involving a security or any aspect of the securities 28 business or any felony; 29 (iv) is permanently or temporarily enjoined by any court of 30 competent jurisdiction from engaging in or continuing any conduct 31 or practice involving any aspect of the securities business; 32 (v) is the subject of an order of the securities commissioner 33 denying, suspending, or revoking registration as a broker-dealer, 34 agent, investment adviser, or investment adviser representative; 35 (vi) is the subject of an order entered within the past five 36 years by the securities administrator of any other state or by the 37 Securities and Exchange Commission denying or revoking 38 registration as a broker-dealer, agent, investment adviser, or 39 investment adviser representative or the substantial equivalent of 40 those terms as defined in this chapter, is the subject of an order of 41 the Securities and Exchange Commission suspending or expelling 42 him from a national securities exchange or national securities 43 association registered under the Securities Exchange Act of 1934

1 [588] 20 1 or is the subject of a United States post office fraud order; but (1) 2 the securities commissioner may not institute a revocation or 3 suspension proceeding under this item (vi) more than one year 4 from the date of the order relied on and (2) he may not enter an 5 order under this item (vi) on the basis of an order under another 6 state act unless that order was based on facts which would 7 currently constitute a ground for an order under this section; 8 (vii) has engaged in dishonest or unethical practices in the 9 securities business; 10 (viii) is insolvent, either in the sense that his liabilities exceed 11 his assets or in the sense that he cannot meet his obligations as 12 they mature, but the securities commissioner may not enter an 13 order against a broker-dealer or investment adviser under this item 14 (viii) without a finding of insolvency as to the broker-dealer or 15 investment adviser; or 16 (ix) is not qualified on the basis of such factors as training, 17 experience and knowledge of the securities business, except as 18 otherwise provided in Section 35-1-530. 19 (2) The securities commissioner may by order deny, suspend, or 20 revoke any registration if he finds (a) that the order is in the public 21 interest and (b) that the applicant or registrant has failed: 22 (i) reasonably to supervise his agents if he is a broker-dealer 23 or his employees if he is an investment adviser; or 24 (ii) to pay the proper filing fee; but the securities 25 commissioner may enter only a denial order under this item (ii), 26 and he shall vacate any such order when the deficiency has been 27 corrected. 28 29 Section 35-1-530. The following provisions govern the 30 application of item (ix) of subsection (1) of Section 35-1-520: 31 (1) The securities commissioner may not enter an order against a 32 broker-dealer on the basis of the lack of qualification of any person 33 other than (a) the broker-dealer himself if he is an individual or (b) 34 an agent of the broker-dealer. 35 (2) The securities commissioner may not enter an order against 36 an investment adviser on the basis of the lack of qualification of 37 any person other than (a) the investment adviser himself if he is an 38 individual or (b) any other person who represents the investment 39 adviser in doing any of the acts which make him an investment 40 adviser. 41 (3) The securities commissioner may not enter an order solely 42 on the basis of lack of experience if the applicant or registrant is 43 qualified by training or knowledge or both.

1 [588] 21 1 (4) The securities commissioner shall consider that an agent who 2 will work under the supervision of a registered broker-dealer need 3 not have the same qualifications as a broker-dealer. 4 (5) The securities commissioner may by rule provide for an 5 examination, which may be written or oral or both, to be taken by 6 any class of or all applicants, as well as persons who represent or 7 will represent an investment adviser in doing any of the acts which 8 make him an investment adviser. 9 10 Section 35-1-550. The securities commissioner may by order 11 summarily postpone or suspend registration pending final 12 determination of any proceeding under this section. Upon the 13 entry of the order, the securities commissioner shall promptly 14 notify the applicant or registrant, as well as the employer or 15 prospective employer if the applicant or registrant is an agent or 16 investment adviser representative, that it has been entered and of 17 the reasons for the order and that within fifteen days after the 18 receipt of a written request the matter will be set down for hearing. 19 If no hearing is requested and none is ordered by the securities 20 commissioner, the order remains in effect until it is modified or 21 vacated by the securities commissioner. If a hearing is requested 22 or ordered, the securities commissioner, after notice of and 23 opportunity for hearing, may modify or vacate the order or extend 24 it until final determination. 25 26 Section 35-1-560. If the securities commissioner finds that any 27 registrant or applicant for registration is no longer in existence or 28 has ceased to do business as a broker-dealer, agent, investment 29 adviser, or investment adviser representative, or is subject to an 30 adjudication of mental incompetence or to the control of a 31 committee, conservator, or guardian, or cannot be located after 32 reasonable search, the securities commissioner may by order 33 cancel the registration or application. 34 35 Section 35-1-570. Withdrawal from registration as a 36 broker-dealer, agent, investment adviser, or investment adviser 37 representative becomes effective thirty days after receipt of an 38 application to withdraw or within that shorter period of time as the 39 securities commissioner may determine, unless a revocation or 40 suspension proceeding is pending when the application is filed or a 41 proceeding to revoke or suspend or to impose conditions upon the 42 withdrawal is instituted within thirty days after the application is 43 filed. If a proceeding is pending or instituted, withdrawal becomes

1 [588] 22 1 effective at that time and upon those conditions as the securities 2 commissioner by order determines. If no proceeding is pending or 3 instituted and withdrawal automatically becomes effective, the 4 securities commissioner may nevertheless institute a revocation or 5 suspension proceeding under item (ii) of subsection (1) of Section 6 35-1-520 within one year after withdrawal became effective and 7 enter a revocation or suspension order as of the last date on which 8 registration was effective. Withdrawal of a notice filing by a 9 federal covered adviser shall become effective upon receipt by the 10 securities commissioner of notice of the intention to withdraw. 11 12 Section 35-1-580. No order may be entered under any part of 13 Sections 35-1-520 to 35-1-570 or Section 35-1-1475 except the 14 first sentence of Section 35-1-550 without (a) appropriate prior 15 notice to the applicant or registrant, as well as the employer or 16 prospective employer if the applicant or registrant is an agent or 17 investment adviser representative, (b) opportunity for hearing, and 18 (c) written findings of fact and conclusions of law. 19 20 Section 35-1-590. Every registered broker-dealer, shall comply 21 with the recordkeeping requirements of the Securities Act of 1934. 22 A licensed investment adviser, subject to the limitations of Section 23 222 of the Investment Advisers Act of 1940, shall make and keep 24 such accounts, correspondence, memoranda, papers, books, and 25 other records as the securities commissioner prescribes by rule or 26 order. All records so required shall be preserved for three years, 27 unless such period is modified by the securities commissioner by 28 rule or order, and subject to the limitations of the Securities 29 Exchange Act of 1934 and Section 222 of the Investment Advisers 30 Act of 1940 for broker-dealers and investment advisers, 31 respectively. 32 33 Section 35-1-595. With respect to investment advisers, the 34 securities commissioner may require that certain information be 35 furnished or disseminated as necessary or appropriate in the public 36 interest or for the protection of investors and advisory clients. To 37 the extent determined by the securities commissioner in his 38 discretion, information furnished to clients or prospective clients 39 of an investment adviser that would be in compliance with the 40 Investment Advisers Act of 1940 and the rules thereunder may be 41 used in whole or partial satisfaction of this requirement. 42

1 [588] 23 1 Section 35-1-600. All the records referred to in Section 2 35-1-590 are subject at any time or from time to time to such 3 reasonable periodic, special or other examinations by 4 representatives of the securities commissioner, within or without 5 this State, as the securities commissioner deems necessary or 6 appropriate in the public interest or for the protection of investors. 7 For the purpose of avoiding unnecessary duplication of 8 examinations, the securities commissioner, in so far as he deems it 9 practicable in administering this section, may cooperate with the 10 securities administrators of other states, the Securities and 11 Exchange Commission, and any national securities exchange or 12 national securities association registered under the Securities 13 Exchange Act of 1934. 14 15 Section 35-1-610. Every registered broker-dealer, not to exceed 16 the limitations of Section 15 of the Securities Exchange Act of 17 1934, and investment adviser, not to exceed the limitations of 18 Section 222 of the Investment Advisers Act of 1940, shall file such 19 financial reports as the securities commissioner prescribes by rule 20 or order. 21 22 Section 35-1-620. If the information contained in any 23 document filed with the securities commissioner is or becomes 24 inaccurate or incomplete in any material respect, the registrant 25 shall promptly file a correcting amendment unless notification of 26 the correction has been given under Section 35-1-410. A federal 27 covered adviser shall file a corrected notice filing with the 28 securities commissioner only if amended documents are required 29 to be filed with the Securities Exchange Commission. 30 31 Article 7. 32 33 Registration of Securities 34 35 Section 35-1-810. It is unlawful for any person to offer or sell 36 any security in this State unless (a) it is registered under this 37 chapter, (b) the security or transaction is exempted under Section 38 35-1-310 or 35-1-320, or (c) it is a federal covered security. 39 40 Section 35-1-820. The following securities may be registered 41 by notification, whether or not they are also eligible for 42 registration by coordination under Section 35-1-840:

1 [588] 24 1 (1) Any security whose issuer and any predecessors have been 2 in continuous operation for at least five years, if (a) there has been 3 no default during the current fiscal year or within the three 4 preceding fiscal years in the payment of principal, interest, or 5 dividends on any security of the issuer, or any predecessors, with a 6 fixed maturity or a fixed interest or dividend provisions and (b) the 7 issuer and any predecessors during the past three fiscal years have 8 had average net earnings, determined in accordance with generally 9 accepted accounting practices, (i) which are applicable to all 10 securities without a fixed maturity or a fixed interest or dividend 11 provision outstanding at the date the registration statement is filed 12 and equal at least five percent of the amount of such outstanding 13 securities, as measured by the maximum offering price or the 14 market price on a day, selected by the registrant, within thirty days 15 before the date of filing the registration statement, whichever is 16 higher, or book value on a day, selected by the registrant, within 17 ninety days of the date of filing the registration statement to the 18 extent that there is neither a readily determinable market price nor 19 a cash offering price, or (ii) which, if the issuer and any 20 predecessors have not had any security of the type specified in 21 clause (i) outstanding for three full fiscal years, equal at least five 22 percent of the amount, as measured in clause (i), of all securities 23 which will be outstanding if all the securities being offered or 24 proposed to be offered, whether or not they are proposed to be 25 registered or offered in this State, are issued; and 26 (2) Any security, other than a certificate of interest or 27 participation in an oil, gas or mining title, or lease or in payments 28 out of production under such a title or lease, registered for 29 nonissuer distribution if (a) any security of the same class has ever 30 been registered under this chapter or a predecessor law or (b) the 31 security being registered was originally issued pursuant to an 32 exemption under this chapter or a predecessor law. 33 34 Section 35-1-830. A registration statement under Section 35 35-1-820 and this section shall contain the following information 36 and be accompanied by the following documents in addition to the 37 information specified in Section 35-1-910 and the consent to 38 service of process required by Section 35-1-1410: 39 (1) a statement demonstrating eligibility for registration by 40 notification; 41 (2) with respect to the issuer and any significant subsidiary; 42 (a) its name, address, and form of organization,

1 [588] 25 1 (b) the state, or foreign jurisdiction, and the date of its 2 organization, and 3 (c) the general character and location of its business; 4 (3) with respect to any person on whose behalf any part of the 5 offering is to be made in a nonissuer distribution; 6 (a) his name and address, 7 (b) the amount of securities of the issuer held by him as of the 8 date of the filing of the registration statement, and 9 (c) a statement of his reasons for making the offering; 10 (4) a description of the security being registered; 11 (5) the information and documents specified in items (8), (9), 12 (10) and (12) of Section 35-1-880; 13 (6) in the case of any registration under item (2) of Section 14 35-1-820 which does not also satisfy the conditions of item (1) of 15 Section 35-1-820, a balance sheet of the issuer as of a date within 16 four months prior to the filing of the registration statement and a 17 summary of earnings for each of the two fiscal years preceding the 18 date of the balance sheet and for any period between the close of 19 the last fiscal year and the date of the balance sheet, or for the 20 period of the issuer’s and any predecessors’ existence if less than 21 two years; and 22 (7) such additional information as the securities commissioner 23 may by rule or order require. 24 A registration statement under Section 35-1-820 and this section 25 becomes effective when the securities commissioner so orders. 26 27 Section 35-1-840. Any security for which a registration 28 statement has been filed under the Securities Act of 1933 in 29 connection with the same offering may be registered by 30 coordination. 31 32 Section 35-1-850. A registration statement under Section 33 35-1-840 and this section shall contain the following information 34 and be accompanied by the following documents in addition to the 35 information specified in Section 35-1-910 and the consent to 36 service of process required by Section 35-1-1410: 37 (1) two copies of the latest form of prospectus filed under the 38 Securities Act of 1933; 39 (2) if the securities commissioner by rule or otherwise requires, 40 a copy of the articles of incorporation and bylaws, or their 41 substantial equivalents, currently in effect, a copy of any 42 agreements with or among underwriters, a copy of any indenture

1 [588] 26 1 or other instrument governing the issuance of the security to be 2 registered and a specimen or copy of the security; 3 (3) if the securities commissioner requests, any other 4 information or copies of any other documents filed under the 5 Securities Act of 1933; and 6 (4) an undertaking to forward all future amendments to the 7 federal prospectus, other than an amendment which merely delays 8 the effective date of the registration statement, promptly and in any 9 event not later than the first business day after the day they are 10 forwarded to or filed with the Securities and Exchange 11 Commission, whichever first occurs. 12 13 Section 35-1-860. A registration statement under Sections 14 35-1-840 and 35-1-850 automatically becomes effective at the 15 moment the federal registration statement becomes effective if all 16 the following conditions are satisfied: 17 (1) no stop order is in effect and no proceeding is pending under 18 Sections 35-1-1010 to 35-1-1050; 19 (2) the registration statement has been on file with the securities 20 commissioner for at least ten days; and 21 (3) a statement of the maximum and minimum proposed 22 offering prices and the maximum underwriting discounts and 23 commissions has been on file for two full business days or such 24 shorter period as the securities commissioner permits by rule or 25 otherwise and the offering is made within these limitations. 26 The registrant shall promptly notify the securities commissioner 27 by telephone or telegram of the date and time when the federal 28 registration statement became effective and the content of the price 29 amendment, if any, and shall promptly file a post-effective 30 amendment containing the information and documents in the price 31 amendment. “Price amendment” means the final federal 32 amendment which includes a statement of the offering price, 33 underwriting, and selling discounts or commissions, amount of 34 proceeds, conversion rates, call prices, and other matters 35 dependent upon the offering price. Upon failure to receive the 36 required notification and post-effective amendment with respect to 37 the price amendment, the securities commissioner may enter a stop 38 order, without notice or hearing, retroactively denying 39 effectiveness to the registration statement or suspending its 40 effectiveness until compliance with this section, if he promptly 41 notifies the registrant by telephone or telegram, and promptly 42 confirms by letter or telegram when he notifies by telephone, of 43 the issuance of the order. If the registrant proves compliance with

1 [588] 27 1 the requirements of this section as to notice and post-effective 2 amendment, the stop order is void as of the time of its entry. The 3 securities commissioner may by rule or otherwise waive either or 4 both of the conditions specified in items (2) and (3) of this section. 5 If the federal registration statement becomes effective before all 6 the conditions in this section are satisfied and they are not waived, 7 the registration statement automatically becomes effective as soon 8 as all the conditions are satisfied. If the registrant advises the 9 securities commissioner of the date when the federal registration 10 statement is expected to become effective, the securities 11 commissioner shall promptly advise the registrant by telephone or 12 telegram, at the registrant’s expense, whether all the conditions are 13 satisfied and whether he then contemplates the institution of a 14 proceeding under Sections 35-1-1010 to 35-1-1050. But this 15 advice by the securities commissioner does not preclude the 16 institution of such a proceeding at any time. 17 18 Section 35-1-870. Any security may be registered by 19 qualification. 20 21 Section 35-1-880. Filings pursuant to Section 35-1-870 and this 22 section shall contain, within the registration statement, prospectus, 23 offering circular, or other offering documents, the following 24 information and be accompanied by the following documents in 25 addition to the information specified in Section 35-1-910 and the 26 consent to service of process required by Section 35-1-1410: 27 (1) with respect to the issuer and any significant subsidiary 28 (a) its name, address and form of organization, 29 (b) the state or foreign jurisdiction and date of its 30 organization, 31 (c) the general character and location of its business, 32 (d) a description of its physical properties and equipment, and 33 (e) a statement of the general competitive conditions in the 34 industry or business in which it is or will be engaged; 35 (2) with respect to every director and officer of the issuer or 36 person occupying a similar status or performing similar functions 37 (a) his name, address, and principal occupation for the past 38 five years, 39 (b) the amount of securities of the issuer held by him as of a 40 specified date within thirty days of the filing of the registration 41 statement, 42 (c) the amount of the securities covered by the registration 43 statement to which he has indicated his intention to subscribe, and

1 [588] 28 1 (d) a description of any material interest in any material 2 transaction with the issuer or any significant subsidiary effected 3 within the past three years or proposed to be effected; 4 (3) with respect to persons covered by item (2) of this section, 5 the remuneration paid during the past twelve months and estimated 6 to be paid during the next twelve months, directly or indirectly, by 7 the issuer, together with all predecessors, parents, subsidiaries, and 8 affiliates, to all those persons in the aggregate; 9 (4) with respect to any person owning of record, or beneficially 10 if known, ten percent or more of the outstanding shares of any 11 class of equity security of the issuer, the information specified in 12 item (2) of this section other than his occupation; 13 (5) with respect to every promoter if the issuer was organized 14 within the past three years, the information specified in item (2) of 15 this section, the amount paid to him within that period or intended 16 to be paid to him, and the consideration for any such payment; 17 (6) with respect to any person on whose behalf any part of the 18 offering is to be made in a nonissuer distribution 19 (a) his name and address, 20 (b) the amount of securities of the issuer held by him as of the 21 date of the filing of the registration statement, 22 (c) a description of any material interest in any material 23 transaction with the issuer or any significant subsidiary effected 24 within the past three years or proposed to be effected, and 25 (d) a statement of his reasons for making the offering; 26 (7) the capitalization and long-term debt, on both a current and a 27 pro forma basis, of the issuer and any significant subsidiary, 28 including a description of each security outstanding or being 29 registered or otherwise offered, and a statement of the amount and 30 kind of consideration, whether in the form of cash, physical assets, 31 services, patents, good will, or anything else, for which the issuer 32 or any subsidiary has issued any of its securities within the past 33 two years or is obligated to issue any of its securities; 34 (8) the kind and amount of securities to be offered; the 35 proposed offering price or the method by which it is to be 36 computed; any variation therefrom at which any proportion of the 37 offering is to be made to any person or class of persons other than 38 the underwriters, with a specification of any such person or class; 39 the basis upon which the offering is to be made if otherwise than 40 for cash; the estimated aggregate underwriting and selling 41 discounts or commissions and finders’ fees, including separately 42 cash, securities, contracts or anything else of value to accrue to the 43 underwriters or finders in connection with the offering, or, if the

1 [588] 29 1 selling discounts or commissions are variable, the basis of 2 determining them and their maximum and minimum amounts; the 3 estimated amounts of other selling expenses, including legal, 4 engineering, and accounting charges; the name and address of 5 every underwriter and every recipient of a finder’s fee; a copy of 6 any underwriting or selling-group agreement pursuant to which the 7 distribution is to be made, or the proposed form of any such 8 agreement whose terms have not yet been determined; and a 9 description of the plan of distribution of any securities which are to 10 be offered otherwise than through an underwriter; 11 (9) the estimated cash proceeds to be received by the issuer from 12 the offering; the purposes for which the proceeds are to be used by 13 the issuer; the amount to be used for each purpose; the order or 14 priority in which the proceeds will be used for the purposes stated; 15 the amounts of any funds to be raised from other sources to 16 achieve the purposes stated; the sources of any such funds; and, if 17 any part of the proceeds is to be used to acquire any property, 18 including good will, otherwise than in the ordinary course of 19 business, the names and addresses of the vendors, the purchase 20 price, the names of any persons who have received commissions in 21 connection with the acquisition and the amounts of any such 22 commissions and any other expense in connection with the 23 acquisition, including the cost of borrowing money to finance the 24 acquisition; 25 (10) a description of any stock options or other security options 26 outstanding or to be created in connection with the offering, 27 together with the amount of any such options held or to be held by 28 every person required to be named in item (2), (4), (5), (6), or (8) 29 of this section and by any person who holds or will hold ten 30 percent or more in the aggregate of any such options; 31 (11) the dates of, parties to and general effect concisely stated of 32 every management or other material contract made or to be made 33 otherwise than in the ordinary course of business if it is to be 34 performed in whole or in part at or after the filing of the 35 registration statement or was made within the past two years, 36 together with a copy of every such contract; 37 (12) a description of any pending litigation or proceeding to 38 which the issuer is a party and which materially affects its business 39 or assets, including any such litigation or proceeding known to be 40 contemplated by governmental authorities; 41 (13) two copies of any prospectus, pamphlet, circular, form 42 letter, advertisement or other sales literature intended as of the 43 effective date to be used in connection with the offering;

1 [588] 30 1 (14) a specimen or copy of the security being registered; a copy 2 of the issuer’s articles of incorporation and bylaws, or their 3 substantial equivalents, as currently in effect; and a copy of any 4 indenture or other instrument covering the security to be 5 registered; 6 (15) a signed or conformed copy of an opinion of counsel as to 7 the legality of the security being registered, with an English 8 translation if it is in a foreign language, which shall state whether 9 the security when sold will be legally issued, fully paid and 10 nonassessable and, if a debt security, a binding obligation of the 11 issuer; 12 (16) the written consent of any accountant, engineer, appraiser, 13 or other person whose profession gives authority to a statement 14 made by him, if any such person is named as having prepared or 15 certified a report or valuation, other than a public and official 16 document or statement, which is used in connection with the 17 registration statement; 18 (17) a balance sheet of the issuer as of a date within four months 19 prior to the filing of the registration statement; a profit and loss 20 statement and analysis of surplus for each of the three fiscal years 21 preceding the date of the balance sheet and for any period between 22 the close of the last fiscal year and the date of the balance sheet, or 23 for the period of the issuer’s and any predecessor’s existence if 24 less than three years; and, if any part of the proceeds of the 25 offering is to be applied to the purchase of any business, the same 26 financial statements which would be required if that business were 27 the registrant; and 28 (18) such additional information as the securities commissioner 29 requires by rule or order. 30 A registration statement under Section 35-1-870 and this section 31 becomes effective when the securities commissioner so orders. 32 33 Section 35-1-890. A registration statement may be filed by the 34 issuer, any other person on whose behalf the offering is to be made 35 or a registered broker-dealer. 36 37 Section 35-1-900.Every person filing a registration statement 38 shall pay a filing fee as required by the securities commissioner. A 39 filing fee of five hundred dollars shall remain in effect unless and 40 until the securities commissioner promulgates a rule or order 41 establishing a different fee. No registration statement may be 42 renewed or reregistered unless another filing fee of five hundred 43 dollars or other appropriate amount as may be specified by the

1 [588] 31 1 commissioner is paid. When a registration statement is withdrawn 2 before the effective date or a preeffective stop order is entered 3 under Sections 35-1-1010 to 35-1-1050, the securities 4 commissioner shall retain the entire filing fee. 5 6 Section 35-1-910. Every registration statement shall specify (a) 7 the amount of securities to be offered in this State, (b) the states in 8 which a registration statement or similar document in connection 9 with the offering has been or is to be filed and (c) any adverse 10 order, judgment or decree entered in connection with the offering 11 by the regulatory authorities in each state or by any court or the 12 Securities and Exchange Commission. 13 14 Section 35-1-920. Any document filed under this chapter or a 15 predecessor law, within five years preceding the filing of a 16 registration statement, may be incorporated by reference in the 17 registration statement to the extent that the document is currently 18 accurate. 19 20 Section 35-1-930. The securities commissioner may by rule or 21 otherwise permit the omission of any item of information or 22 document from any registration statement. 23 24 Section 35-1-940. In the case of a nonissuer distribution, 25 information may not be required under Section 35-1-880 or 26 Section 35-1-970 unless it is known to the person filing the 27 registration statement or to the persons on whose behalf the 28 distribution is to be made or can be furnished by them without 29 unreasonable effort or expense. 30 31 Section 35-1-950. The securities commissioner may by rule or 32 order require as a condition of registration by qualification or 33 coordination (a) that any security issued within the past three years 34 or to be issued to a promoter for a consideration substantially 35 different from the public offering price, or to any person for a 36 consideration other than cash, be deposited in escrow and (b) that 37 the proceeds from the sale of the registered security in this State be 38 impounded until the issuer receives a specified amount from the 39 sale of the security either in this State or elsewhere. 40 The securities commissioner may by rule or order require as a 41 condition of registration that any security registered by 42 qualification or coordination be sold only on a specified form of 43 subscription or sale contract and that a signed or conformed copy

1 [588] 32 1 of each contract be filed with the securities commissioner or 2 preserved for any period up to three years specified in the rule or 3 order. 4 5 Section 35-1-960. Every registration statement is effective for 6 one year from its effective date, except during the time a stop order 7 is in effect under Sections 35-1-1010 to 35-1-1050. All 8 outstanding securities of the same class as a registered security are 9 considered to be registered for the purpose of any nonissuer 10 transaction (a) so long as the registration statement is effective and 11 (b) no stop order suspending or revoking the effectiveness of the 12 registration statement has been entered under Sections 35-1-1010 13 to 35-1-1050. A registration statement may not be withdrawn for 14 one year from its effective date if any securities of the same class 15 are outstanding. A registration statement may be withdrawn 16 otherwise only in the discretion of the securities commissioner. 17 18 Section 35-1-970. So long as a registration statement is 19 effective, the securities commissioner may by rule or order require 20 the person who filed the registration statement to file reports, not 21 more often than quarterly, to keep reasonably current the 22 information contained in the registration statement and to disclose 23 the progress of the offering. 24 25 Section 35-1-990. As a condition of registration a prospectus 26 approved by the securities commissioner shall be sent or given to 27 each person to whom an offer is made before or concurrently with 28 (a) the first written offer made to him, otherwise than by means of 29 a public advertisement, by or for the account of the issuer or any 30 other person on whose behalf the offering is being made or by any 31 underwriter or broker-dealer who is offering part of an unsold 32 allotment or subscription taken by him as a participant in the 33 distribution, (b) the confirmation of any sale made by or for the 34 account of any such person, (c) payment pursuant to any such sale 35 or (d) delivery of the security pursuant to any such sale, whichever 36 first occurs. 37 38 Section 35-1-1000. Securities registered pursuant to Sections 39 35-1-820 to 35-1-880, become eligible for trading in the secondary 40 market at current market prices upon completion of the original 41 offering when such securities are outstanding and in the hands of 42 the public. 43

1 [588] 33 1 Section 35-1-1010. The securities commissioner may issue a 2 stop order denying effectiveness to, or suspending or revoking the 3 effectiveness of, any registration statement if he finds (a) that the 4 order is in the public interest and (b) that: 5 (i) the registration statement as of its effective date or as of any 6 earlier date in the case of an order denying effectiveness, or any 7 report under Section 35-1-970, is incomplete in any material 8 respect or contains any statement which was, in the light of the 9 circumstances under which it was made, false or misleading with 10 respect to any material fact; 11 (ii) any provision of this chapter or any rule, order or condition 12 lawfully imposed under this chapter has been wilfully violated, in 13 connection with the offering by (1) the person filing the 14 registration statement, (2) the issuer, any partner, officer or 15 director of the issuer, any person occupying a similar status or 16 performing similar functions, or any person directly or indirectly 17 controlling or controlled by the issuer, but only if the person filing 18 the registration statement is directly or indirectly controlled by or 19 acting for the issuer or (3) any underwriter; 20 (iii) the security registered or sought to be registered is the 21 subject of an administrative stop order or similar order or a 22 permanent or temporary injunction of any court of competent 23 jurisdiction entered under any other federal or state act applicable 24 to the offering but (1) the securities commissioner may not 25 institute a proceeding against an effective registration statement 26 under this item (iii) more than one year from the date of the order 27 or injunction relied on and (2) he may not enter an order under this 28 item (iii) on the basis of an order or injunction entered under any 29 other state act unless that order or injunction was based on facts 30 which would currently constitute a ground for a stop order under 31 this section; 32 (iv) the issuer’s enterprise or method of business includes or 33 would include activities which are illegal where performed; 34 (v) the offering has worked or tended to work a fraud upon 35 purchasers or would so operate; 36 (vi) the offering has been or would be made with unreasonable 37 amounts of underwriters’ and sellers’ discounts, commissions or 38 other compensation, promoters’ profits or participation or 39 unreasonable amounts or kinds of options; 40 (vii) when a security is sought to be registered by notification, it 41 is not eligible for such registration;

1 [588] 34 1 (viii) when a security is sought to be registered by coordination, 2 there has been a failure to comply with the undertaking required by 3 item (4) of Section 35-1-850; or 4 (ix) the applicant or registrant has failed to pay the proper filing 5 fee; but the securities commissioner may enter only a denial order 6 under this item (ix), and he shall vacate any such order when the 7 deficiency has been corrected. 8 9 Section 35-1-1030. The securities commissioner may by order 10 summarily postpone or suspend the effectiveness of the 11 registration statement pending final determination of any 12 proceeding under this section. Upon the entry of the order, the 13 securities commissioner shall promptly notify each person 14 specified in Section 35-1-1040 that it has been entered and of the 15 reasons therefor and that within fifteen days after the receipt of a 16 written request the matter will be set down for hearing. If no 17 hearing is requested and none is ordered by the securities 18 commissioner, the order will remain in effect until it is modified or 19 vacated by the securities commissioner. If a hearing is requested 20 or ordered, the securities commissioner, after notice of and 21 opportunity for hearing to each person specified in Section 22 35-1-1040, may modify or vacate the order or extend it until final 23 determination. 24 25 Section 35-1-1040. No stop order may be entered under any part 26 of Sections 35-1-1010 to 35-1-1030 except the first sentence of 27 Section 35-1-1030 without (a) appropriate prior notice to the 28 applicant or registrant, the issuer and the person on whose behalf 29 the securities are to be or have been offered, (b) opportunity for 30 hearing and (c) written findings of fact and conclusions of law. 31 32 Section 35-1-1050. The securities commissioner may vacate or 33 modify a stop order if he finds that the conditions which prompted 34 entry have changed or that it is otherwise in the public interest to 35 do so. 36 37 Article 8. 38 39 Notice Filings for Federal Covered Securities 40 41 Section 35-1-1100. (a) The securities commissioner, by rule or 42 order, may require the filing of any or all of the following

1 [588] 35 1 documents with respect to a federally-covered security under 2 Section 18(b)(2) of the Securities Act of 1933: 3 (1) Prior to the initial offer of the federally-covered security in 4 this State, all documents that are part of a current federal 5 registration statement filed with the United States Securities and 6 Exchange Commission under the Securities Act of 1933 or a notice 7 form adopted by the securities commissioner in lieu thereof, 8 together with a consent to service of process signed by the issuer 9 and a notice filing fee of five hundred forty-six dollars. 10 (2) After the initial offer of the federally-covered security in 11 this State, all documents that are part of an amendment to a current 12 federal registration statement filed with the United States 13 Securities and Exchange Commission under the Securities Act of 14 1933, or a notice form adopted by the securities commissioner in 15 lieu thereof which must be filed concurrently with the securities 16 commissioner. 17 (3) All notice filings for federally-covered securities are 18 effective upon receipt by the commission, unless another date is 19 requested by the issuer. These filings are effective for twelve 20 months. If securities are to be offered beyond this twelve-month 21 period, the issuer must file an annual notice filing consisting of any 22 documents that the securities commissioner, by rule or otherwise, 23 requires and a fee of five hundred forty-six dollars. The renewal 24 notice filing is effective upon the expiration of the prior filing 25 period. 26 (4) Amendments to a notice filing are effective upon receipt 27 by the securities commissioner. Termination of a notice filing is 28 effective upon receipt by the securities commissioner of notice of 29 the termination. 30 (b) With respect to any security that is a federally-covered 31 security under Section 18(b)(4)(D) of the Securities Act of 1933, 32 the securities commissioner, by rule or order, may require the 33 issuer to file a notice on SEC Form D and a consent to service of 34 process signed by the issuer no later than fifteen (15) days after the 35 first sale of the federally-covered security in this State, together 36 with a fee of three hundred dollars. 37 (c) The securities commissioner, by rule or order, may require 38 the filing of any document filed with the United States Securities 39 and Exchange Commission under the Securities Act of 1933 with 40 respect to a federally-covered security under Section 18(b)(3) or 41 (4) of the Securities Act of 1933, together with a filing fee of 42 twenty-five dollars.

1 [588] 36 1 (d) The securities commissioner may issue a stop order 2 suspending the offer and sale of a federally-covered security, 3 except a federally-covered security under Section 18(b)(1) of the 4 Securities Act of 1933, if he finds that: (1) the order is in the 5 public interest, and (2) there is a failure to comply with any 6 condition established under this section. 7 (e) The securities commissioner, by rule or order, may modify, 8 change, or waive any or all of the provisions of this section. 9 10 Article 9. 11 12 Fraudulent and Other Prohibited Practices 13 14 Section 35-1-1210. It is unlawful for any person, in connection 15 with the offer, sale, or purchase of any security, directly or 16 indirectly, to: 17 (1) employ any device, scheme, or artifice to defraud; 18 (2) make any untrue statement of a material fact or to omit to 19 state a material fact necessary in order to make the statements 20 made, in the light of the circumstances under which they are made, 21 not misleading; or 22 (3) engage in any act, practice, or course of business which 23 operates or would operate as a fraud or deceit upon any person. 24 25 Section 35-1-1220. It is unlawful for any person who receives 26 any consideration from another person primarily for advising the 27 other person as to the value of securities or their purchase or sale, 28 whether through the issuance of analyses or reports or otherwise: 29 (1) to employ any device, scheme, or artifice to defraud the 30 other person; 31 (2) to engage in any act, practice, or course of business which 32 would operate as a fraud or deceit upon the other person; 33 (3) acting as principal for his own account, knowingly to sell 34 any security to or purchase any security from a client, or acting as 35 broker for a person other than such client, knowingly to effect any 36 sale or purchase of any security for the account of such client, 37 without disclosing to such client in writing before the completion 38 of such transaction the capacity in which he is acting and obtaining 39 the consent of the client to such transaction. The prohibitions of 40 this subparagraph shall not apply to any transaction with a 41 customer of a broker-dealer if such broker-dealer is not acting as 42 an investment adviser in relation to such transaction;

1 [588] 37 1 (4) to engage in dishonest or unethical practices as the 2 commissioner may define by rule; 3 (5) The provisions of items (3) and (4) of this section do not 4 apply to federal covered advisers. 5 The commissioner may by rule or order adopt exemptions from 6 item (3) of this section where such exemptions are consistent with 7 the public interest and within the purposes fairly intended by the 8 policy and provisions of this chapter. 9 10 Section 35-1-1230. Except as may be permitted by rule or order 11 of the securities commissioner, it is unlawful for any investment 12 adviser to enter into, extend, or renew any investment advisory 13 contract unless it provides in writing that: 14 (1) the investment adviser shall not be compensated on the basis 15 of a share of capital gains upon or capital appreciation of the funds 16 or any portion of the funds of the client; 17 (2) no assignment of the contract may be made by the 18 investment adviser without the consent of the other party to the 19 contract; and 20 (3) the investment adviser, if a partnership, shall notify the other 21 party to the contract of any change in the membership of the 22 partnership within a reasonable time after the change. 23 Item (1) does not prohibit an investment advisory contract which 24 provides for compensation based upon the total value of a fund 25 averaged over a definite period, or as of definite dates, or taken as 26 of a definite time. “Assignment”, as used in item (2), includes any 27 direct or indirect transfer or hypothecation of an investment 28 advisory contract by the assignor or of a controlling block of the 29 assignor’s outstanding voting securities by a security holder of the 30 assignor; but, if the investment adviser is a partnership, no 31 assignment of an investment advisory contract is considered to 32 result from the death or withdrawal of a minority of the members 33 of the investment adviser having only a minority interest in the 34 business of the investment adviser, or from the admission to the 35 investment adviser of one or more members who, after admission, 36 will be only a minority of the members and will have only a 37 minority interest in the business. 38 The commissioner may by rule or order adopt exemptions from 39 the provisions of this section where such exemptions are consistent 40 with the public interest and within the purposes fairly intended by 41 the policy and provisions of this chapter. 42

1 [588] 38 1 Section 35-1-1240. To the extent permitted by rule or order of 2 the securities commissioner, an investment adviser licensed under 3 this chapter may take or retain custody of securities or funds of a 4 client. 5 6 Article 11 7 8 Judicial Review of Securities Commissioner’s Orders 9 10 Section 35-1-1310. Any person aggrieved by a final order of the 11 securities commissioner may obtain a review of the order in the 12 court of common pleas for Richland County or in the county 13 wherein the person resides by filing in court, within thirty days 14 after the entry of the order, a written petition praying that the order 15 be modified or set aside in whole or in part. The filing of a written 16 petition for review, accompanied by the posting of any bond set by 17 the court in which a petition is filed, shall stay the effectiveness of 18 the commissioner’s final order until such time as the court has 19 reviewed the order. A copy of the petition must be served upon 20 the securities commissioner, and the securities commissioner shall 21 certify and file in court a copy of the filing and evidence upon 22 which the order was entered. When these have been filed, the 23 court has exclusive jurisdiction to affirm, modify, enforce or set 24 aside the order, in whole or in part. The findings of the securities 25 commissioner as to the facts, if supported by competent, material, 26 and substantial evidence, are conclusive. 27 28 Section 35-1-1320. If either party applies to the court for leave 29 to adduce additional material evidence, and shows to the 30 satisfaction of the court that there were reasonable grounds for 31 failure to adduce the evidence in the hearing before the securities 32 commissioner, the court may order the additional evidence to be 33 taken before the securities commissioner and to be adduced upon 34 the hearing in such manner and upon such conditions as the court 35 considers proper. The securities commissioner may modify his 36 findings and order by reason of the additional evidence and shall 37 file in court the additional evidence together with any modified or 38 new findings or order. 39 40 Section 35-1-1330. The commencement of proceedings under 41 Section 35-1-1310 does not, unless specifically ordered by the 42 court, operate as a stay of the securities commissioner’s order. 43

1 [588] 39 1 Article 13 2 3 Enforcement, Remedies, Liabilities and Penalties 4 5 Section 35-1-1410. Every applicant for registration under this 6 chapter, federal covered adviser, and every issuer which proposes 7 to offer a security in this State through any person acting on any 8 agency basis in the common-law sense shall file with the securities 9 commissioner, in such form as he by rule prescribes, an 10 irrevocable consent appointing the securities commissioner or his 11 successor in office to be his attorney to receive service of any 12 lawful process in any noncriminal suit, action, or proceeding 13 against him or his successor, executor, or administrator which 14 arises under this chapter or any rule or order hereunder after the 15 consent has been filed, with the same force and validity as if 16 served personally on the person filing the consent. A person who 17 has filed such a consent in connection with a previous registration 18 need not file another. Service may be made by leaving a copy of 19 the process in the office of the securities commissioner, but it is 20 not effective unless (a) the plaintiff, who may be the securities 21 commissioner in a suit, action, or proceeding instituted by him, 22 forthwith sends notice of the service and a copy of the process by 23 registered mail to the defendant or respondent at his last address on 24 file with the securities commissioner and (b) the plaintiff’s 25 affidavit of compliance with this section is filed in the case on or 26 before the return day of the process, if any, or within such further 27 time as the court allows. 28 29 Section 35-1-1420. When any person, including any nonresident 30 of this State, engages in conduct prohibited or made actionable by 31 this chapter or any rule or order hereunder, has not filed a consent 32 to service of process under Section 35-1-1410 and personal 33 jurisdiction over him cannot otherwise be obtained in this State, 34 that conduct shall be considered equivalent to his appointment of 35 the securities commissioner or his successor in office to be his 36 attorney to receive service of any lawful process in any 37 noncriminal suit, action, or proceeding against him or his 38 successor, executor, or administrator which grows out of that 39 conduct and which is brought under this chapter or any rule or 40 order hereunder, with the same force and validity as if served on 41 him personally. Service may be made by leaving a copy of the 42 process in the office of the securities commissioner, and it is not 43 effective unless (a) the plaintiff, who may be the securities

1 [588] 40 1 commissioner in a suit, action, or proceeding instituted by him, 2 forthwith sends notice of the service and a copy of the process by 3 registered mail to the defendant or respondent at his last-known 4 address or takes other steps which are reasonably calculated to 5 give actual notice and (b) the plaintiff’s affidavit of compliance 6 with this section is filed in the case on or before the return day of 7 the process, if any, or within such further time as the court allows. 8 9 Section 35-1-1430. When process is served under Section 10 35-1-1410 or Section 35-1-1420, the court or the securities 11 commissioner in a proceeding before him shall order such 12 continuance as may be necessary to afford the defendant or 13 respondent reasonable opportunity to defend. 14 15 Section 35-1-1440. The securities commissioner in his discretion 16 (a) may make such public or private investigations within or 17 outside of this State as he deems necessary to determine whether 18 any person has violated or is about to violate any provision of this 19 chapter or any rule or order hereunder or to aid in the enforcement 20 of this chapter or in the prescribing of rules and forms hereunder, 21 (b) may require or permit any person to file a statement in writing, 22 under oath or otherwise as the securities commissioner determines, 23 as to all the facts and circumstances concerning the matter to be 24 investigated and (c) may publish information concerning any 25 violation of this chapter or any rule or order hereunder. 26 27 Section 35-1-1450. For the purpose of any investigation or 28 proceeding under this chapter, the securities commissioner or any 29 officer designated by him may administer oaths and affirmations, 30 subpoena witnesses, compel their attendance, take evidence and 31 require the production of any books, papers, correspondence, 32 memoranda, agreements, or other documents or records which the 33 securities commissioner deems relevant or material to the inquiry. 34 35 Section 35-1-1460. In case of contumacy by, or refusal to obey a 36 subpoena issued to, any person, the court of common pleas, upon 37 application by the securities commissioner, may issue to the person 38 an order requiring him to appear before the securities 39 commissioner or the officer designated by him, to produce 40 documentary evidence, if so ordered, or to give evidence touching 41 the matter under investigation or in question. The court may fine 42 the person not exceeding three thousand dollars if it finds that the 43 person’s failure to respond fully to the subpoena was not in good

1 [588] 41 1 faith or was for purposes of delay. In any case the court may 2 award the securities commissioner fees and costs incurred in 3 appearing before the court. Failure to obey the order of the court 4 may be punished by the court as a contempt of court in addition to 5 the other penalties authorized by this section. 6 7 Section 35-1-1470. No person is excused from attending and 8 testifying or from producing any document or record before the 9 securities commissioner or in obedience to the subpoena of the 10 securities commissioner or any officer designated by him or in any 11 proceeding instituted by the securities commissioner, on the 12 ground that the testimony or evidence, documentary or otherwise, 13 required of him may tend to incriminate him or subject him to a 14 penalty or forfeiture. But no individual may be prosecuted or 15 subjected to any penalty or forfeiture for or on account of any 16 transaction, matter or thing concerning which he is compelled, 17 after claiming his privilege against self-incrimination, to testify or 18 produce evidence documentary or otherwise, except that the 19 individual testifying is not exempt from prosecution and 20 punishment for perjury or contempt committed in testifying. 21 22 Section 35-1-1475. The securities commissioner may impose 23 and collect an administrative fine against any person found to have 24 violated any provision of this chapter, any rule or order 25 promulgated by the commissioner, or any written agreement 26 entered into with the commissioner in an amount not exceeding 27 five thousand dollars for each violation. 28 29 Section 35-1-1480. Whenever it appears to the securities 30 commissioner that any person has engaged or is about to engage in 31 any act or practice constituting a violation of any provision of this 32 chapter or any rule or order hereunder, he may in his discretion 33 bring an action in the court of common pleas for Richland County 34 or in the county wherein such person resides to enjoin the acts or 35 practices and to enforce compliance with this chapter or any rule or 36 order hereunder. Upon a proper showing a permanent or 37 temporary injunction, restraining order or writ of mandamus shall 38 be granted and a receiver or conservator may be appointed for the 39 defendant or the defendant’s assets. The court may not require the 40 securities commissioner to post a bond. 41 42 Section 35-1-1490. Any person who:

1 [588] 42 1 (1) offers or sells a security in violation of subsection (2) of 2 Section 35-1-170 or Section 35-1-410 or Section 35-1-810, or of 3 any rule or order under Section 35-1-50 which requires the 4 affirmative approval of sales literature before it is used or of any 5 condition imposed under Section 35-1-950 or Section 35-1-990; or 6 (2) Offers or sells a security by means of any untrue statement 7 of a material fact or any omission to state a material fact necessary 8 in order to make the statements made, in the light of the 9 circumstances under which they are made, not misleading, the 10 buyer not knowing of the untruth or omission, and who does not 11 sustain the burden of proof that he did not know, and in the 12 exercise of reasonable care could not have known, of the untruth or 13 omission; 14 Is liable to the person buying the security from him, who may 15 sue either at law or in equity to recover the consideration paid for 16 the security, together with interest at six percent per year from the 17 date of payment, costs, and reasonable attorneys’ fees, less the 18 amount of any income received on the security, upon the tender of 19 the security, or for damages if he no longer owns the security. 20 Damages are the amount that would be recoverable upon a tender 21 less the value of the security when the buyer disposed of it and 22 interest at six percent per year from the date of disposition. 23 24 Section 35-1-1500. Every person who directly or indirectly 25 controls a seller liable under Section 35-1-1490, every partner, 26 officer or director of such a seller, every person occupying a 27 similar status or performing similar functions, every employee of 28 such a seller who materially aids in the sale, and every 29 broker-dealer or agent who materially aids in the sale are also 30 liable jointly and severally with and to the same extent as the 31 seller, unless the nonseller who is so liable sustains the burden of 32 proof that he did not know, and in exercise of reasonable care 33 could not have known, of the existence of the facts by reason of 34 which the liability is alleged to exist. There is contribution as in 35 cases of contract among the several persons so liable. 36 37 Section 35-1-1510.Any tender specified in Section 35-1-1490 38 may be made at any time before entry of judgment. 39 40 Section 35-1-1520. Every cause of action under this chapter 41 survives the death of any person who might have been a plaintiff 42 or defendant. 43

1 [588] 43 1 Section 35-1-1530. No person may sue under Section 35-1-1490 2 or 35-1-1500 more than three years after the contract of sale, 3 except that in cases involving a violation of Section 35-1-1490(2), 4 where the cause of action accrues on or after July 1, 2003, the 5 limitations period is extended to three years after discovery of the 6 untrue statement or omission or after the discovery should have 7 been made by exercise of reasonable diligence. No person may sue 8 under either section if the buyer received: 9 (a) a written offer, before suit and at a time when he owned the 10 security, to refund the consideration paid together with interest at 11 six percent per year from the date of payment, less the amount of 12 any income received on the security, and he failed to accept the 13 offer within thirty days of its receipt; or 14 (b) the offer before suit and at a time when he did not own the 15 security, unless he rejected the offer in writing within thirty days 16 of its receipt. 17 18 Section 35-1-1540. No person who has made or engaged in the 19 performance of any contract in violation of any provision of this 20 chapter or any rule or order hereunder or who has acquired any 21 purported right under any such contract with knowledge of the 22 facts by reason of which its making or performance was in 23 violation, may base any suit on the contract. 24 25 Section 35-1-1550. Any condition, stipulation, or provision 26 binding any person acquiring any security to waive compliance 27 with any provision of this chapter or any rule or order hereunder is 28 void. 29 30 Section 35-1-1560. The rights and remedies provided by this 31 chapter are in addition to any other rights or remedies that may 32 exist at law or in equity, but this chapter does not create any cause 33 of action not specified in this section or in Section 35-1-510. 34 35 Section 35-1-1570. Nothing in this chapter limits the power of 36 the State to punish any person for any conduct which constitutes a 37 crime by statute or at common law. 38 39 Section 35-1-1580. The securities commissioner may refer that 40 evidence as is available concerning violations of this chapter or of 41 any rule or order under this chapter to the appropriate Division of 42 the Attorney General’s Office or other appropriate prosecution,

1 [588] 44 1 law enforcement, or licensing authorities who may, institute the 2 appropriate proceedings under this chapter. 3 4 Section 35-1-1590. Any person who wilfully violates any 5 provision of this chapter except Section 35-1-160, who wilfully 6 violates any rule or order under this chapter, or who wilfully 7 violates Section 35-1-160, knowing the statement made to be false 8 or misleading in any material respect, is guilty of a: 9 (1) felony and, upon conviction, must be fined not more than 10 fifty thousand dollars or imprisoned not more than ten years, or 11 both, if the person’s actions result in loss to an investor of twenty 12 thousand dollars or more; 13 (2) felony and, upon conviction, must be fined in the discretion 14 of the court or imprisoned not more than five years, or both, if the 15 person’s actions result in loss to an investor of more than one 16 thousand dollars but less than twenty thousand dollars; 17 (3) misdemeanor and, upon conviction, must be fined not more 18 than thirty thousand dollars or imprisoned not more than three 19 years, or both, if the person’s actions result in loss to an investor of 20 one thousand dollars or less, or if no losses are proven. 21 However, no person may be imprisoned for the violation of any 22 rule or order if he proves that he had no knowledge of the rule or 23 order. 24 25 Section 35-1-101. This chapter may be cited as the South 26 Carolina Uniform Securities Act of 2005. 27 28 South Carolina Reporters Comments 29 30 The South Carolina Uniform Securities Act of 2005 is adapted 31 on behalf of the Judiciary and Insurance and Banking Committees 32 of the South Carolina Senate by the South Carolina Law Institute 33 based on the 2002 amendment and revision of the Uniform 34 Securities Act promulgated by the National Conference of 35 Commissioners on Uniform State Laws. 36 37 Section 35-1-102. In this chapter, unless the context otherwise 38 requires: 39 (1) ‘Administrator’ means the Attorney General. 40 (2) ‘Agent’ means an individual, other than a broker-dealer, 41 who represents a broker-dealer in effecting or attempting to effect 42 purchases or sales of securities, or represents an issuer in effecting 43 or attempting to effect purchases or sales of the issuer’s securities.

1 [588] 45 1 But a partner, officer, or director of a broker-dealer or issuer, or an 2 individual having a similar status or performing similar functions 3 is an agent only if the individual otherwise comes within the term. 4 The term does not include an individual excluded by rule adopted 5 or order issued under this chapter. 6 (3) ‘Bank’ means: 7 (A) a banking institution organized under the laws of the 8 United States; 9 (B) a member bank of the Federal Reserve System; 10 (C) any other banking institution, whether incorporated or 11 not, doing business under the laws of a State or of the United 12 States, a substantial portion of the business of which consists of 13 receiving deposits or exercising fiduciary powers similar to those 14 permitted to be exercised by national banks under the authority of 15 the Comptroller of the Currency pursuant to Section 1 of Public 16 Law 87-722 (12 U.S.C. Section 92a), and which is supervised and 17 examined by a state or federal agency having supervision over 18 banks, and which is not operated for the purpose of evading this 19 chapter; and 20 (D) a receiver, conservator, or other liquidating agent of any 21 institution or firm included in subparagraph (A), (B), or (C). 22 (4) ‘Broker-dealer’ means a person engaged in the business of 23 effecting transactions in securities for the account of others or for 24 the person’s own account. The term does not include: 25 (A) an agent; 26 (B) an issuer; 27 (C) a bank or savings institution if its activities as 28 broker-dealer are limited to those specified in Section 3(a)(4) and 29 3(a)(5) of the Securities Exchange Act of 1934 (15 U.S.C. Section 30 78c(a)(4) and (5)), or a bank that satisfies the conditions specified 31 in Section 3(a)(4)(E) of the Securities Exchange Act of 1934 (15 32 U.S.C. 78c(a)(4)); 33 (D) an international banking institution; or 34 (E) a person excluded by rule adopted or order issued under 35 this chapter. 36 (5) ‘Depository institution’ means: 37 (A) a bank; or 38 (B) a savings institution, trust company, credit union, or 39 similar institution that is organized or chartered under the laws of a 40 State or of the United States, authorized to receive deposits, and 41 supervised and examined by an official or agency of a State or the 42 United States if its deposits or share accounts are insured to the 43 maximum amount authorized by statute by the Federal Deposit

1 [588] 46 1 Insurance Corporation, the National Credit Union Share Insurance 2 Fund, or a successor authorized by federal law. The term does not 3 include: 4 (i) an insurance company or other organization primarily 5 engaged in the business of insurance; 6 (ii) a Morris Plan bank; or 7 (iii) an industrial loan company that is not an ‘insured 8 depository institution’ as defined in Section 3(c)(2) of the Federal 9 Deposit Insurance Act, 12 U.S.C. 1813(c)(2), or any successor 10 statute. 11 (6) ‘Federal covered investment adviser’ means a person 12 registered under the Investment Advisers Act of 1940. 13 (7) ‘Federal covered security’ means a security that is, or upon 14 completion of a transaction will be, a covered security under 15 Section 18(b) of the Securities Act of 1933 (15 U.S.C. Section 16 77r(b)) or rules or regulations adopted pursuant to that provision. 17 (8) ‘Filing’ means the receipt under this chapter of a record by 18 the Securities Commissioner or a designee of the Securities 19 Commissioner. 20 (9) ‘Fraud’, ‘deceit’, and ‘defraud’ are not limited to common 21 law deceit. 22 (10) ‘Guaranteed’ means guaranteed as to payment of all 23 principal and all interest. 24 (11) ‘Institutional investor’ means any of the following, whether 25 acting for itself or for others in a fiduciary capacity: 26 (A) a depository institution or international banking 27 institution; 28 (B) an insurance company; 29 (C) a separate account of an insurance company; 30 (D) an investment company as defined in the Investment 31 Company Act of 1940; 32 (E) a broker-dealer registered under the Securities Exchange 33 Act of 1934; 34 (F) an employee pension, profit-sharing, or benefit plan if 35 the plan has total assets in excess of ten million dollars or its 36 investment decisions are made by a named fiduciary, as defined in 37 the Employee Retirement Income Security Act of 1974, that is a 38 broker-dealer registered under the Securities Exchange Act of 39 1934, an investment adviser registered or exempt from registration 40 under the Investment Advisers Act of 1940, an investment adviser 41 registered under this chapter, a depository institution, or an 42 insurance company;

1 [588] 47 1 (G) a plan established and maintained by a State, a political 2 subdivision of a State, or an agency or instrumentality of a State or 3 a political subdivision of a State for the benefit of its employees, if 4 the plan has total assets in excess of ten million dollars or its 5 investment decisions are made by a duly designated public official 6 or by a named fiduciary, as defined in the Employee Retirement 7 Income Security Act of 1974, that is a broker-dealer registered 8 under the Securities Exchange Act of 1934, an investment adviser 9 registered or exempt from registration under the Investment 10 Advisers Act of 1940, an investment adviser registered under this 11 chapter, a depository institution, or an insurance company; 12 (H) a trust, if it has total assets in excess of ten million 13 dollars, its trustee is a depository institution, and its participants 14 are exclusively plans of the types identified in subparagraph (F) or 15 (G), regardless of the size of their assets, except a trust that 16 includes as participants self-directed individual retirement 17 accounts or similar self-directed plans; 18 (I) an organization described in Section 501(c)(3) of the 19 Internal Revenue Code (26 U.S.C. Section 501(c)(3)), corporation, 20 Massachusetts trust or similar business trust, limited liability 21 company, or partnership, not formed for the specific purpose of 22 acquiring the securities offered, with total assets in excess of ten 23 million dollars; 24 (J) a small business investment company licensed by the 25 Small Business Administration under Section 301(c) of the Small 26 Business Investment Act of 1958 (15 U.S.C. Section 681(c)) with 27 total assets in excess of ten million dollars; 28 (K) a private business development company as defined in 29 Section 202(a)(22) of the Investment Advisers Act of 1940 (15 30 U.S.C. Section 80b-2(a)(22)) with total assets in excess of ten 31 million dollars; 32 (L) a federal covered investment adviser acting for its own 33 account; 34 (M) a ‘qualified institutional buyer’ as defined in Rule 35 144A(a)(1), other than Rule 144A(a)(1)(i)(H), adopted under the 36 Securities Act of 1933 (17 C.F.R. 230.144A); 37 (N) a ‘major U.S. institutional investor’ as defined in Rule 38 15a-6(b)(4)(i) adopted under the Securities Exchange Act of 1934 39 (17 C.F.R. 240.15a-6); 40 (O) any other person, other than an individual, of 41 institutional character with total assets in excess of ten million 42 dollars not organized for the specific purpose of evading this 43 chapter; or

1 [588] 48 1 (P) any other person specified by rule adopted or order 2 issued under this chapter. 3 (12) ‘Insurance company’ means a company organized as an 4 insurance company whose primary business is writing insurance or 5 reinsuring risks underwritten by insurance companies and which is 6 subject to supervision by the insurance commissioner or a similar 7 official or agency of a State. 8 (13) ‘Insured’ means insured as to payment of all principal and 9 all interest. 10 (14) ‘International banking institution’ means an international 11 financial institution of which the United States is a member and 12 whose securities are exempt from registration under the Securities 13 Act of 1933. 14 (15) ‘Investment adviser’ means a person that, for 15 compensation, engages in the business of advising others, either 16 directly or through publications or writings, as to the value of 17 securities or the advisability of investing in, purchasing, or selling 18 securities or that, for compensation and as a part of a regular 19 business, issues or promulgates analyses or reports concerning 20 securities. The term includes a financial planner or other person 21 that, as an integral component of other financially related services, 22 provides investment advice regarding securities to others for 23 compensation as part of a business or that holds itself out as 24 providing investment advice regarding securities to others for 25 compensation. The term does not include: 26 (A) an investment adviser representative; 27 (B) a lawyer, accountant, engineer, or teacher whose 28 performance of investment advice regarding securities is solely 29 incidental to the practice of the person’s profession; 30 (C) a broker-dealer or its agents whose performance of 31 investment advice regarding securities is solely incidental to the 32 conduct of business as a broker-dealer and that does not receive 33 special compensation for the investment advice regarding 34 securities; 35 (D) a publisher of a bona fide newspaper, news magazine, or 36 business or financial publication of general and regular circulation; 37 (E) a federal covered investment adviser; 38 (F) a bank or savings institution; 39 (G) any other person that is excluded by the Investment 40 Advisers Act of 1940 from the definition of investment adviser; or 41 (H) any other person excluded by rule adopted or order 42 issued under this chapter.

1 [588] 49 1 (16) ‘Investment adviser representative’ means an individual 2 employed by or associated with an investment adviser or federal 3 covered investment adviser and who makes any recommendations 4 or otherwise gives investment advice regarding securities, manages 5 securities accounts or portfolios of clients, determines which 6 recommendation or advice regarding securities should be given, 7 provides investment advice regarding securities or holds herself or 8 himself out as providing investment advice regarding securities, 9 receives compensation to solicit, offer, or negotiate for the sale of 10 or for selling investment advice regarding securities, or supervises 11 employees who perform any of the foregoing. The term does not 12 include an individual who: 13 (A) performs only clerical or ministerial acts; 14 (B) is an agent whose performance of investment advice 15 regarding securities is solely incidental to the individual acting as 16 an agent and who does not receive special compensation for 17 investment advisory services; 18 (C) is employed by or associated with a federal covered 19 investment adviser, unless the individual has a ‘place of business’ 20 in this State as that term is defined by rule adopted under Section 21 203A of the Investment Advisers Act of 1940 (15 U.S.C. Section 22 80b-3a) and is: 23 (i) an ‘investment adviser representative’ as that term is 24 defined by rule adopted under Section 203A of the Investment 25 Advisers Act of 1940 (15 U.S.C. Section 80b-3a); or 26 (ii) not a ‘supervised person’ as that term is defined in 27 Section 202(a)(25) of the Investment Advisers Act of 1940 (15 28 U.S.C. Section 80b-2(a)(25)); or 29 (D) is excluded by rule adopted or order issued under this 30 chapter. 31 (17) ‘Issuer’ means a person that issues or proposes to issue a 32 security, subject to the following: 33 (A) The issuer of a voting trust certificate, collateral trust 34 certificate, certificate of deposit for a security, or share in an 35 investment company without a board of directors or individuals 36 performing similar functions is the person performing the acts and 37 assuming the duties of depositor or manager pursuant to the trust 38 or other agreement or instrument under which the security is 39 issued. 40 (B) The issuer of an equipment trust certificate or similar 41 security serving the same purpose is the person by which the 42 property is or will be used or to which the property or equipment is

1 [588] 50 1 or will be leased or conditionally sold or that is otherwise 2 contractually responsible for assuring payment of the certificate. 3 (C) The issuer of a fractional undivided interest in an oil, 4 gas, or other mineral lease or in payments out of production under 5 a lease, right, or royalty is the owner of an interest in the lease or 6 in payments out of production under a lease, right, or royalty, 7 whether whole or fractional, that creates fractional interests for the 8 purpose of sale. 9 (18) ‘Nonissuer transaction’ or ‘nonissuer distribution’ means a 10 transaction or distribution not directly or indirectly for the benefit 11 of the issuer. 12 (19) ‘Offer to purchase’ includes an attempt or offer to obtain, 13 or solicitation of an offer to sell, a security or interest in a security 14 for value. The term does not include a tender offer that is subject 15 to Section 14(d) of the Securities Exchange Act of 1934 (15 U.S.C. 16 78n(d)). 17 (20) ‘Person’ means an individual; corporation; business trust; 18 estate; trust; partnership; limited liability company; association; 19 joint venture; government; governmental subdivision, agency, or 20 instrumentality; public corporation; or any other legal or 21 commercial entity. 22 (21) ‘Place of business’ of a broker-dealer, an investment 23 adviser, or a federal covered investment adviser means: 24 (A) an office at which the broker-dealer, investment adviser, 25 or federal covered investment adviser regularly provides brokerage 26 or investment advice regarding securities or solicits, meets with, or 27 otherwise communicates with customers or clients; or 28 (B) any other location that is held out to the general public as 29 a location at which the broker-dealer, investment adviser, or 30 federal covered investment adviser provides brokerage or 31 investment advice regarding securities or solicits, meets with, or 32 otherwise communicates with customers or clients. 33 (22) ‘Predecessor chapter’ means Chapter 1 of Title 35 of the 34 South Carolina Code of Laws, 1976, prior to its amendment by the 35 adoption of the South Carolina Uniform Securities Act of 2005. 36 (23) ‘Price amendment’ means the amendment to a registration 37 statement filed under the Securities Act of 1933 or, if an 38 amendment is not filed, the prospectus or prospectus supplement 39 filed under the Securities Act of 1933 that includes a statement of 40 the offering price, underwriting and selling discounts or 41 commissions, amount of proceeds, conversion rates, call prices, 42 and other matters dependent upon the offering price.

1 [588] 51 1 (24) ‘Principal place of business’ of a broker-dealer or an 2 investment adviser means the executive office of the broker-dealer 3 or investment adviser from which the officers, partners, or 4 managers of the broker-dealer or investment adviser direct, 5 control, and coordinate the activities of the broker-dealer or 6 investment adviser. 7 (25) ‘Record’, except in the phrases ‘of record’, ‘official 8 record’, and ‘public record’, means information that is inscribed on 9 a tangible medium or that is stored in an electronic or other 10 medium and is retrievable in perceivable form. 11 (26) ‘Sale’ includes every contract of sale, contract to sell, or 12 disposition of, a security or interest in a security for value, and 13 ‘offer to sell’ includes every attempt or offer to dispose of, or 14 solicitation of an offer to purchase, a security or interest in a 15 security for value. Both terms include: 16 (A) a security given or delivered with, or as a bonus on 17 account of, a purchase of securities or any other thing constituting 18 part of the subject of the purchase and having been offered and 19 sold for value; 20 (B) a gift of assessable stock involving an offer and sale; and 21 (C) a sale or offer of a warrant or right to purchase or 22 subscribe to another security of the same or another issuer and a 23 sale or offer of a security that gives the holder a present or future 24 right or privilege to convert the security into another security of 25 the same or another issuer, including an offer of the other security. 26 (27) ‘Securities and Exchange Commission’ means the United 27 States Securities and Exchange Commission. 28 (28) ‘Securities Commissioner’ means the Attorney General. 29 (29) ‘Security’ means any note; stock; treasury stock; security 30 future; bond; debenture; evidence of indebtedness; certificate of 31 interest or participation in a profit-sharing agreement; collateral 32 trust certificate; preorganization certificate or subscription; 33 transferable share; investment contract; voting trust certificate; 34 certificate of deposit for a security; fractional undivided interest in 35 oil, gas, or other mineral rights; put, call, straddle, option, or 36 privilege on a security, certificate of deposit, or group or index of 37 securities, including an interest therein or based on the value 38 thereof; put, call, straddle, option, or privilege entered into on a 39 national securities exchange relating to foreign currency; or, in 40 general, an interest or instrument commonly known as a ‘security’; 41 or a certificate of interest or participation in, temporary or interim 42 certificate for, receipt for, guarantee of, or warrant or right to 43 subscribe to or purchase, any of the foregoing. The term:

1 [588] 52 1 (A) includes both a certificated and an uncertificated 2 security; 3 (B) does not include an insurance or endowment policy or 4 annuity contract under which an insurance company promises to 5 pay a sum of money either in a lump sum or periodically for life or 6 other specified period; 7 (C) does not include an interest in a contributory or 8 noncontributory pension or welfare plan subject to the Employee 9 Retirement Income Security Act of 1974; 10 (D) includes an investment in a common enterprise with the 11 expectation of profits to be derived primarily from the efforts of a 12 person other than the investor and a ‘common enterprise’ means an 13 enterprise in which the fortunes of the investor are interwoven with 14 those of either the person offering the investment, a third party, or 15 other investors; and 16 (E) ‘Investment contract’ may include, among other 17 contracts, an interest in a limited partnership and a limited liability 18 company and shall include an investment in a viatical settlement or 19 similar agreement. 20 (30) ‘Self-regulatory organization’ means a national securities 21 exchange registered under the Securities Exchange Act of 1934, a 22 national securities association of broker-dealers registered under 23 the Securities Exchange Act of 1934, a clearing agency registered 24 under the Securities Exchange Act of 1934, or the Municipal 25 Securities Rulemaking Board established under the Securities 26 Exchange Act of 1934. 27 (31) ‘Sign’ means, with present intent to authenticate or adopt a 28 record: 29 (A) to execute or adopt a tangible symbol; or 30 (B) to attach or logically associate with the record an 31 electronic symbol, sound, or process. 32 (32) ‘State’ means a State of the United States, the District of 33 Columbia, Puerto Rico, the United States Virgin Islands, or any 34 territory or insular possession subject to the jurisdiction of the 35 United States. 36 37 Official Comments 38 39 Prior Provisions: 1956 Act Section 401; RUSA 101. 40 1. Under Section 605(a) the administrator has the power to 41 define by rule any term, whether or not used in this chapter, as 42 long as the definitions are not inconsistent with the chapter.

1 [588] 53 1 2. All definitions include corresponding meanings. For 2 example, “filing” would include “file” or “filed”; “sale” would 3 include “sell.” 4 3. Prefatory Phrase: “In this [chapter], unless the context 5 otherwise requires”: Prior Provisions: 1956 Act Section 401 6 Preface; RUSA Section 101 Preface. This prefatory phrase which 7 is in the counterpart provisions of the federal securities statutes, 8 see, e.g., Securities Act of 1933 Section 2(a), provides the basis for 9 the courts to take into account the statutory and factual context of 10 each definition, see, e.g., Reves v. Ernst & Young, 494 U.S. 56 11 (1990); 2 Louis Loss & Joel Seligman, Securities Regulation 12 927-929 (3d ed. rev. 1999), and will allow the courts to harmonize 13 this chapter’s definitions with the counterpart federal securities 14 definitions to the extent appropriate. Cf. Akin v. Q-L Inv., Inc., 15 959 F.2d 521, 532 (5th Cir. 1992) (“Texas courts generally look to 16 decisions of the federal courts to interpret the Texas Securities Act 17 because of obvious similarities between the state and federal 18 laws”); Koch v. Koch Indus., Inc. 203 F.3d 1202, 1235 (10th 19 Cir.2000) (following federal definition of materiality); Biales v. 20 Young, 432 S.E.2d 482, 484 (S.C. 1993) (“Section 35-1-1490(2) is 21 substantially similar to Section 12(1) of the Federal Securities 22 Act”). 23 4. Section 102(2): Agent: Prior Provisions: 1956 Act Section 24 401(b); RUSA Section 101(14). Section (102)(2), in part, follows 25 the 1956 Act definition. The 1956 Act used the term “agent” 26 while the RUSA Section 101(14) used the term “sales 27 representative.” Given the broader enactment of the 1956 Act, this 28 chapter also uses the term “agent.” Certain exclusions from the 29 1956 Act are exemptions in this chapter. See Section 402(b). 30 Whether a particular individual who represents a broker-dealer 31 or issuer is an “agent” depends upon much the same factors that 32 create an agency relationship at common law. See, e.g., Norwest 33 Bank Hastings v. Clapp, 394 N.W.2d 176, 179 (Minn. Ct. App. 34 1986) (following Official Comment that establishing agency under 35 the Uniform Securities Act “depends upon much the same factors 36 which create an agency relationship at common law”); 37 Shaughnessy & Co., Inc. v. Commissioner of Sec., 1971-1978 38 Blue Sky L. Rep. (CCH) ¶71,348 (Wis. Cir. Ct. 1977) (unlicenced 39 person who took information relevant to securities transactions and 40 turned it over to securities agents was himself an agent). 41 An individual can be an agent for a broker-dealer or issuer for a 42 purpose other than effecting or attempting to effect purchases or 43 sales of securities and not be a statutory agent under this chapter.

1 [588] 54 1 See, e.g., Baker, Watts & Co. v. Miles & Stockridge, 620 A.2d 2 356, 367 (Md. Ct. App. 1993) (attorney-client relationship is 3 generally one of agency, but that alone does not bring an attorney 4 within securities act definition of agent). An individual will not be 5 an agent under Section 102(2) because of the person’s status as a 6 partner, officer, or director of a broker-dealer or issuer if such an 7 individual does not effect or attempt to effect purchases or sales of 8 securities. See, e.g., Abell v. Potomac Ins. Co., 858 F.2d 1104 (5th 9 Cir. 1988). 10 Section 102(2) is intended to include any individual who acts as 11 an agent, whether or not the individual is an employee or 12 independent contractor. Cf. Hollinger v. Titan Capital Corp., 914 13 F.2d 1564 (9th Cir. en banc 1990), cert. denied, 499 U.S. 976 14 (1991). 15 The word “individual” in the definition of the term “agent” is 16 limited to human beings and does not include a juridical “person” 17 such as a corporation. Cf. definition of “person” in Section 18 102(20). The 1956 Act Section 401(b) similarly was limited to 19 individuals and did not include juridical persons. See, e.g., 20 Connecticut Nat’l Bank v. Giacomi, 699 A.2d 101, 111-112 21 (Conn. 1997) (“agent” only includes natural persons when it uses 22 the term individual); Schpok v. Fodale, 236 N.W.2d 97, 99 (Mich. 23 Ct. App. 1975) (agent defined to be individual and did not include 24 a corporation). 25 An individual whose acts are solely clerical or ministerial would 26 not be an agent under Section 102(2). Cf. Section 402(b)(8). 27 Ministerial or clerical acts might include preparing written 28 communications or responding to inquiries. 29 5. Section 102(3): Bank: Prior Provision: Subsection 3(a)(6) of 30 the Securities Exchange Act of 1934. A United States branch of a 31 foreign bank that otherwise satisfies this definition would be a 32 bank. 33 6. Section 102(4): Broker-Dealer: Prior Provisions: 1956 Act 34 Section 401(c); RUSA Section 101(2). This definition generally 35 follows the definition of broker-dealer in the 1956 Act and RUSA. 36 The use of the compound term is meant to include either a broker 37 or a dealer. The recognized distinction is that a broker acts for the 38 benefit of another while a dealer acts for itself in buying for or 39 selling securities from its own inventory. 40 The distinction between “a person engaged in the business of 41 effecting transactions in securities” and an investor, who may buy 42 and sell with some frequency and is outside the scope of this term,

1 [588] 55 1 has been well developed in the case law. See 6 Louis Loss & Joel 2 Seligman, Securities Regulation 2980-2984 (3d ed. 1990). 3 The 1956 Act Section 401(c) excluded from the definition of 4 broker-dealer a person who during any twelve consecutive months 5 did not direct more than 15 offers to buy or sell in this State. In 6 this chapter exemptions from broker-dealer registration are 7 provided in Section 401(b). 8 The Gramm-Leach-Bliley Act, signed into law in November 9 1999, rescinded the blanket exemption of banks from the definition 10 of broker and dealer in Sections 3(a)(4) and (5) of the Securities 11 Exchange Act of 1934. The Gramm-Leach-Bliley Act permits a 12 bank to avoid registration as a broker or dealer at the federal level 13 if the bank limits its activities to those specified in the Securities 14 Exchange Act. This chapter generally adopts the activity focused 15 exceptions for banks included in the Gramm-Leach-Bliley Act, 16 with minor modifications relating to the private placement and de 17 minimis brokerage activities of banks (15 U.S.C. 78c(a)(4)(B)(vii) 18 and (xi)). This chapter also reaches savings institutions. 19 A state may decide to adopt an exclusion in Section 102(4)(C) 20 that fully conforms with the bank exceptions contained in the 21 Gramm-Leach-Bliley Act. For states that choose this approach, 22 the language of Section 102(4)(C) should read: 23 (C) a bank or savings institution if its activities as broker-dealer 24 are limited to those specified in Section 3(a)(4) and 3(a)(5) of the 25 Securities Exchange Act of 1934 (15 U.S.C. Section 78c(a)(4) and 26 (5)), or a bank that satisfies the conditions specified in Section 3(a) 27 (4)(E) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a) 28 (4)). Section 102(4)(E) of this chapter also permits a securities 29 administrator to adopt additional exclusions that exclude banks and 30 other depository institutions, in whole or in part, from the 31 definition of “broker-dealer.” 32 States that promptly adopt this chapter should consider whether 33 it is appropriate to provide banks a transition period to comply 34 with the chapter’s new activity focused exceptions. The activity 35 focused exceptions for banks in the Gramm-Leach-Bliley Act were 36 originally to become effective at the federal level on May 12, 37 2001. However, the Securities and Exchange Commission has 38 delayed the effective date of these activity focused exceptions and 39 thus continued the blanket exemption for banks beyond May 12, 40 2001, and commenced a rulemaking designed to clarify and define 41 the scope of the bank exceptions in the Gramm-Leach-Bliley Act. 42 See Sec. Ex. Act Rels. 44,291, 74 SEC Dock. 2155 (2001) 43 (proposal); 45,897, 77 SEC Dock. 1555 (2002) (proposal). To

1 [588] 56 1 avoid disrupting the activities of banks, states should consider 2 delaying implementation of the activity focused exceptions in this 3 chapter until these exceptions are implemented at the federal level. 4 Section 15(h)(1) of the Securities Exchange Act of 1934, as 5 amended by the National Securities Markets Improvement Act of 6 1996, preempts state law from “[establishing] capital, custody, 7 margin, financial responsibility, making and keeping records, 8 bonding, or financial or operational reporting requirements for 9 brokers, dealers, municipal securities dealers, government 10 securities brokers, or government securities dealers that differ 11 from, or are in addition to the requirements in those areas 12 established under [the Securities Exchange Act].” These 13 preemptions are recognized in the substantive broker-dealer 14 provisions in Article 4. 15 7. Section 102(5): Depository institution: No Prior Provision. A 16 depository institution’s securities are addressed by the exemption 17 in Section 201(3). A depository institution is an institutional 18 investor in Section 102(11)(A). 19 8. Section 102(6): Federal covered investment adviser: No Prior 20 Provision. This provision is necessitated by Section 203A of the 21 Investment Advisers Act of 1940, added by Title III of the 22 National Securities Markets Improvement Act of 1996, which 23 allocates to primary state regulation most advisers with assets 24 under management of less than $25 million. SEC registration is 25 permitted, but not required, for investment advisers having 26 between $25 and $30 million of assets under management and is 27 required of investment advisers having at least $30 million of 28 assets under management. Investment Advisers Act of 1940 Rule 29 203A-1. Most advisers with assets under management of $25 30 million or more register solely under Section 203 of the Investment 31 Advisers Act of 1940 and not state law. This division of labor is 32 intended to eliminate duplicative regulation of investment advisers. 33 9. Section 102(7): Federal covered security: No Prior 34 Provision. The National Securities Markets Improvement Act of 35 1996, as subsequently amended, partially preempted state law in 36 the securities offering and reporting areas. Under Section 18(a) of 37 the Securities Act of 1933, no state statute, rule, order, or other 38 administrative action may apply to: 39 (1) The registration of a “covered” security or a security that 40 will be a covered security upon completion of the transaction; 41 (2)(A) any offering document prepared by or on behalf of the 42 issuer of a covered security;

1 [588] 57 1 (2)(B) any proxy statement, report to shareholders, or other 2 disclosure document relating to a covered security or its issuer that 3 is required to be filed with the SEC or any national securities 4 association registered under Section 15A of the Securities 5 Exchange Act such as the National Association of Securities 6 Dealers (NASD); or 7 (3) the merits of a covered security or a security that will be 8 a covered security upon completion of the transaction. 9 Section 18(b) of the Securities Act of 1933 applies to four types 10 of “covered securities”: 11 (1) Securities listed or authorized for listing on the New York 12 Stock Exchange (NYSE), the American Stock Exchange (Amex); 13 the National Market System of the Nasdaq stock market; or 14 securities exchanges registered with the Securities and Exchange 15 Commission (SEC) (or any tier or segment of their trading) if the 16 SEC determines by rule that their listing standards are substantially 17 similar to those of the NYSE, Amex, or Nasdaq National Market 18 System, which the SEC has done through Rule 146; and any 19 security of the same issuer that is equal in seniority or senior to 20 any security listed on the NYSE, Amex, or Nasdaq National 21 Market System; 22 (2) securities issued by an investment company registered with 23 the SEC (or one that has filed a registration statement under the 24 Investment Company Act of 1940); 25 (3) securities offered or sold to “qualified purchasers.” This 26 category of covered securities will become operational when the 27 SEC defines the term “qualified purchaser” as used in Section 28 18(b)(3) of the Securities Act of 1933, by rule. To date the SEC 29 has proposed, but not adopted, Rule 146(c) of the Securities Act of 30 1933; and 31 (4) securities issued under the following specified exemptions 32 of the Securities Act of 1933: 33 (A) Sections 4(1) (transactions by persons other than an 34 issuer, underwriter or dealer), and 4(3) (dealers after specified 35 periods of time), but only if the issuer files reports with the 36 Commission under Sections 13 or 15(d) of the Securities Exchange 37 Act; 38 (B) Section 4(4) (unsolicited brokerage transactions); 39 (C) Securities Act exemptions in Section 3(a) with the 40 exception of the charitable exemption in Section 3(a)(4), the 41 exchange exemption in Section 3(a)(10), the intrastate exemption 42 in Section 3(a)(11), and the municipal securities exemption in 43 Section 3(a)(2) but only with “respect to the offer or sale of such

1 [588] 58 1 [municipal] security in the State in which the issuer of such 2 security is located”; and 3 (D) securities issued in compliance with SEC rules under 4 Section 4(2) (private placements). 5 Section 18(c)(1) preserves state authority “to investigate and 6 bring enforcement actions with respect to fraud or deceit, or 7 unlawful conduct by a broker or dealer, in connection with 8 securities or securities transactions.” 9 The National Securities Markets Improvement Act, in essence, 10 preempts aspects of the securities registration and reporting 11 processes for specified federal covered securities. The chapter 12 does not diminish state authority to investigate and bring 13 enforcement actions generally with respect to securities 14 transactions. 15 The States are authorized to require filings of any document 16 filed with the SEC for notice purposes “together with annual or 17 periodic reports of the value of securities sold or offered to be sold 18 to persons located in the State (if such sales data is not included in 19 documents filed with the Commission), solely for notice purposes 20 and the assessment of any fee, together with a consent to service of 21 process and any required fee.” Section 18(c)(2). However, no 22 filing or fee may be required with respect to any listed security that 23 is a covered security under Section 18(b)(1) (traded on specified 24 stock markets). Section 302 of this chapter addresses notice filings 25 and fees applicable to federal covered securities. 26 10. Section 102(8): Filing: Prior Provision: RUSA Section 27 101(4). The RUSA definition was revised to recognize that 28 records may be filed in paper form or electronically with the 29 administrator, or designees such as the Web-CRD (Central 30 Registration Depository) or Investment Adviser Registration 31 Depository (IARD) or the Securities and Exchange Commission’s 32 Electronic Data Gathering, Analysis and Retrieval System 33 (EDGAR) or successor systems. 34 In the RUSA definition, the term “filed” referred to “actual 35 delivery of a document or application.” This chapter substitutes 36 the term “record” which is defined in Section 102(25) to refer 37 broadly to “information that is inscribed on a tangible medium or 38 that is stored in an electronic or other medium and is retrievable in 39 perishable form”. This definition requires the receipt of a record. 40 The definition does not limit filing to any specific medium such as 41 mail, certified mail, or a particular electronic system. The 42 definition is intended to permit an administrator to accept filings 43 over the Internet or through a direct modem system, both of which

1 [588] 59 1 are now used to transmit documents to EDGAR, or through new 2 electronic systems as they evolve. 3 “Receipt” refers to the actual delivery of a record to the 4 administrator or a designee and does not refer to a subsequent 5 examination of the record by the administrator. See, e.g., Fehrman 6 v. Blunt, 825 S.W.2d 658 (Mo. Ct. App. 1992). If a deficient form 7 was provided to a designee, but not provided to the administrator 8 because of the deficiency, it would not be filed under this 9 definition. 10 11. Section 102(9): Fraud, deceit and defraud: Prior Provisions: 11 1956 Act Section 401(d); RUSA Section 101(6). This definition, 12 which is identical to the 1956 Act and RUSA, codifies the holdings 13 that “fraud” as used in the federal and state securities statutes is not 14 limited to common law deceit. See generally 7 Louis Loss & Joel 15 Seligman, Securities Regulation 3421-3448 (3d ed. 1991). 16 12. Section 102(10): Guaranteed: Prior Provisions: 1956 Act 17 Section 401(e); RUSA Section 401(a)(1). The 1956 Act definition 18 of “guaranteed” applies generally to payment of “principal, 19 interest, or dividends.” The RUSA definition of “guaranteed,” 20 which was solely applicable to exempt securities, applied to the 21 guarantee of “all or substantially all of principal and interest or 22 dividends.” 23 Section 102(10) follows the 1956 Act approach and applies 24 generally to the guarantee of “all principal and all interest.” Any 25 method of guarantee that results in a guarantee of payment of all 26 principal and all interest will suffice including, for example, an 27 irrevocable letter of credit. 28 This definition does not address whether or not a guarantee, 29 whether whole or partial, is itself a security. That issue is 30 addressed by the definition of “security” in Section 102(29). 31 13. Section 102(11): Institutional investor: Prior Provisions: 32 RUSA Section 101(5); Securities Act of 1933 Rules 144A and 33 501(a). 34 Sections 102(11)(A) through (K) are based on Rule 501(a) of 35 the Securities Act of 1933, but do not include the paragraphs of 36 Rule 501(a) that address individuals. Given the significant period 37 of time since Rule 501(a) was adopted, this chapter has used a $10 38 million minimum for several categories of institutional investor 39 rather than $5 million minimum used in Rule 501(a). 40 Section 102(11)(H) concludes with an except clause meant to 41 exclude self-directed plans for individuals from this definition. 42 With respect to the exclusion of Rule 144A(a)(1)(H) from 43 Section 102(11)(M), the substance of Rule 144A(a)(1)(H) appears

1 [588] 60 1 in Section 102(11)(I), but with a requirement of total assets in 2 excess of ten million dollars. 3 Section 102(11)(O) is meant to reach persons similar to those 4 listed in Sections 102(11)(A) through (N), but not otherwise listed. 5 Under Section 503, if challenged in a proceeding, the burden of 6 proving the availability of an exemption is on the person claiming 7 it. An interpretive opinion may be sought from the administrator 8 under Section 605(d). 9 14. Section 102(12): Insurance company: No Prior Provision. 10 This definition is based on Securities Act of 1933 Section 2(a)(13). 11 15. Section 102(13): Insured: Prior Provision: RUSA Section 12 401(a)(2). The RUSA definition of “insured,” which was solely 13 applicable to exempt securities, applied to the insurance of “all or 14 substantially all of principal, interest, or dividends.” Section 15 102(13) is applicable generally but is limited to “payment of all 16 principal and all interest.” 17 16. Section 102(14): International banking institution: No Prior 18 Provision. Securities issued or guaranteed by the International 19 Bank for Reconstruction and Development, 22 U.S.C. Section 20 286k-1(a); the Inter-American Development Bank, 22 U.S.C. 21 Section 283h(a); the Asian Development Bank, 22 U.S.C. Section 22 285h(a); the African Development Bank, 22 U.S.C. Section 23 290i-9; and the International Finance Corporation, see 22 U.S.C. 24 Section 282k; are treated as exempt securities under Section 3(a) 25 (2) of the Securities Act of 1933, see generally 3 Louis Loss & 26 Joel Seligman, Securities Regulation 1191-1194 (3d ed. rev. 1999), 27 and are within this term. 28 17. Section 102(15): Investment adviser: Prior Provisions: 29 1956 Act Section 401(f); RUSA Section 101(7). This term 30 generally follows the definition in Section 202(a)(11) of the 31 Investment Advisers Act of 1940, but has been updated to take into 32 account new media such as the Internet. 33 The first sentence in Section 102(15) is identical to the first 34 sentence in the 1956 Act Section 401(f) and the counterpart 35 language in Section 202(a)(11). The RUSA definition deleted the 36 phrases “either directly or through publications or writings” and 37 “regular” before business. These terms have been returned to 38 Section 102(15) because of the intention that this definition be 39 construed uniformly with the definition in Section 202(a)(11) of 40 the Investment Advisers Act of 1940. This first sentence would 41 not reach the author of a book who did not receive compensation 42 as part of a regular business for providing investment advice.

1 [588] 61 1 The second sentence in the term addressing financial planners is 2 new. The purpose of this sentence is to achieve functional 3 regulation of financial planners who satisfy the definition of 4 investment adviser. Cf. Investment Advisers Act Release 1092, 39 5 SEC Dock. 494 (1987) (similar approach in Securities and 6 Exchange Commission interpretative Release). This reference is 7 not intended to preclude persons who hold a formally recognized 8 financial planning or consulting designation or certification from 9 using this designation. The use by a person of a title, designation 10 or certification as a financial planner or other similar title, 11 designation, or certification alone does not require registration as 12 an investment adviser. 13 Sections 102(15)(A) through (H) are exclusions from the term 14 “investment adviser.” An excluded person can be held liable for 15 fraud in providing investment advice, see Section 502, but would 16 not be subject to the registration and regulatory provisions in 17 Article 4. 18 Sections 102(15)(A) and (E) are new and recognize that 19 investment adviser representatives and federal covered investment 20 advisers are separately treated in this chapter. See definitions in 21 Sections 102(6) and 102(16); registration and exemptions in 22 Sections 404-405. 23 Sections 102(15)(B), (C), and (G) are substantively identical to 24 the 1956 Act, RUSA, and the Investment Advisers Act of 1940. 25 The Official Comment to the 1956 Act Section 401(f) quoted an 26 opinion of the Securities and Exchange Commission General 27 Counsel in Investment Advisers Act Release 2 on the meaning of 28 “special compensation” included in Section 102(15)(C): 29 [This clause] amounts to a recognition that brokers and dealers 30 commonly give a certain amount of advice to their customers in 31 the course of their regular business, and that it would be 32 inappropriate to bring them within the scope of the Investment 33 Advisers Act merely because of this aspect of their business. On 34 the other hand, that portion of clause [(C)], which refers to ‘special 35 compensation’, amounts to an equally clear recognition that a 36 broker or dealer who is specially compensated for the rendition of 37 advice should be considered an investment adviser and not be 38 excluded from the purview of the chapter merely because he is also 39 engaged in effecting market transactions in securities. . . . The 40 essential distinction to be borne in mind in considering borderline 41 cases . . . is the distinction between compensation for advice itself 42 and compensation for services of another character to which advice 43 is merely incidental.

1 [588] 62 1 Similarly, other broker-dealer employees such as research 2 analysts who receive no special compensation from third parties 3 for investment advice would not be required to register as 4 investment advisers. 5 The 1956 Act definition added the word “paid” in Section 401(f) 6 (4) to the counterpart exclusion in Section 202(a)(11) of the 7 Investment Advisers Act “to emphasize,” as the Official Comment 8 explained, “that a person who periodically distributes a ‘tipster 9 sheet’ free as a way to get paying clients is not excluded from the 10 definition as a ‘publisher.’” 11 After the 1956 Act was published, the United States Supreme 12 Court construed the definition of investment adviser in Lowe v. 13 SEC, 472 U.S. 181 (1985), and concluded: 14 “Congress did not intend to exclude publications that are 15 distributed by investment advisers as a normal part of the business 16 of servicing their clients. The legislative history plainly 17 demonstrates that Congress was primarily interested in regulating 18 the business of rendering personalized investment advice, 19 including publishing activities that are a normal incident thereto. 20 On the other hand, Congress, plainly sensitive to First Amendment 21 concerns, wanted to make clear that it did not seek to regulate the 22 press through the licensing of nonpersonalized publishing 23 activities.” 24 Id. at 185. 25 Responsive to this language RUSA rewrote this exclusion to 26 provide: 27 a publisher, employee, or columnist of a newspaper, news 28 magazine, or business or financial publication, or an owner, 29 operator, or employee of a cable, radio, or television network, 30 station, or production facility, if, in either case, the financial or 31 business news published or disseminated is made available to the 32 general public and the content does not consist of rendering advice 33 on the basis of the specific investment situation of each client. 34 Recent experience at the federal and state levels suggest that the 35 1956 Act and RUSA approaches may be too broad. The retention 36 of the Investment Advisers Act approach provides a better balance 37 between First Amendment concerns and protection of investors 38 from non-“bona fide” publicizing of investment advice. The 39 exclusion in Section 102(15)(D) is intended to exclude publishers 40 of Internet or electronic media, but only if the Internet or electronic 41 media publication or website satisfies the “bona fide” and 42 “publication of general and regular circulation” requirements. Cf. 43 SEC v. Park, 99 F. Supp. 2d 889, 895-896 (N.D. Ill. 2000) (court

1 [588] 63 1 declined to dismiss complaint against an Internet website when 2 there were allegations that the website was not “bona fide” or of 3 “general and regular circulation”). 4 The exclusion in Section 102(15)(G) is required by the National 5 Securities Markets Improvement Act of 1996. This exclusion will 6 reach banks and bank holding companies as described in 7 Investment Advisers Act Section 202(a)(11)(A) and persons whose 8 advice solely concerns United States government securities as 9 described in Section 202(a)(11)(E). 10 18. Section 102(16): Investment adviser representative: No 11 Prior Provision. Investment adviser representatives have not been 12 required to register under the federal Investment Advisers Act, 13 before or after the National Securities Markets Improvement Act. 14 The term investment adviser representative is not intended to 15 preclude persons who hold a formally recognized financial 16 planning or consulting title, designation, or certification from using 17 such a designation. The use by a person of a title, designation or 18 certification as a financial planner, or other similar title, 19 designation, or certification alone does not require registration as 20 an investment adviser representative. 21 19. Section 102(17): Issuer: Prior Provisions: 1956 Act Section 22 401(g); RUSA Section 101(8). This Section generally follows the 23 1956 Act and RUSA. 24 In paragraph (B), the phrase “or that is otherwise contractually 25 responsible for assuring payment of the certificate” is intended to 26 address forms of payment other than leases or conditional sales 27 contracts. It would also reach guarantors. 28 20. Section 102(18): Nonissuer transaction or nonissuer 29 distribution: Prior Provisions: 1956 Act Section 401(h); RUSA 30 Section 101(9). This definition is relevant to several exempt 31 transactions in Section 202. 32 In TechnoMedical Labs, Inc. v. Utah Sec. Div., 744 P.2d 320 33 (Utah Ct. App. 1987), the court declined to limit the term benefit 34 to monetary benefits and instead held a spinoff transaction could 35 provide direct or indirect benefits to an issuer. Id. at 323-324, 36 following SEC v. Datronics Eng’r, Inc., 490 F.2d 250 (4th Cir. 37 1973), cert. denied, 416 U.S. 937; SEC v. Harwin Indus. Corp., 38 326 F. Supp. 943 (S.D.N.Y. 1971). In a similar fashion, 39 transactions by officers, directors, promoters, and other insiders of 40 the issuer may benefit the issuer and may not qualify as nonissuer 41 transactions.

1 [588] 64 1 21. Section 102(19): Offer to purchase: No Prior Provision: A 2 rescission offer under Section 510 would be an offer to purchase 3 with respect to a security that earlier had been sold. 4 22. Section 102(20): Person: Prior Provisions: 1956 Act 5 Section 401(i); RUSA Section 101(10). This is the standard 6 definition used by the National Conference of Commissioners for 7 Uniform State Laws with the addition of “limited liability 8 company” to reflect current usage. The use of the concluding 9 phrase “or any other legal or commercial entity” is intended to be 10 broad enough to include other forms of business entities that may 11 be created or popularized in the future. 12 23. Section 102(21): Place of business: Prior Provision: Rules 13 203A-3(b) and 222-1 of the Investment Advisers Act of 1940. 14 24. Section 102(23): Price amendment: Prior Provision: RUSA 15 Section 101(11). A price amendment may be used in a registration 16 coordinated with the Securities and Exchange Commission 17 procedure in Section 303(d). In the case of noncash offerings, 18 required information concerning such matters as the offering price 19 and underwriting arrangements is normally filed in a “price” 20 amendment after the rest of the registration statement has been 21 reviewed by the Securities and Exchange Commission staff. See 22 generally 1 Louis Loss & Joel Seligman, Securities Regulation 23 542-550 (3d ed. rev. 1998). 24 25. Section 102(24): Principal place of business: Prior 25 Provision: Rule 222-1(b) of the Investment Advisers Act of 1940. 26 26. Section 102(25): Record: Prior Provision: Uniform 27 Electronic Transactions Act Section 2(13). Cf. Section 3(a)(37) of 28 the Securities Exchange Act of 1934. The Uniform Electronic 29 Transactions Act Section 2(13) defines record in nearly identical 30 terms. The Official Comment explains: 31 This is a standard definition designed to embrace all means of 32 communicating or storing information except human memory. It 33 includes any method for storing or communicating information, 34 including “writings.” A record need not be indestructible or 35 permanent, but the term does not include oral or other 36 communications which are not stored or preserved by some means. 37 This term is intended to embrace new forms of records that are 38 created or popularized in the future. A record would include, but 39 not be limited to, a registration statement, report, application, 40 book, publication, account, paper, correspondence, memorandum, 41 agreement, document, computer file, or disk, microfilm, 42 photograph, or audio or visual tape.

1 [588] 65 1 27. Section 102(26): Sale: Prior Provisions: 1956 Act Section 2 401(j); RUSA Section 101(13). Both the 1956 Act and RUSA 3 definition of “sale” are modeled on Section 2(a)(3) of the 4 Securities Act of 1933. 5 Language in Section 401(j) of the 1956 Act addressed the now 6 rescinded SEC “no sale” doctrine and has been eliminated. Merger 7 transactions are usually sales under Section 102(26), but may be 8 exempted from the securities registration requirements by Section 9 202(18). 10 28. Section 102(29): Security: Prior Provisions: 1956 Act 11 Section 401(1); RUSA Section 101(16). 12 Much of the definition in Section 102(29), like the definitions in 13 the 1956 Act Section 401(l) and RUSA Section 101(16), is 14 identical to the definition in Section 2(a)(1) of the Securities Act. 15 State courts interpreting the Uniform Securities Act definition of 16 security have often looked to interpretations of the federal 17 definition of security. See generally 2 Louis Loss & Joel 18 Seligman, Security Regulation 923-1138.19 (3d ed. rev. 1999). 19 The most recent amendments to Section 2(a)(1) of the Securities 20 Act of 1933 were added by the Commodities Futures 21 Modernization Act of 2000 which added or revised language in the 22 Securities Act addressing security futures and securities puts, calls, 23 straddles, options, or privileges. Identical language has been 24 included in Section 102(29) of this chapter to harmonize 25 interpretation of the federal and state definition of a “security.” 26 With respect to a security futures product, Section 28(a) of the 27 Securities Exchange Act of 1934, as amended by the Commodity 28 Futures Modernization Act of 2000, further provides: “No 29 provision of any State law regarding the offer, sale or distribution 30 of securities shall apply to any transaction in a security futures 31 product, except that this sentence shall not be construed as limiting 32 any State antifraud law of general applicability.” 33 Preorganization certificates or subscriptions are included in this 34 term, obviating the need for a separate definition as was included 35 in RUSA Section 402(13). 36 Section 102(29) uses RUSA’s “fractional undivided interest in 37 oil, gas or other mineral rights” formulation, which originated in 38 Section 2(a)(1) of the Securities Act of 1933, rather than the 1956 39 Act formulation, “certificate of interest or participation in an oil, 40 gas or mining title.” In recent years, courts interpreting Section 41 2(a)(1) of the Securities Act of 1933 have found certain oil, gas or 42 mineral rights to be investment contracts (that is, securities). 2

1 [588] 66 1 Louis Loss & Joel Seligman, Securities Regulation 979-982 (3d 2 ed. rev. 1999). 3 A new sentence was added in Section 102(29)(A) referring to 4 certificated or uncertificated securities to indicate that the term is 5 intended to apply whether or not a security is evidenced by a 6 writing. Section 102(29)(A) is intended to reject Thomas v. State 7 of Tex., 65 S.W.3d 38 (Tex. Crim. App. 2001) (Under Texas law 8 evidence of indebtedness requires a writing). 9 Insurance or endowment policies or endowment or annuity 10 contracts, other than those on which an insurance company 11 promises to make variable payments, are excluded from this term. 12 Variable insurance products are also excluded in many states and 13 are exempted from securities registration in others under 14 provisions such as Section 201(4). When variable products are 15 included in the definition of security and exempted from 16 registration state securities administrators can bring enforcement 17 actions concerning variable insurance sales practices. 18 The Drafting Committee recognized that the decision whether to 19 exclude variable annuities from the definition of security will be 20 made on a state-by-state basis. Those states which intend to 21 exclude variable products from the definition of security should 22 add the words “or variable” to Section 102(29)(B) so that it will 23 read: 24 (B) The term does not include an insurance or endowment 25 policy or annuity contract under which an insurance company 26 promises to pay a fixed or variable sum of money either in a lump 27 sum or periodically for life or other specified period. 28 In the view of the American Council of Life Insurers: 29 The brackets around the words “or variable” should be removed 30 to follow the majority of jurisdictions. Thirty-seven jurisdictions 31 [including Guam] currently exclude all insurance, endowment and 32 annuity contracts from the definition of security. Removal of the 33 brackets around the words “or variable,” therefore, would 34 incorporate the approach taken in the majority of jurisdictions. 35 The removal of these brackets also prevents a statutory conflict 36 with [up to] 48 jurisdictions that grant the insurance commissioner 37 exclusive jurisdiction to regulate the issuance and sale of variable 38 contracts. Moreover, this approach recognizes that the issuance 39 and sale of variable contracts is comprehensively regulated by the 40 Securities and Exchange Commission, the National Association of 41 Securities Dealers, 50 state insurance departments, and in the case 42 of group life and annuities, the Department of Labor. Like all 43 other financial products, this approach imposes only one, rather

1 [588] 67 1 than two, levels of regulation in each state and reflects the 2 philosophy of financial services modernization. 3 In the view of the North American Securities Administrators 4 Association variable products should be exempted from 5 registration, not excluded from the definition of securities: 6 One of the goals of this chapter is to align state and federal law. 7 The United States Supreme Court ruled that a variable annuity is a 8 security in SEC v. Variable Annuity Life Insurance Company of 9 America, 359 U.S. 65 (1959). More recently, it has been 10 confirmed that variable insurance products are “covered securities” 11 as defined in the National Securities Markets Improvement Act of 12 1996 (NSMIA) and in the Securities Litigation Uniform Standards 13 Act of 1998 (SLUSA), see Lander v. Hartford Life Annuity Ins., 14 251 F.3d 101 (2d Cir. 2001). 15 When variable products are included in the definition of security 16 and exempted from registration, state securities administrators can 17 bring enforcement actions concerning variable insurance sales 18 practices. 19 This approach toward functional regulation is supported by the 20 National Association of Securities Dealers as evidenced by a 21 February 2001 letter from Mary Schapiro, President of Regulatory 22 Policy & Oversight: “Based on our experience, we have found that 23 variable products’ sales-related problems parallel those of mutual 24 funds and other securities. Because of the substantial similarities 25 between variable contracts and other securities products, we 26 believe it is incongruous for agents and sales practices involved in 27 variable annuities not to be covered by state securities laws.” 28 State securities regulators support the functional regulation of 29 agents because: 1) insurance companies are not affected since state 30 securities regulators are preempted from requiring the registration 31 of variable products; 2) the vast majority of broker-dealer 32 subsidiaries of insurance companies are already registered to sell 33 securities in most states; and 3) the vast majority of agents are 34 already dually licensed to sell insurance and securities in most 35 states. 36 Section 102(29)(C) includes the exclusion in RUSA from the 37 1956 definition of security for “an interest in a contributory or 38 noncontributory pension or welfare plan subject to the Employee 39 Retirement Income Security Act of 1974.” 40 The first clause in Section 102(29)(D) is derived from the 41 leading case of SEC v. W.J. Howey Co., 328 U.S. 293 (1946), 42 which has been widely followed by federal and state courts. The 43 second clause in Section 102(29)(D) is based, in part, on the

1 [588] 68 1 leading case of SEC v. Glenn W. Turner Enter., Inc., 474 F.2d 476, 2 482 n.7 (9th Cir. 1973), cert. denied, 419 U.S. 900 (1974). 3 The courts have divided over the interpretation of the “common 4 enterprise” element of an investment contract. The courts 5 generally recognize that “horizontal” commonality (for example, 6 the pooling of an investment by two or more investors) is a 7 common enterprise. A small minority of the federal circuits will 8 also find a common enterprise in a “vertical” relationship when a 9 single investor is dependent upon the expertise of a single 10 commodities broker. Since two or more persons do not share in 11 the profitability of an undertaking, it is difficult to argue that there 12 is a common enterprise. Section 102(29)(D) follows a 13 significantly larger number of federal circuits and adopts a more 14 restrictive form of vertical commonality that occurs only when 15 there is profit sharing between two persons even if, for example, 16 one is a conventional investor and one is a promoter. See 17 generally 2 Louis Loss & Joel Seligman, Securities Regulation 18 989-997 (3d ed. Rev. 1999). 19 In interpreting all elements of the investment contract, the courts 20 have emphasized substance, not form. A conventional partnership 21 involving two individuals who actively participate in its 22 management and who each own 50 percent interest of its profits 23 has consistently not been viewed as an investment contract 24 because profits do not come from the efforts of others. On the 25 other hand, investments in limited partnership interests which are 26 traded on stock exchanges consistently have been held to be 27 investment securities because profits do come substantially from 28 the efforts of others. Indeed, interests in an entity called a general 29 partnership may be a security when the general partnership 30 functions like a limited partnership. See, e.g., Williamson v. 31 Tucker, 645 F.2d 404, 424 (5th Cir. 1981), cert. denied, 454 U.S. 32 897 (1981); see generally 2 Loss & Seligman, supra, at 1019-1033. 33 Section 102(29)(E) is consistent with state and federal securities 34 laws which have recognized interests in limited liability companies 35 and limited partnerships in some circumstances as “securities,” see 36 2 Louis Loss & Joel Seligman, Securities Regulation 1028-1031 37 (3d ed. rev. 1999), when consistent with the court decisions 38 interpreting the investment contract concept. This chapter also 39 refers to an investment in a viatical settlement or a similar 40 agreement to make unequivocally clear that viatical settlement and 41 similar agreements, which otherwise satisfy the definition of an 42 investment contract, are securities. This is intended to reject the 43 holding of one court that a viatical contract could not be a security.

1 [588] 69 1 See SEC v. Life Partners Inc., 87 F.3d 536 (D.C. Cir. 1996), reh’g 2 denied, 102 F.3d 587 (D.C. Cir. 1996). A number of states have 3 done so by statute. 4 Judicial construction of the term “investment contract” has been 5 the most frequently litigated issue concerning the term “security.” 6 See Gabaldon, A Sense of Security: An Empirical Study, 25 J. 7 Corp. L. 307 (2000), explaining that there had been 792 cases 8 decided to that date in which the definition of a security played a 9 prominent role. Id. at 308. Some 461 of the 792 cases (58 10 percent) concerned investment contracts. Id. at 322. A number of 11 states, by statute, rule, or case law have also adopted the “risk 12 capital” test to find a security when an investment is subject to the 13 risks of an enterprise with the expectation of profit or other 14 valuable benefit and the investor has no direct control over the 15 management of the enterprise. See, e.g., 2 Loss & Seligman, 16 supra, at 939-940 n.50. 17 29. Section 102(30): Self-regulatory organization: Prior 18 Provision: RUSA Section 101(17). This definition was added by 19 RUSA and is based on a counterpart provision in the American 20 Law Institute Federal Securities Code. At the current time national 21 securities exchanges are registered under Section 6 of the 22 Securities Exchange Act of 1934; national securities associations 23 under Section 15A; clearing agencies under Section 17A; and the 24 Municipal Securities Rulemaking Board under Section 15B. 25 30. Section 102(31): Sign: No Prior Provision. This definition 26 is intended to facilitate electronic signatures, to the extent 27 permitted by Section 105. 28 31. Section 102(32): State: Prior Provisions: 1956 Act Section 29 401(m); RUSA Section 101(18). This is the standard definition 30 used by the National Conference of Commissioners on Uniform 31 State Laws. It does include territories and possessions of the 32 United States, as well as the District of Columbia and Puerto Rico, 33 but does not include foreign governments, their territories, or their 34 possessions. In this chapter “foreign” always refers to activity, a 35 government, or person outside of the United States, not a different 36 state within the United States. 37 38 South Carolina Reporter’s Comments 39 40 1. Section 35-1-102(1): “Administrator.” Prior law used the term 41 “Securities commissioner” which Section 35-1-20(1) defined as 42 the Attorney General. The change in designation was not intended 43 to make any substantive change from prior law. South Carolina

1 [588] 70 1 changed the reference in this chapter from “administrator” to 2 “Securities Commissioner”. This section simply clarifies that any 3 references to an administrator are inadvertent. 4 2. Section 35-1-102(2): “Agent.” This definition substantially 5 follows the prior provision found at Section 35-1-20(2). A prior 6 amendment in 1990 deleted the mention of certain exclusions 7 found elsewhere in that chapter that are now included in Section 8 35-1-402(b) of this chapter. The wording changes in this chapter 9 are not intended to make any substantive change from prior law. 10 The definition of “agent” has been discussed in two cases. A 11 financial institution which made a loan which served as capital for 12 an investment fraudulently promoted by others, but which did not 13 assist in the preparation of the offering documents nor urge 14 investors to purchase interests, was not an “agent” because it did 15 not assist or attempt to assist the sale of limited partner interests in 16 the venture. Atlanta Skin Care & Cancer Clinic, P.C. v. Hallmark 17 Gen. Partners, Inc., 320 S.C. 113, 463 S.E.2d 600 (1995). A 18 District Court interpreting South Carolina law held that attorneys 19 engaged in traditional advisory functions were not agents under 20 Section 35-1-20(2). In CFT Seaside Investment Limited 21 Partnership v. Hammet, et al., 868 F. Supp. 836, Fed. Sec. L. Rep. 22 P. 98, 602 (D.S.C. 1994), the court articulated that while an 23 attorney-client relationship is ordinarily one of agency, the 24 definition in Section 35-1-20(2) is directed toward one who assists 25 directly in the offering or conducts the sale but does not fall under 26 the definition of broker-dealer. Thus, attorneys who merely offer 27 legal advice or draft documents for use in securities transactions 28 are not “agents” under that definition. 29 3. Section 35-1-102(3): “Bank.” This term is new. Prior law 30 excluded a bank from the definition of a broker-dealer in Section 31 35-1-20(3). Atlanta Skin & Cancer Clinic, P.C. v. Hallmark Gen. 32 Partners, Inc., 320 S.C. 113, 463 S.E.2d 600 (1995). 33 The 1997 amendment deleted any reference to exclusions from 34 the term “broker-dealer.” In 1999, the federal 35 Gramm-Leach-Bliley Act (GLBA) rescinded the blanket 36 exemption of banks under federal securities laws, by adopting a 37 “functional” approach focusing on the activities engaged in by the 38 bank. The new chapter adopts this “functional” approach in its 39 definition of a broker-dealer in Section 102(4). 40 4. Section 35-1-102(4): “Broker-dealer.” The first sentence 41 substantially follows the prior provision in Section 35-1-20(3). 42 The partial exclusions of banks and savings institutions, and the 43 exclusion of international banking institutions are new. Prior to

1 [588] 71 1 being rewritten in the 1997 amendment, Section 35-1-20(3) 2 contained a blanket exclusion of banks from the definition of 3 “broker-dealer.” Atlanta Skin & Cancer Clinic, P.C. v. Hallmark 4 Gen. Partners, Inc., 320 S.C. 113, 463 S.E.2d 600 (1995). 5 The 1997 amendment dropped any reference to banks being 6 included or excluded as “broker-dealers.” There is no precedent in 7 South Carolina case law which defines “broker-dealer” to include a 8 bank. The federal GLBA rescinded the blanket exemption of 9 banks under federal securities laws, by adopting a “functional” 10 approach focusing on the activities engaged in by the bank. The 11 new chapter adopts this “functional” approach with respect to 12 banks in its definition of a broker-dealer in Section 35-1-102(4). 13 South Carolina elected to adopt the alternate language, proposed 14 by the National Conference of Commissioners on Uniform State 15 Acts, which fully conforms to the bank exceptions in the 16 Graham-Leach-Bliley Act. The reference in this chapter to 17 excluding an agent from the definition of “broker-dealer” is 18 consistent with the prior law found in Section 35-1-20(2) which 19 defined an agent, in part, as “any individual, other than a 20 broker-dealer, who represents a broker-dealer or issuer in effecting 21 or attempting to effect purchasers or sales of securities.” The 22 exclusion of an “issuer” from the definition of “broker-dealer” in 23 this chapter is also consistent with the pre-1997 definition of 24 “broker-dealer” in Section 35-1-20(3). Since the 1997 25 amendment, there is no South Carolina precedent holding that a 26 “broker-dealer” includes an issuer. The provision allowing the 27 exclusion of a person “by rule adopted or order issued under this 28 chapter,” is a new provision which is primarily designed to allow 29 the Administrator the ability to exclude banks and other depository 30 institutions, in whole or in part, from the definition of a 31 “broker-dealer.” 32 5. Section 35-1-102(5): “Depository institution.” This term is 33 new. The definition includes not only a “bank” but broadens its 34 coverage to include other types of depository institutions such as 35 savings institutions, trust companies, and credit unions. 36 6. Section 35-1-102(6): “Federal covered investment adviser.” 37 This section is substantially similar to Section 35-1-20(4) which 38 was enacted in 1997, after passage of the National Securities 39 Markets Improvements Act of 1996 (NSMIA). NSMIA allocates 40 to the states primary regulation of most investment advisors with 41 assets under management of less than $25 million. Advisors 42 managing between $25 million and $30 million of assets are 43 permitted to register with the SEC. Those advisors who manage at

1 [588] 72 1 least $30 million in assets are required to register with the SEC. 2 Most advisors who manage assets greater than $25 million register 3 only under Section 35-1-203 of the federal Investment Advisors 4 Act. The new provision will continue to align this State’s 5 approach with that mandated in NSMIA. 6 7. Section 35-1-102(7): “Federal covered security.” This 7 definition is substantially similar to the prior law found in Section 8 35-1-20(5) which was adopted after the 1996 passage of NSMIA, 9 and no substantive change was intended in this definition. In order 10 to prevent duplication and improve coordination between federal 11 and state securities regulation, NSMIA preempted state law in the 12 area of securities offerings and reporting for “federal covered 13 securities.” Section 18(a) of the Securities Act of 1933 states that 14 no state may regulate as to reporting and registration, while 15 Section 18(b) applies those prohibitions to four classes of “covered 16 securities.” The four types of securities are: (1) securities listed on 17 the NYSE, Amex or NASDAQ markets or SEC registered 18 securities determined as having met substantially similar listing 19 standards; (2) securities issued by an investment company 20 registered with the SEC, such as a mutual fund, or one that has 21 filed a registration statement; (3) securities offered or sold to 22 “qualified purchasers” (once the SEC defines that term); or (4) 23 securities offered under certain specific exemptions of the 24 Securities Act of 1933. While the State has undiminished 25 authority to investigate and bring enforcement actions with respect 26 to these securities, the registration and reporting regulation of 27 “federal covered securities” will rest with the SEC. 28 8. Section 35-1-102(8): “Filing.” This term is substantially 29 similar to prior law found in Section 35-1-100 which was adopted 30 in 1997. This definition is designed to recognize the electronic 31 filing of a document as well as the filing of a paper document. No 32 substantive change is intended by the new wording. 33 9. Section 35-1-102(9): “Fraud, deceit, and defraud.” This 34 language is identical to the prior provision found at Section 35 35-1-20(6). 36 10. Section 35-1-102(10): “Guaranteed.” This language differs 37 from prior law found at Section 35-1-20(7) in that the new 38 language deletes reference to guaranteeing the payment of 39 “dividends.” The other minor changes are not intended to make 40 any substantive departure from prior law. 41 11. Section 35-1-102(11): “Institutional investor.” This term is 42 new. Since federal law presumes that the notice and merit review 43 mechanisms are unnecessary where the purchaser is an

1 [588] 73 1 “institutional investor,” sales or offers to sell to such a purchaser 2 are “exempt transactions” under Section 35-1-202(13)(A). There 3 can be no registration requirement (Sections 35-1-301 through 4 35-1-306) and no required filing of sales and advertising literature 5 (Section 35-1-504) at the state level for such purchasers. 6 12. Section 35-1-102(12): “Insurance company.” This term is 7 new. 8 13. Section 35-1-102(13): “Insured.” This term is new. 9 14. Section 35-1-102(14): “International banking institution.” 10 This term is new. Securities issued or guaranteed by “international 11 banking institutions” are required by federal law to be exempt 12 from registration and merit review at the state level. 13 15. Section 35-1-102(15): “Investment adviser.” The first two 14 sentences of this definition are substantially similar to prior law 15 found at Section 35-1-20(8). The exclusions in subsections 16 (A)-(H), are from the registration and regulatory provisions in 17 Article 4, but an excluded person can be held liable under this 18 chapter for fraud in providing investment advice pursuant to 19 Section 35-1-502. South Carolina amended the proposed chapter 20 by adding “regarding securities” after the term “investment 21 advice” for purposes of making the scope of the exclusions 22 consistent with the initial definition of investment adviser. The 23 exclusion in subsection (D) is somewhat narrower than those in the 24 1997 amendment in that the new exclusion is limited to 25 publications of “general and regular circulation.” This change is 26 based upon the recent experience of state and federal regulators 27 that indicates a restriction of the exclusion to that found in the 28 Investment Advisors Act may strike a better balance between First 29 Amendment concerns and protecting investors from the 30 publication of investment advice that is not “bona fide.” The 31 limitation in Section 35-1-102(15)(D) is intended to exclude 32 Internet and electronic media publishers but only if they meet the 33 “bona fide” requirement which was also found in prior law, and 34 the new “general and regular circulation” requirement in this 35 section. 36 16. Section 35-1-102(16): “Investment adviser representative.” 37 This definition revises prior law (found at Section 35-1-20(a)) 38 which was adopted in 1997 after passage of the 1996 NSMIA. 39 The reworded definition is similar to prior law except that this 40 definition includes specific exclusions. The exclusion in Section 41 35-1-102(16)(B) for agents whose investment advice is “solely 42 incidental to the individual acting as an agent and who does not 43 receive special compensation for investment advisory service”

1 [588] 74 1 mirrors the exclusion in Section 35-1-102(15)(C). The exclusion 2 in Section 35-1-102(16)(C) harmonizes this chapter with the 3 federal Investment Advisors Act after NSMIA. South Carolina 4 added as qualifying language “regarding securities” and 5 “securities’ accounts” in order to be clear that the definition of the 6 term applies only to securities advice and securities accounts. 7 17. Section 35-1-102(17): “Issuer.” This definition generally 8 follows prior law found in Section 35-1-20(10). 9 18. Section 35-1-102(18): “Nonissuer transaction” or 10 “nonissuer distribution.” Prior law is found at Section 11 35-1-20(11). Because of new provisions for exempt transactions 12 in Section 35-1-202, this definition is relevant. There is no intent 13 to make a substantive change from prior law. 14 19. Section 35-1-102(19): “Offer to purchase.” This definition 15 is new. The rescission remedy under prior law for “purchasers” is 16 now expanded by Section 35-1-510 to include “sellers” of 17 securities. 18 20. Section 35-1-102(20): “Person.” This definition is similar 19 to prior law found at Section 35-1-20(12). The new definition is 20 worded in broader language to include any present or future form 21 of business entity. 22 21. Section 35-1-102(21): “Place of business.” This definition 23 is new. 24 22. Section 35-1-102(22): The Uniform Securities Act of 2002 25 contained language to repeal an enacting State’s existing securities 26 laws and this section would have defined the repealed chapter. 27 South Carolina opted to amend its existing laws rather than repeal 28 them, so this definition is revised from the uniform language to 29 reflect that procedure. 30 23. Section 35-1-102(23): “Price amendment.” This definition 31 is new and is applicable to registrations coordinated with the SEC 32 in Section 35-1-303(d). 33 24. Section 35-1-102(24): “Principal place of business.” This 34 definition is new. 35 25. Section 35-1-102(25): “Record.” This definition is new. It 36 is relevant to the definition of “filing” in Section 35-1-102(8). 37 26. Section 35-1-102(26): “Sale” and “Offer to sell.” This 38 definition revises prior law found at Section 35-1-20(13). The 39 definition is substantially similar to Section 35-1-20(13)(a)-(e) of 40 prior law, but deletes prior subsection (f). Under current case law, 41 one does not have to pass title to be a “seller.” For nonowners, 42 the South Carolina Supreme Court in Biales v. Young, 315 S.C. 43 166, 432 S.E.2d 482 (1993), used the test set forth in Pinter v.

1 [588] 75 1 Dahl, 486 U.S. 622 (1988). A nonowner can be a “seller” by 2 soliciting a purchase and being motivated at least in part by the 3 desire to serve either his own financial interest or the interest of the 4 seller. Biales, 432 S.E.2d at 485. Transactional attorneys, so long 5 as they refrain from persuading or urging buyers to purchase 6 securities, would not meet the solicitation test and would not be 7 held to be sellers. Id. See also, CFT Seaside Inv. Ltd. P’ship v. 8 Hammett, 868 F. Supp. 836, 842 (D.S.C. 1994). To be an 9 employee of a seller, an employee must be subject to the control of 10 a seller to “direct the particular work or undertaking as to the 11 means or manner of its accomplishment.” Allen v. Columbia Fin. 12 Mgmt., 297 S.C. 481, 377 S.E.2d 352 (Ct. App. 1988). This test 13 normally excludes attorneys, id., and should exclude other 14 professionals performing their normal roles. The new provision 15 does not explicitly exempt a loan from the definition of a “sale.” 16 As such, the holding in Crim v. E. F. Hutton, 298 S.C. 448, 381 17 S.E.2d 492 (1989), is now subject to question since a loan is now 18 subject to the test for a security. See, S.C. Nat’l Bank v. 19 Darmstadter, 622 F. Supp. 226 (D.S.C. 1985). 20 A minority shareholder does not significantly participate in the 21 sale, and therefore is not a seller, where his only participation is to 22 transfer his stock certificate. McCall v. Finley, 294 S.C. 1, 362 23 S.E.2d 26 (Ct. App. 1987). In general, any transaction by which 24 stock is offered to individuals or to the general public, is a “sale” 25 or “offer to sell.” Bradley v. Hullander, 272 S.C. 6, 249 S.E.2d 26 486 (1978). 27 27. Section 35-1-102(27): “Securities and Exchange 28 Commission.” This definition is new. 29 28. Section 35-1-102(28) “Securities Commissioner.” This 30 definition follows existing law. 31 29. Section 35-1-102(29): “Security.” This definition replaces 32 prior law found at Section 35-1-20(15). The new definition uses 33 the broader term “fractional undivided interests in oil, gas or other 34 mineral rights” in lieu of prior law’s formulation of “certificate of 35 interest or participation in an oil, gas, or mining title or lease.” 36 Interests in viatical settlements are considered to be securities, 37 rejecting the holding in SEC v. Life Partners, Inc., 87 F.3d 536 38 (D.C. Cir. 1996), reh’g denied , 102 F.3d 587 (1996), which held 39 that viatical settlements may not be investment contracts if 40 decisions affecting the value of the settlement predate the sale. 41 South Carolina law had been silent on the viatical issue. South 42 Carolina changed subsection (29)(E) to clarify that limited 43 partnership interests and a limited liability company may be a

1 [588] 76 1 “security”, but that a viatical investment is now considered to be a 2 “security.” The definition of a viatical settlement will be resolved 3 by reference to statutes and Department of Insurance rules and 4 regulations governing that industry. South Carolina looks for 5 guidance in defining a “security” to those cases interpreting the 6 federal Securities Act of 1933. McGaha v. Mosley, 283 S.C. 268, 7 322 S.E.2d 462 (Ct. App. 1984); Garrett v. Snedigar, 293 S.C. 176, 8 359 S.E.2d 283 (Ct. App. 1987). A federal court decision has 9 stated that the South Carolina decisions perceive no distinction 10 between the state and federal definitions of a “security.” Faircloth 11 v. Jackie Fine Arts, Inc., 682 F. Supp. 837 (D.S.C. 1988). South 12 Carolina follows the federal approach of concentrating on 13 economic reality rather than the form of a transaction in 14 determining whether a security is involved. Garrett v. Snedigar, 15 293 S.C. 176, 359 S.E.2d 283 (Ct. App. 1987) citing Tcherepnin v. 16 Knight, 389 U.S. 332, 336 (1967). Garrett remanded for further 17 findings whether or not what was labeled a “general partnership” 18 interest was in fact a “limited partnership” interest, as the trial 19 court held, given the measures of control retained by the 20 supposedly passive partners. The Fourth Circuit Court of Appeals 21 has held that limited partnership interests are a security where the 22 general partners are active managers and the limited partners are 23 passive. Kosnoski v. Bruce, 699 F.2d 944 (4th Cir. 1982). Stock 24 in a closely held corporation has been held to be a security if it has 25 the usual characteristics of stock. Carver v. Blanford, 288 S.C. 26 309, 342 S.E.2d 406 (1986). A written assignment of an interest in 27 profits is a certificate of interest or participation in a profit sharing 28 agreement and is therefore a security. McGaha v. Mosley, 283 29 S.C. 268, 322 S.E.2d 461 (Ct. App. 1984). The same result would 30 be reached under this new chapter. In determining whether a bank 31 loan note was a “security,” the federal District Court has employed 32 the “commercial versus investment” test to determine whether the 33 transaction was a commercial loan or an investment by the bank. 34 S.C. Nat’l Bank v. Darmstadter, 622 F. Supp. 226 (D.S.C. 1985). 35 30. Section 35-1-102(30): “Self Regulatory organization.” 36 This definition is new. 37 31. Section 35-1-102(31): “Sign.” This definition is new. 38 32. Section 35-1-102(32): “State.” This definition is 39 substantially similar to prior law found at Section 35-1-20(16). 40 41 Section 35-1-103. ‘Securities Act of 1933’ (15 U.S.C. Section 42 77a et seq.), ‘Securities Exchange Act of 1934’ (15 U.S.C. Section 43 78a et seq.), ‘Public Utility Holding Company Act of 1935’(15

1 [588] 77 1 U.S.C. Section 79 et seq.), ‘Investment Company Act of 1940’ (15 2 U.S.C. Section 80a-1 et seq.), ‘Investment Advisers Act of 1940’ 3 (15 U.S.C. Section 80b-1 et seq.), ‘Employee Retirement Income 4 Security Act of 1974’ (29 U.S.C. Section 1001 et seq.), ‘National 5 Housing Act’ (12 U.S.C. Section 1701 et seq.), ‘Commodity 6 Exchange Act’ (7 U.S.C. Section 1 et seq.), ‘Internal Revenue 7 Code’ (26 U.S.C. Section 1 et seq.), ‘Securities Investor Protection 8 Act of 1970’ (15 U.S.C. Section 78aaa et seq.), ‘Securities 9 Litigation Uniform Standards Act of 1998’ (112 Stat. 3227), 10 ‘Small Business Investment Act of 1958’ (15 U.S.C. Section 661 11 et seq.), and ‘Electronic Signatures in Global and National 12 Commerce Act’ (15 U.S.C. Section 7001 et seq.) mean those 13 statutes and the rules and regulations adopted under those statutes, 14 as in effect on the date of enactment of this chapter, or as later 15 amended. 16 17 Official Comments 18 19 Prior Provisions: 1956 Act Section 401(k); RUSA Section 20 101(15). 21 1. There are a large number of references to other laws in this 22 chapter, particularly to the federal securities laws identified in 23 Section 103, and to rules adopted by the Securities and Exchange 24 Commission under those laws. One of the main objectives of this 25 chapter is to take account of those provisions in the federal laws 26 that are preemptive, and to coordinate with other, nonpreemptive 27 provisions of the federal laws where coordination between federal 28 and state securities law is in the public interest. 29 2. Section 12(d) of the Uniform Statute and Rule Construction 30 Act, adopted by NCCUSL in 1995, provides: “A statute or rule 31 that incorporates by reference a statute or rule of another 32 jurisdiction does not incorporate a later enactment or adoption or 33 amendment of the other statute or rule.” Nevertheless, it is not 34 uncommon for States to permit later amendments to statutes and 35 rules referenced in enacted legislation to become automatically 36 effective. In those states the final bracketed language in this 37 Section should be included in the chapter. 38 3. In those states which do not permit automatic effectiveness of 39 later amendments and that follow Section 12(d) of the Uniform 40 Statute and Rule Construction Act, this problem has been 41 addressed by either giving the administrator the power to update 42 by rule or the duty to notify the legislature when amendment is 43 necessary. When the legislature notification approach is adopted,

1 [588] 78 1 to prevent a gap period, the administrator might be given the 2 power to act by rule until the legislature has acted. 3 4. After enactment, amendments to a preemptive federal statute, 4 to rules adopted by a federal agency under a preemptive provision 5 of a federal statute, or to amendments to such rules should be 6 enforced in all states under the Supremacy Clause of the United 7 States Constitution. A number of such references are in this 8 chapter. 9 10 South Carolina Reporter’s Comments 11 12 This provision is a substantial revision of prior law found at 13 Section 35-1-20(14). The list of federal statutes is updated and 14 also broadened to coordinate with nonpreemptive federal statutes 15 and to take account of preemptive statutes. The new provision also 16 includes amendments adopted after the effective date of this 17 chapter. 18 19 Section 35-1-104. A reference in this chapter to an agency or 20 department of the United States is also a reference to a successor 21 agency or department. 22 23 Official Comment 24 25 No Prior Provision. 26 27 South Carolina Reporter’s Comments 28 29 This provision is new. 30 31 Section 35-1-105. This chapter modifies, limits, and supersedes 32 the federal Electronic Signatures in Global and National 33 Commerce Act, but does not modify, limit, or supersede Section 34 101(c) of that act (15 U.S.C. Section 7001(c)) or authorize 35 electronic delivery of any of the notices described in Section 36 103(b) of that act (15 U.S.C. Section 7003(b)). This chapter 37 authorizes the filing of records and signatures, when specified by 38 provisions of this chapter or by a rule adopted or order issued 39 under this chapter, in a manner consistent with Section 104(a) of 40 that act (15 U.S.C. Section 7004(a)). 41 42 Official Comment 43

1 [588] 79 1 No Prior Provision. The purpose of this Section is to permit the 2 filing of electronic signatures and electronic records. 3 4 South Carolina Reporter’s Comments 5 6 This provision is new. 7 8 Article 2 9 10 Exemptions From Registration of Securities 11 12 Official Comments 13 14 Section 201 includes exempt securities and Section 202 includes 15 exempt transactions. Both exempt securities and exempt 16 transactions are exempt from the securities registration, notice 17 filing requirement of Section 302, and the filing of sales literature 18 Section 504 of this chapter. Neither Section 201 nor Section 202 19 provides an exemption from the chapter’s antifraud provisions in 20 Article 5, nor the broker-dealer, agent, investment adviser, or 21 investment adviser registration requirements in Article 4. 22 A Section 201 exempt security retains its exemption when 23 initially issued and in subsequent trading. 24 A Section 202 transaction exemption must be established for 25 each transaction. 26 Neither the exempt security nor the transaction exemptions are 27 meant to be mutually exclusive. A security or transaction may 28 qualify for two or more exemptions. 29 Article 2 is not available to any security, transaction, or offer 30 that, although in technical compliance with a specific section in 31 Article 2, is part of an unlawful plan or scheme to evade the 32 registration provisions of Article 3. In such cases registration is 33 required. Cf. Prelim. Note 6 to Regulation D adopted under the 34 Securities Act of 1933. 35 36 South Carolina Reporter’s Comments 37 38 Article 2 addresses exemptions from registration. Generally, 39 changes in prior law address the preemption by NSMIA or the 40 need for modernization of prior exemptions. There is, generally, a 41 retention or broadening of existing exemptions. South Carolina 42 has previously addressed the NSMIA exemptions in its 1997 43 amendments, so the impact of those is considerably less than in

1 [588] 80 1 those states which retain the 1956 Act without amendment. The 2 Official Comments reflect the legal and policy decisions 3 underlying Article 2’s provisions. 4 Section 35-1-201 identifies exempt securities; Section 35-1-202 5 identifies exempt transactions. The Official Comments explain 6 that a particular security or offering may qualify as exempt under 7 both sections. South Carolina narrowly construes exemptions to 8 registration under existing case law, McGaha v. Mosley, 283 S.C. 9 268, 273, 322 S.E.2d 461, 464 (Ct. App. 1984). Such construction 10 would remain appropriate under this chapter. 11 It is important to note that exemption from registration does not 12 equate with exemption from either civil or regulatory liability 13 under the antifraud provisions contained in Article 5. In addition, 14 Article 2 exemptions are not available where a security, transaction 15 or offer, even though in technical compliance with Article 2’s 16 language, is part of an unlawful plan or scheme to evade Article 17 3’s registration provisions. 18 19 Section 35-1-201. The following securities are exempt from the 20 requirements of Sections 35-1-301 through 35-1-306 and 21 35-1-504: 22 (1) a security, including a revenue obligation or a separate 23 security as defined in Rule 131 (17 C.F.R. 230.131) adopted under 24 the Securities Act of 1933, issued, insured, or guaranteed by the 25 United States; by a State; by a political subdivision of a State; by a 26 public authority, agency, or instrumentality of one or more States; 27 by a political subdivision of one or more States; or by a person 28 controlled or supervised by and acting as an instrumentality of the 29 United States under authority granted by the Congress; or a 30 certificate of deposit for any of the foregoing; 31 (2) a security issued, insured, or guaranteed by a foreign 32 government with which the United States maintains diplomatic 33 relations, or any of its political subdivisions, if the security is 34 recognized as a valid obligation by the issuer, insurer, or 35 guarantor; 36 (3) a security issued by and representing or that will represent 37 an interest in or a direct obligation of, or be guaranteed by: 38 (A) an international banking institution; 39 (B) a banking institution organized under the laws of the 40 United States; a member bank of the Federal Reserve System; or a 41 depository institution a substantial portion of the business of which 42 consists or will consist of receiving deposits or share accounts that 43 are insured to the maximum amount authorized by statute by the

1 [588] 81 1 Federal Deposit Insurance Corporation, the National Credit Union 2 Share Insurance Fund, or a successor authorized by federal law or 3 exercising fiduciary powers that are similar to those permitted for 4 national banks under the authority of the Comptroller of Currency 5 pursuant to Section 1 of Public Law 87-722 (12 U.S.C. Section 6 92a); or 7 (C) any other depository institution, unless by rule or order 8 the Securities Commissioner proceeds under Section 35-1-204; 9 (4) a security issued by and representing an interest in, or a 10 debt of, or insured or guaranteed by, an insurance company 11 authorized to do business in this State; 12 (5) a security issued or guaranteed by a railroad, other common 13 carrier, public utility, or public utility holding company that is: 14 (A) regulated in respect to its rates and charges by the United 15 States or a State; 16 (B) regulated in respect to the issuance or guarantee of the 17 security by the United States, a State, Canada, or a Canadian 18 province or territory; or 19 (C) a public utility holding company registered under the 20 Public Utility Holding Company Act of 1935 or a subsidiary of 21 such a registered holding company within the meaning of that act; 22 (6) a federal covered security specified in Section 18(b)(1) of 23 the Securities Act of 1933 (15 U.S.C. Section 77r(b)(1)) or by rule 24 adopted under that provision or a security listed or approved for 25 listing on another securities market specified by rule under this 26 chapter; a put or a call option contract; a warrant; a subscription 27 right on or with respect to such securities; or an option or similar 28 derivative security on a security or an index of securities or foreign 29 currencies issued by a clearing agency registered under the 30 Securities Exchange Act of 1934 and listed or designated for 31 trading on a national securities exchange, a facility of a national 32 securities exchange, or a facility of a national securities association 33 registered under the Securities Exchange Act of 1934 or an offer or 34 sale, of the underlying security in connection with the offer, sale, 35 or exercise of an option or other security that was exempt when the 36 option or other security was written or issued; or an option or a 37 derivative security designated by the Securities and Exchange 38 Commission under Section 9(b) of the Securities Exchange Act of 39 1934 (15 U.S.C. Section 78i(b)); 40 (7) a security issued by a person organized and operated 41 exclusively for religious, educational, benevolent, fraternal, 42 charitable, social, athletic, or reformatory purposes, or as a 43 chamber of commerce, and not for pecuniary profit, no part of the

1 [588] 82 1 net earnings of which inures to the benefit of a private stockholder 2 or other person, or a security of a company that is excluded from 3 the definition of an investment company under Section 3(c)(10)(B) 4 of the Investment Company Act of 1940 (15 U.S.C. Section 5 80a-3(c)(10)(B)); except that with respect to the offer or sale of a 6 note, bond, debenture, or other evidence of indebtedness issued by 7 such a person, a rule may be adopted under this chapter limiting 8 the availability of this exemption by classifying securities, persons, 9 and transactions, imposing different requirements for different 10 classes, specifying with respect to paragraph (B) the scope of the 11 exemption and the grounds for denial or suspension, and requiring 12 an issuer: 13 (A) to file a notice specifying the material terms of the 14 proposed offer or sale and copies of any proposed sales and 15 advertising literature to be used and provide that the exemption 16 becomes effective if the Securities Commissioner does not 17 disallow the exemption within the period established by the rule; 18 (B) to file a request for exemption authorization for which a 19 rule under this chapter may specify the scope of the exemption, the 20 requirement of an offering statement, the filing of sales and 21 advertising literature, the filing of consent to service of process 22 complying with Section 35-1-611, and grounds for denial or 23 suspension of the exemption; or 24 (C) to register under Section 35-1-304; 25 (8) a member’s or owner’s interest in, or a retention certificate 26 or like security given in lieu of a cash patronage dividend issued 27 by, a cooperative organized and operated as a nonprofit 28 membership cooperative under the cooperative laws of a State, but 29 not a member’s or owner’s interest, retention certificate, or like 30 security sold to persons other than bona fide members of the 31 cooperative; and 32 (9) an equipment trust certificate with respect to equipment 33 leased or conditionally sold to a person, if any security issued by 34 the person would be exempt under this section or would be a 35 federal covered security under Section 18(b)(1) of the Securities 36 Act of 1933 (15 U.S.C. Section 77r(b)(1)). 37 38 Official Comments 39 40 Prior Provisions: 1956 Act Section 402(a); RUSA Section 41 401(b). 42 1. Section 201(1): United States government and municipal 43 securities: Prior Provisions: 1956 Act Section 402(a)(1); RUSA

1 [588] 83 1 Section 401(b)(1). This exemption generally follows the 1956 Act 2 except that it adds securities “insured” by a specified government 3 to those “issued” or “guaranteed.” RUSA, in contrast, also 4 addressed foreign governments, which in this chapter are treated 5 separately in Section 201(2). Rule 131 issued under the Securities 6 Act of 1933 defines separate securities issued under governmental 7 obligations. 8 A significant minority of states have excluded from the Section 9 201(1) exemption industrial revenue bonds. Interest on these 10 securities is solely repayable from revenues received from a 11 nongovernmental industrial or commercial enterprise. Typically 12 this exclusion will not operate if (A) the payments are made or 13 unconditionally guaranteed by a person whose securities are 14 exempt from registration under Section 18(b)(1) of the Securities 15 Act of 1933, or (B) in accordance with a rule under this [chapter], 16 the issuer first files a notice in a record specifying the terms of the 17 proposed offer or sale and a copy of the offering statement and the 18 administrator does not disallow the exemption within the time 19 period established by the rule. 20 2. Section 201(2): Foreign government securities: Prior 21 Provisions: 1956 Act Section 402(a)(2); RUSA Section 401(b)(2). 22 The 1956 Act, as amended, and RUSA both reached foreign 23 governments as specified in Section 201(2) and separately treated 24 “a security issued, insured, or guaranteed by Canada, a Canadian 25 province or territory, a political subdivision of Canada or a 26 Canadian province or territory, an agency or corporate or other 27 instrumentality of one or more of the foregoing.” The separate 28 treatment of Canadian securities is largely redundant and has been 29 eliminated from this section. 30 3. Section 201(3): Depository institution and international 31 banking institution securities: Prior Provision: RUSA 401(b)(3). 32 Section 402(a)(3) of the 1956 Act exempts specified bank and 33 similar depository institutions; Section 402(a)(4) exempts specified 34 savings and loan and similar thrift institution securities; and 35 Section 402(a)(6) exempts specified credit union securities. 36 RUSA Section 401(b)(3) combines the three types of depository 37 institutions into a common definition (see RUSA Section 101(13)) 38 which are adopted in this chapter as Sections 102(3) and 102(5)) 39 and a common exemption (see RUSA Section 401(b)(3)) which is 40 adopted in this subsection. 41 Banks specified in Section 3(a)(2) of the Securities Act of 1933 42 issue federal covered securities under Section 18(b)(4)(C) of the 43 Securities Act of 1933. Section 201(3)(C) applies to securities

1 [588] 84 1 issued by depository institutions without depository insurance. 2 Under Section 204, the administrator will have the ability to 3 revoke or limit this exemption. 4 4. Section 201(4): Insurance company securities: Prior 5 Provisions: 1956 Act Section 402(a)(5); RUSA Section 401(b)(4). 6 The issuance, insurance, or guarantee of securities by an insurance 7 company is extensively regulated by state insurance commissions 8 or other state agencies. 9 Under this chapter insurance, endowment policies, or annuity 10 contracts under which an insurance company promises to pay fixed 11 sums are excluded from the definition of a security in Section 12 102(29)(B). 13 Unless brackets are removed from the words “or variable” in 14 Section 102(29)(B), a variable annuity or other variable insurance 15 product would be considered a security under this chapter and 16 under federal securities law. See SEC v. Variable Annuity Life 17 Ins. Co. of Am., 359 U.S. 65 (1959); SEC v. United Benefit Life 18 Ins. Co., 387 U.S. 202 (1967). 19 A variable annuity or other variable insurance product issued by 20 an investment company registered with the Securities and 21 Exchange Commission under the Investment Company Act of 22 1940 would be a “federal covered security,” see Section 102(7). 23 See Lander v. Hartford Life & Annuity Ins. Co., 251 F.3d 101 (2d 24 Cir. 2001). 25 A variable annuity or other variable insurance product not issued 26 by a registered investment company would be exempted by 27 Section 201(4), but would be subject to the antifraud provisions in 28 Article 5. 29 5. Section 201(5): Common carrier and public utility securities: 30 Prior Provisions: 1956 Act Section 401(a)(7); RUSA Section 31 401(b)(5). Both the 1956 Act and RUSA include references, 32 omitted here, to the Interstate Commerce Commission, whose 33 enabling legislation subsequently was repealed. Public utility 34 holding companies covered by this exemption are subject both to 35 the Public Utility Holding Company Act and to state or Canadian 36 utility regulation. 37 6. Section 201(6): Certain options and rights: No Prior 38 Provision. The 1956 Act Section 402(a)(8) provided an exemption 39 for securities listed on the New York, American, Midwest (now 40 Chicago), or other designated stock exchanges, senior or 41 substantially equal securities of the same issuer listed on the 42 exchange and any security covered by listed or approved

1 [588] 85 1 subscription rights or warrants, or any warrant or right to purchase 2 or subscribe to any security exempted by Section 402(a)(8). 3 RUSA essentially retained this exemption in Section 401(b)(7) 4 and added securities designated for inclusion in the National 5 Market System by the National Association of Securities Dealers 6 in Section 401(b)(8) and specified options issued by a clearing 7 agency registered under the Securities Exchange Act of 1934 in 8 Section 401(b)(9). 9 In 1996 Congress enacted the National Securities Markets 10 Improvement Act and provided in Section 18(b)(1) that securities 11 listed on the New York, American or Nasdaq Stock Exchange, or 12 designated by rule of the Securities and Exchange Commission, as 13 well as any security of the same issuer that is equal in seniority or 14 senior to any of these securities will be a federal covered security. 15 Under Rule 146 the SEC has designated as federal covered 16 securities under Section 18(b)(1) Tier I of the Pacific Exchange; 17 Tier I of the Philadelphia Stock Exchange; and The Chicago Board 18 Options Exchange on condition that the relevant listing standards 19 continue to be substantially similar to those of the New York, 20 American, or Nasdaq stock markets. See Reporter’s Note to 21 Section 102(7). A federal covered security subject to Section 22 18(b)(1) of the Securities Act of 1933 will not be subject to the 23 securities registration requirements of Sections 301 and 303 24 through 306. 25 The exemption in Section 201(6) addresses specified options, 26 warrants, and rights that are not federal covered securities under 27 Section 18(b)(1) of the Securities Act of 1933, but generally would 28 have been exempted under RUSA. The 1956 Act, which was 29 narrower, was drafted before the computerized Nasdaq stock 30 market began trading the National Market List and the 31 development of standardized options markets. 32 The final clause of Section 201(6) makes clear that any offer or 33 sale of the underlying security that occurs as a result of the offer or 34 sale of an option or other derivative security exempted under this 35 provision or as the result of the exercise of the option or other 36 derivative security, is covered by the exemption if the option met 37 the terms of the exemption at the time such derivative security was 38 written (that is, sold) or issued. The sale of the underlying security 39 when an option is exercised would be exempt even if the 40 underlying security is not at that time subject to any exemption 41 under the chapter. This is consistent with existing precedent under 42 federal law suggesting that the legality of the sale of an underlying 43 security when an option is exercised should be determined by the

1 [588] 86 1 status of the security at the time the option was written rather than 2 at the time of exercise. See, e.g., H. Kook & Co., Inc. v. 3 Scheinman, Hochstin & Trotta, Inc., 414 F.2d 93 (2d Cir. 1969). 4 Any transaction in an underlying security that results from the 5 offer, sale, or exercise of any derivative security issued by a 6 registered clearing agency and traded on a national securities 7 exchange or association is exempt if the derivative security when 8 written was exempt under Section 201(6). 9 The Securities and Exchange Commission has adopted Rule 10 9b-1 under Section 9(b). 11 7. Section 201(7): Nonprofit organization securities: Prior 12 Provision: Section 3(a)(4) of the Securities Act of 1933. 13 Section 402(a)(9) of the 1956 Act and Section 401(b)(10) of 14 RUSA exempt specified nonprofit securities. Both are modeled on 15 Section 3(a)(4) of the Securities Act, which was subsequently 16 amended. 17 Securities issued under Section 3(a)(4) of the Securities Act of 18 1933 are not treated as federal covered securities in Section 18(b) 19 (4)(C), although a separate Section 3(a)(13) exemption which 20 addresses certain church plan securities are federal covered 21 securities under Section 18(b)(4)(C). 22 RUSA included an optional notice and review requirement for 23 nonprofit securities in Section 401(b)(10) “if at least ten days 24 before a sale of the security the person has filed with the 25 administrator a notice setting forth the material terms of the 26 proposed sale and copies of any sales and advertising literature to 27 be used and the administrator by order does not disallow the 28 exemption within the next five full business days.” 29 The nonprofit exemption is of particular concern to state 30 securities administrators. See, e.g., State Regulators Announce 31 Dramatic Rise in Religious Scams; Tens of Thousands Lured, 33 32 Sec. Reg. & L. Rep. (BNA) 1189 (2001). 33 Under Section 6 of the Philanthropy Protection Act, Congress 34 preempted application of the registration provisions of state 35 securities laws to issuance of securities covered by Section 3(c) 36 (10) of the Investment Company Act of 1940 unless states acted 37 within three years of enactment (December 1998) to pass special 38 state legislation canceling federal preemption. Ten states enacted 39 such legislation. Those states may preserve this treatment of 40 Section 3(c)(10) securities by deleting from Section 201(7) the 41 phrase “or a security of a company that is excluded from the 42 definition of an investment company under Section 3(c)(10)(B) of 43 the Investment Company Act of 1940.”

1 [588] 87 1 Section 201(7) provides statutory authority for the states to 2 adopt rules with respect to notes, bonds, debentures and other 3 evidences of indebtedness issued by nonprofit organizations. Each 4 state may adopt different rules tailored for various types of 5 nonprofit debt offerings, (e.g., local church bond offerings, 6 national church bond offerings, church extension funds, charitable 7 gift annuities). For states that do not wish to provide an automatic 8 exemption from registration for a particular type of nonprofit debt 9 instrument or offering, Section 201(7) creates three categories of 10 regulatory review that may be required by rule: (a) exemption by 11 notice filing, (b) exemption by state authorization, and (c) 12 registration by qualification. These categories are consistent with 13 the manner in which many states currently review different types 14 of nonprofit debt securities. See Horner & Makens, Securities 15 Regulation of Religious and Other Nonprofit Organizations, 27 16 Stetson L. Rev. 473 (1997). 17 8. Section 201(8): Cooperatives: Prior Provision: RUSA Section 18 401(b)(13). Section 201(8) is derived from RUSA Section 401(b) 19 (13) which was included in that act after a number of states had 20 adopted exemptions for securities issued by cooperatives. Section 21 201(8) is not intended to be available if securities are offered or 22 sold to the public generally. 23 The 1956 Act Section 402(a)(12) had instead provided: “insert 24 any desired exemption for cooperatives.” The Reporter for the 25 1956 Act had found such sharp variation among the 18 states that 26 then had adopted a cooperative exemption that “no common 27 pattern can be found.” Louis Loss, Commentary on the Uniform 28 Securities Act 118 (1976). 29 9. Section 201(9): Equipment trust certificates: Prior Provision: 30 RUSA Section 401(b)(6). The Securities Act of 1933 Section 3(a) 31 (6) includes a narrower exemption for railroad equipment trusts. 32 Section 201(9) follows RUSA. The Official Comment to RUSA 33 Section 401(b)(6) explained: 34 The new paragraph (b)(6) reflects the extensive development of 35 equipment lease financing through leveraged leases, conditional 36 sales, and other devices. The underlying premise is that if the 37 securities of the person using such a financing device would be 38 exempt under some other paragraph of Section 401, the equipment 39 trust certificate or other security issued to acquire the property in 40 question also is exempt. 41 42 South Carolina Reporter’s Comments 43

1 [588] 88 1 1. Section 35-1-201(1): This exemption for federal, state, and 2 other public agency securities generally follows prior law, with the 3 exception noted in the Official Comments for the addition of 4 securities “insured” by a specified government to those “issued” or 5 “guaranteed.” South Carolina has followed the majority of states 6 that have included industrial revenue bonds within this exemption. 7 2. Section 35-1-201(2): This exemption for foreign government 8 securities makes no substantive change in existing law. 9 3. Section 35-1-201(3): This exemption combines three separate 10 exemptions under existing law, as noted in the Official Comments. 11 The Securities Commissioner has the ability to revoke or limit this 12 exception. 13 4. Section 35-1-201(4): No prior provision. Variable annuity 14 products are defined as a “security” in Section 35-1-102(29)(B), 15 but are exempt from registration either because they qualify as a 16 “federal covered security” or by this exemption. 17 5. Section 35-1-201(5): No substantial change in existing law. 18 6. Section 35-1-201(6): This exemption for “federally covered 19 securities” tracks the preemption in NSMIA. It also exempts 20 certain options, warrants, and rights not defined as “federally 21 covered securities” in deference to the development of 22 standardized options markets. 23 7. Section 35-1-201(7): Existing law grants an automatic 24 exemption for specified nonprofit securities. This chapter allows 25 that to continue, unless the Securities Commissioner adopts a rule 26 to require regulatory review in one of three categories, as noted in 27 the Official Comments: (a) notice filing, (b) state authorization, 28 and (c) qualification under Section 304. 29 8. Section 35-1-201(8): This exemption for securities issued by 30 cooperatives clarifies that the resale to nonmembers of a 31 cooperative security is not subject to this exemption. 32 9. Section 35-1-201(9): No prior provision. 33 34 Section 35-1-202. The following transactions are exempt from 35 the requirements of Sections 35-1-301 through 35-1-306 and 36 35-1-504: 37 (1) an isolated nonissuer transaction, whether effected by or 38 through a broker-dealer or not; 39 (2) a nonissuer transaction by or through a broker-dealer 40 registered, or exempt from registration under this chapter, and a 41 resale transaction by a sponsor of a unit investment trust registered 42 under the Investment Company Act of 1940, in a security of a

1 [588] 89 1 class that has been outstanding in the hands of the public for at 2 least ninety days, if, at the date of the transaction: 3 (A) the issuer of the security is engaged in business, the 4 issuer is not in the organizational stage or in bankruptcy or 5 receivership, and the issuer is not a blank check, blind pool, or 6 shell company that has no specific business plan or purpose or has 7 indicated that its primary business plan is to engage in a merger or 8 combination of the business with, or an acquisition of, an 9 unidentified person; 10 (B) the security is sold at a price reasonably related to its 11 current market price; 12 (C) the security does not constitute the whole or part of an 13 unsold allotment to, or a subscription or participation by, the 14 broker-dealer as an underwriter of the security or a redistribution; 15 (D) a nationally recognized securities manual or its electronic 16 equivalent designated by rule adopted or order issued under this 17 chapter or a record filed with the Securities and Exchange 18 Commission that is publicly available contains: 19 (i) a description of the business and operations of the 20 issuer; 21 (ii) the names of the issuer’s executive officers and the 22 names of the issuer’s directors, if any; 23 (iii) an audited balance sheet of the issuer as of a date 24 within 18 months before the date of the transaction or, in the case 25 of a reorganization or merger when the parties to the 26 reorganization or merger each had an audited balance sheet, a pro 27 forma balance sheet for the combined organization; and 28 (iv) an audited income statement for each of the issuer’s 29 two immediately previous fiscal years or for the period of 30 existence of the issuer, whichever is shorter, or, in the case of a 31 reorganization or merger when each party to the reorganization or 32 merger had audited income statements, a pro forma income 33 statement; and 34 (E) any one of the following requirements is met: 35 (i) the issuer of the security has a class of equity 36 securities listed on a national securities exchange registered under 37 Section 6 of the Securities Exchange Act of 1934 or designated for 38 trading on the National Association of Securities Dealers 39 Automated Quotation System; 40 (ii) the issuer of the security is a unit investment trust 41 registered under the Investment Company Act of 1940; 42 (iii) the issuer of the security, including its predecessors, 43 has been engaged in continuous business for at least three years; or

1 [588] 90 1 (iv) the issuer of the security has total assets of at least two 2 million dollars based on an audited balance sheet as of a date 3 within 18 months before the date of the transaction or, in the case 4 of a reorganization or merger when the parties to the 5 reorganization or merger each had such an audited balance sheet, a 6 pro forma balance sheet for the combined organization; 7 (3)a nonissuer transaction by or through a broker-dealer 8 registered or exempt from registration under this chapter in a 9 security of a foreign issuer that is a margin security defined in 10 regulations or rules adopted by the Board of Governors of the 11 Federal Reserve System; 12 (4) a nonissuer transaction by or through a broker-dealer 13 registered or exempt from registration under this chapter in an 14 outstanding security if the guarantor of the security files reports 15 with the Securities and Exchange Commission under the reporting 16 requirements of Section 13 or 15(d) of the Securities Exchange Act 17 of 1934 (15 U.S.C. 78m or 78o(d)); 18 (5) a nonissuer transaction by or through a broker-dealer 19 registered or exempt from registration under this chapter in a 20 security that: 21 (A) is rated at the time of the transaction by a nationally 22 recognized statistical rating organization in one of its four highest 23 rating categories; or 24 (B) has a fixed maturity or a fixed interest or dividend, if: 25 (i) a default has not occurred during the current fiscal 26 year or within the three previous fiscal years or during the 27 existence of the issuer and any predecessor if less than three fiscal 28 years, in the payment of principal, interest, or dividends on the 29 security; and 30 (ii) the issuer is engaged in business, is not in the 31 organizational stage or in bankruptcy or receivership, and is not 32 and has not been within the previous twelve months a blank check, 33 blind pool, or shell company that has no specific business plan or 34 purpose or has indicated that its primary business plan is to engage 35 in a merger or combination of the business with, or an acquisition 36 of, an unidentified person; 37 (6) a nonissuer transaction by or through a broker-dealer 38 registered or exempt from registration under this chapter effecting 39 an unsolicited order or offer to purchase; 40 (7) a nonissuer transaction executed by a bona fide pledgee 41 without the purpose of evading this chapter; 42 (8) a nonissuer transaction by a federal covered investment 43 adviser with investments under management in excess of one

1 [588] 91 1 hundred million dollars acting in the exercise of discretionary 2 authority in a signed record for the account of others; 3 (9) a transaction in a security, whether or not the security or 4 transaction is otherwise exempt, in exchange for one or more bona 5 fide outstanding securities, claims, or property interests, or partly 6 in such exchange and partly for cash, if the terms and conditions of 7 the issuance and exchange or the delivery and exchange and the 8 fairness of the terms and conditions have been approved by the 9 Securities Commissioner after a hearing; 10 (10) a transaction between the issuer or other person on whose 11 behalf the offering is made and an underwriter, or among 12 underwriters; 13 (11) a transaction in a note, bond, debenture, or other evidence 14 of indebtedness secured by a mortgage or other security agreement 15 if: 16 (A) the note, bond, debenture, or other evidence of 17 indebtedness is offered and sold with the mortgage or other 18 security agreement as a unit; 19 (B) a general solicitation or general advertisement of the 20 transaction is not made; and 21 (C) a commission or other remuneration is not paid or given, 22 directly or indirectly, to a person not registered under this chapter 23 as a broker-dealer or as an agent; 24 (12) a transaction by an executor, administrator of an estate, 25 sheriff, marshal, receiver, trustee in bankruptcy, guardian, or 26 conservator; 27 (13) a sale or offer to sell to: 28 (A) an institutional investor; 29 (B) a federal covered investment adviser; or 30 (C) any other person exempted by rule adopted or order 31 issued under this chapter; 32 (14) a sale or an offer to sell securities by or on behalf of an 33 issuer, if the transaction is part of a single issue in which: 34 (A) not more than twenty-five purchasers are present in this 35 State during any twelve consecutive months, other than those 36 designated in paragraph (13); 37 (B) a general solicitation or general advertising is not made 38 in connection with the offer to sell or sale of the securities; 39 (C) a commission or other remuneration is not paid or given, 40 directly or indirectly, to a person other than a broker-dealer 41 registered under this chapter or an agent registered under this 42 chapter for soliciting a prospective purchaser in this State; and

1 [588] 92 1 (D) the issuer reasonably believes that all the purchasers in 2 this State, other than those designated in paragraph (13), are 3 purchasing for investment; 4 (15) a transaction under an offer to existing security holders of 5 the issuer, including persons that at the date of the transaction are 6 holders of convertible securities, options, or warrants, if a 7 commission or other remuneration, other than a standby 8 commission, is not paid or given, directly or indirectly, for 9 soliciting a security holder in this State; 10 (16) an offer to sell, but not a sale, of a security not exempt from 11 registration under the Securities Act of 1933 if: 12 (A) a registration or offering statement or similar record as 13 required under the Securities Act of 1933 has been filed, but is not 14 effective, or the offer is made in compliance with Rule 165 15 adopted under the Securities Act of 1933 (17 C.F.R. 230.165); and 16 (B) a stop order of which the offeror is aware has not been 17 issued against the offeror by the Securities Commissioner or the 18 Securities and Exchange Commission, and an audit, inspection, or 19 proceeding that is public and that may culminate in a stop order is 20 not known by the offeror to be pending; 21 (17) an offer to sell, but not a sale, of a security exempt from 22 registration under the Securities Act of 1933 if: 23 (A) a registration statement has been filed under this chapter, 24 but is not effective; 25 (B) a solicitation of interest is provided in a record to 26 offerees in compliance with a rule adopted by the Securities 27 Commissioner under this chapter; and 28 (C) a stop order of which the offeror is aware has not been 29 issued by the Securities Commissioner under this chapter and an 30 audit, inspection, or proceeding that may culminate in a stop order 31 is not known by the offeror to be pending; 32 (18) a transaction involving the distribution of the securities of 33 an issuer to the security holders of another person in connection 34 with a merger, consolidation, exchange of securities, sale of assets, 35 or other reorganization to which the issuer, or its parent or 36 subsidiary and the other person, or its parent or subsidiary, are 37 parties; 38 (19) a rescission offer, sale, or purchase under Section 35-1-510; 39 (20) an offer or sale of a security to a person not a resident of 40 this State and not present in this State if the offer or sale does not 41 constitute a violation of the laws of the State or foreign 42 jurisdiction in which the offeree or purchaser is present and is not 43 part of an unlawful plan or scheme to evade this chapter;

1 [588] 93 1 (21) employees’ stock purchase, savings, option, profit-sharing, 2 pension, or similar employees’ benefit plan, including any 3 securities, plan interests, and guarantees issued under a 4 compensatory benefit plan or compensation contract, contained in 5 a record, established by the issuer, its parents, its majority-owned 6 subsidiaries, or the majority-owned subsidiaries of the issuer’s 7 parent for the participation of their employees including offers or 8 sales of such securities to: 9 (A) directors; general partners; trustees, if the issuer is a 10 business trust; officers; consultants; and advisors; 11 (B) family members who acquire such securities from those 12 persons through gifts or domestic relations orders; 13 (C) former employees, directors, general partners, trustees, 14 officers, consultants, and advisors if those individuals were 15 employed by or providing services to the issuer when the securities 16 were offered; and 17 (D) insurance agents who are exclusive insurance agents of the 18 issuer, or the issuer’s subsidiaries or parents, or who derive more 19 than 50 percent of their annual income from those organizations; 20 (22) a transaction involving: 21 (A) a stock dividend or equivalent equity distribution, 22 whether the corporation or other business organization distributing 23 the dividend or equivalent equity distribution is the issuer or not, if 24 nothing of value is given by stockholders or other equity holders 25 for the dividend or equivalent equity distribution other than the 26 surrender of a right to a cash or property dividend if each 27 stockholder or other equity holder may elect to take the dividend 28 or equivalent equity distribution in cash, property, or stock; 29 (B) an act incident to a judicially approved reorganization in 30 which a security is issued in exchange for one or more outstanding 31 securities, claims, or property interests, or partly in such exchange 32 and partly for cash; or 33 (C) the solicitation of tenders of securities by an offeror in a 34 tender offer in compliance with Rule 162 adopted under the 35 Securities Act of 1933 (17 C.F.R. 230.162); or 36 (23) a nonissuer transaction in an outstanding security by or 37 through a broker-dealer registered or exempt from registration 38 under this chapter, if the issuer is a reporting issuer in a foreign 39 jurisdiction designated by this paragraph or by rule adopted or 40 order issued under this chapter; has been subject to continuous 41 reporting requirements in the foreign jurisdiction for not less than 42 180 days before the transaction; and the security is listed on the 43 foreign jurisdiction’s securities exchange that has been designated

1 [588] 94 1 by this paragraph or by rule adopted or order issued under this 2 chapter, or is a security of the same issuer that is of senior or 3 substantially equal rank to the listed security or is a warrant or 4 right to purchase or subscribe to any of the foregoing. For 5 purposes of this paragraph, Canada, together with its provinces and 6 territories, is a designated foreign jurisdiction and The Toronto 7 Stock Exchange, Inc., is a designated securities exchange. After 8 an administrative hearing, the Securities Commissioner, by rule 9 adopted or order issued under this chapter, may revoke the 10 designation of a securities exchange under this paragraph, if the 11 Securities Commissioner finds that revocation is necessary or 12 appropriate in the public interest and for the protection of 13 investors. 14 15 Official Comments 16 17 Prior Provisions: 1956 Act Section 402(b); RUSA Section 402. 18 1. Sections 202(1) through (8) are available only for nonissuer 19 transactions. An issuer selling securities in an initial public 20 offering or other offering may not rely on Sections 202(1) through 21 (8). A nonissuer, however, can rely on any issuer transaction 22 exemption such as Section 202(13), when the exemption would be 23 applicable to a nonissuer. The term “nonissuer transaction or 24 nonissuer distribution” is defined in Section 102(18); the term 25 “issuer” is defined in Section 102(17). 26 2. Section 202(1): Isolated nonissuer transactions: Prior 27 Provisions: 1956 Act Section 402(b)(1); RUSA Section 402(1). 28 The term “isolated transaction” is not defined in this chapter, but 29 left to the states to develop. Historically under state law there has 30 been somewhat varied case law development of the term “isolated 31 transactions.” See, e.g., Blinder, Robinson & Co., Inc. v. 32 Goettsch, 403 N.W.2d 772 (Iowa 1987) (isolated nonissuer 33 transaction exemption is not unconstitutionally vague); Allen v. 34 Schauf, 449 P.2d 1010 (Kan. 1969) (regulation defined isolated 35 transactions to not exceed four persons solicited in a twelve month 36 period); Nelson v. State, 355 P.2d 413, 420 (Okla. Ct. Crim. App. 37 1960) (“[a]n isolated sale means one standing alone, disconnected 38 from any other”); see generally 1 Louis Loss & Joel Seligman, 39 Securities Regulation 125-130 (3d ed. rev. 1998). 40 In general this subsection is intended to cover the occasional 41 sale by a person. It would not exempt multiple or successive 42 transactions by a person or group, whether those sales are 43 sufficient to constitute a “distribution” as that term is used for

1 [588] 95 1 purposes of the federal securities laws, see 2 Louis Loss & Joel 2 Seligman, Securities Regulation 1138.50-1138.52 (3d ed. rev. 3 1999), or merely too frequent to be considered “isolated” under the 4 relevant state law. 5 Limited issuer offering transactions are separately addressed in 6 Section 202(14). 7 3. Section 202(2): Nonissuer transactions in specified 8 outstanding securities: Prior Provisions: 1956 Act Section 402(b) 9 (2); RUSA Sections 402(3) and (4). This Section represents a 10 modernization of the securities manual exemption which was 11 included in both the 1956 Act and RUSA. NASAA recommended 12 an amendment to the 1956 Act Section 402(b) after discussion 13 with the Securities Industry Association and others in the securities 14 industry. This Section generally follows the NASAA amendment. 15 Rule 419 issued under the Securities Act of 1933 defines a 16 “blank check company” to be a company that “is a development 17 stage company that has no specific business plan or purpose or has 18 indicated that its business plan is to engage in a merger or 19 acquisition with an unidentified company or companies, or other 20 entity or person.” A “blind pool” is similar and would involve an 21 investment in a blank check or other entity with no identified 22 business plan or purpose. A “shell company” is also similar and 23 would involve an entity which, to date, has no significant business 24 assets, plan, or purpose. 25 4. Section 202(3): Nonissuer transactions in specified foreign 26 transactions: No Prior Provision. The NASAA recommendation 27 that was the basis of Section 202(2) also included specified foreign 28 nonissuer transactions subject to a manual exemption when there 29 was disclosure of the issuer’s officers and directors in the issuer’s 30 country of domicile. This subsection uses margin securities as an 31 alternative approach to identify sufficiently seasoned foreign 32 securities. Margin securities are required to be in compliance with 33 Regulation T which was adopted by the Board of Governors of the 34 Federal Reserve System. 35 5. Section 202(4): Nonissuer transactions in securities subject to 36 Securities Exchange Act reporting: Prior Provision: RUSA Section 37 402(2). RUSA added this exemption to authorize nonissuer 38 secondary trading in the securities of issuers that were subject to 39 the periodic reporting requirements of the Securities Exchange Act 40 of 1934. To bar immediate secondary trading in nonregistered 41 initial public offerings, there was a further requirement that these 42 securities be subject to the reporting requirements of Sections 13 43 or 15(d) of the Securities Exchange Act of 1934 for not less than

1 [588] 96 1 90 days. Section 202(4) only covers the guarantor because if the 2 issuer of the security is a reporting company under Sections 13 or 3 15(d) of the Securities Exchange Act of 1934, the transaction is 4 preempted by Section 18(b)(4)(A) of the Securities Act of 1933. 5 Section 18(b)(4)(A) of the National Securities Markets 6 Improvement Act of 1996 defines nonissuer transactions under 7 Section 4(1) of the Securities Act of 1933 (“transactions by 8 persons other than an issuer, underwriter, or dealer”) as “federal 9 covered securities,” see Section 102(7), if the issuer files reports 10 with the Securities and Exchange Commission under Sections 13 11 or 15(d) of the Securities Exchange Act of 1934. Under Section 12 18(a) of the Securities Act of 1933 no state statute, rule, order, or 13 other administrative action with respect to registration of securities 14 or reporting requirements may apply to a federal covered security. 15 To harmonize Section 202(4) with Sections 18(a) and 18(b)(4)(A) 16 of the Securities Act of 1933, the 90 day reporting period in RUSA 17 Section 402(2) is not adopted in this chapter. 18 6. Section 202(5): Nonissuer transactions in specified fixed 19 income securities: Prior Provisions: 1956 Act Section 402(b)(2) 20 (B); RUSA Section 402(4). 21 The concept of a fixed income security rated by a nationally 22 recognized statistical rating organization in one of its four highest 23 rating categories described in Section 202(5)(A) is well established 24 in federal securities law in Form S-3 adopted under the Securities 25 Act of 1933 and the net capital Rule 15c3-1(c)(2)(vi)(F) adopted 26 under the Securities Exchange Act of 1934. See 2 Louis Loss & 27 Joel Seligman, Securities Regulation 649-653 (3d ed. rev. 1999). 28 Nationally recognized statistical rating organizations have been 29 identified by the Securities and Exchange Commission and include 30 such organizations as Moody’s and Standard and Poor’s. Rating 31 categories typically begin with AAA and under this chapter would 32 include BBB as the fourth highest rating category. 33 Section 202(5)(B) follows the 1956 Act and RUSA, but also 34 addresses blank check and similar offerings, which became major 35 concerns at the state and federal levels during the past two 36 decades. Cf. Securities Act of 1933 Rule 419. See Official 37 Comment (3). 38 This subsection includes both debt securities with fixed maturity 39 or a fixed interest rate and preferred stock with fixed dividend 40 provisions. 41 7. Section 202(6): Unsolicited brokerage transactions: Prior 42 Provisions: 1956 Act Section 402(b)(3); RUSA Section 402(5). 43 Section 18(b)(4)(B) of the Securities Act of 1933 defines as federal

1 [588] 97 1 covered securities those subject to Section 4(4) of the Securities 2 Act of 1933: “brokerage transactions executed upon customers’ 3 orders on any exchange or in the over-the-counter market but not 4 the solicitation of such orders.” Section 202(6) is intended to 5 provide exemption for nonagency transactions by dealers not 6 within the scope of Section 4(4). 7 The 1956 Act Section 402(b)(3) had provided that the 8 administrator “may by rule require that the customer acknowledge 9 upon a specified form that the same was unsolicited, and that a 10 signed copy of each such form be preserved by the broker-dealer 11 for a specified period.” This type of requirement is preempted by 12 Section 18(a) of the Securities Act of 1933 for federal covered 13 securities and is viewed as unnecessary for the limited class of 14 dealer nonagency transactions that will be exempted by Section 15 202(6). 16 8. Section 202(7): Nonissuer transactions by pledgees: Prior 17 Provisions: 1956 Act Section 402(b)(7); RUSA Section 402(9). 18 This subsection is identical to the 1956 Act and substantively 19 identical to RUSA. 20 9. Section 202(8): Nonissuer transactions with federal covered 21 investment advisers: No Prior Provision. This exemption was 22 added because of a recognition that federal covered investment 23 advisers are sophisticated financial professionals capable of 24 determining the merits of a security and do not require the 25 protections provided by requiring registration in a particular state. 26 10. Section 202(9): Specified exchange transactions: No Prior 27 Provision. Section 202(9) provides a state counterpart to the 28 exemption in Section 3(a)(10) of the Securities Act of 1933. 29 11. Section 202(10): Underwriter transactions: Prior 30 Provisions: 1956 Act Section 402(b)(4); RUSA Section 402(6). 31 This subsection is substantively identical to the 1956 Act and 32 RUSA. 33 12. Section 202(11): Unit secured transactions: Prior 34 Provisions: 1956 Act Section 402(b)(5); RUSA Section 402(7). In 35 recent years the application of this exemption has been one of 36 concern to state securities administrators. The conditions that 37 conclude this exemption are new and are intended to address these 38 concerns. 39 13. Section 202(12): Bankruptcy, guardian, or conservator 40 transactions: Prior Provisions: 1956 Act Section 402(b)(6); RUSA 41 Section 402(8). This subsection is identical to that in the 1956 Act 42 and RUSA.

1 [588] 98 1 14. Section 202(13): Transactions with specified investors: 2 Prior Provision: 1956 Act Section 402(b)(8). The 1956 Act 3 contains similar but less inclusive language in Section 402(b)(8). If 4 the Securities and Exchange Commission adopts a rule defining 5 “qualified purchaser” as used in Section 18(b)(3) of the Securities 6 Act to specify certain purchasers of federal covered securities, part 7 or all of this exemption will be redundant. As of September 2002, 8 the Commission has proposed, but not adopted, Rule 146(c). 9 Section 202(13)(B) is limited to transactions for the account of a 10 federal covered investment adviser and is not intended to reach 11 transactions on behalf of others by such adviser. 12 15. Section 202(14): Limited offering transactions: Prior 13 Provisions: 1956 Act Section 402(b)(9); RUSA Section 402(11). 14 The reference in the prefatory language to “a single issue” signifies 15 that two or more issues can be “integrated” and potentially destroy 16 the exemption. There are two general tests for integration under 17 the federal securities laws. The states similarly have followed 18 generally these types of integration principles with respect to 19 securities transaction exemptions. First, there is a six month 20 “buffer” before and after an offer, offer to sell, or sale of a 21 transaction exempt under Section 202(14) during which no other 22 issue can be distributed if integration automatically is to be 23 avoided. See Rule 147(b)(2) and Rule 502(a) of the Securities Act 24 of 1933. Second, if two issues occur within six months, integration 25 may occur depending upon the following factors: 26 (i) are the offerings part of a single plan of financing; 27 (ii) do the offerings involve issuance of the same class of 28 securities; 29 (iii) are the offerings made at or about the same time; 30 (iv) is the same type of consideration to be received; and 31 (v) are the offerings made for the same general purpose. 32 See generally 3 Louis Loss & Joel Seligman, Securities 33 Regulation 1231-1248 (3d ed. rev. 1999). 34 Section 402(b)(9) of the 1956 Act and Section 402(11) of the 35 1985 Act provide alternative limited offering transaction 36 exemptions. The 1956 Act was limited to offers to no more than 37 ten persons (other than institutional investors specified in Section 38 402(b)(8)); all purchasers in the State had to purchase for 39 investment; and no remuneration was given for soliciting 40 prospective purchasers in the State. RUSA, in contrast, was 41 limited to no more than 25 purchasers (other than financial or 42 institutional investors); no general solicitation or advertising; and

1 [588] 99 1 no remuneration was paid to a person other than a broker-dealer 2 for soliciting a prospective purchaser. 3 This section would apply to preorganization limited offerings as 4 well as operating company limited offerings. The Securities Act 5 of 1933 Sections 3(b) and 4(2) also apply to both. In contrast, the 6 1956 Act Section 402(b)(10) and RUSA Section 402(12) used 7 similar concepts in separate Sections to apply to preorganization 8 limited offerings. 9 Section 18(b)(4)(D) of the Securities Act of 1933 defines as 10 federal covered securities those issued under Securities and 11 Exchange Commission rules under Section 4(2) of the Securities 12 Act. This would include Rule 506, which uses the “accredited 13 investor” definition in Rule 501(a). When a transaction involves 14 Rule 506, Section 18(b)(4)(D) further provides “that this paragraph 15 does not prohibit a state from imposing notice filing requirements 16 that are substantially similar to those required by rule or regulation 17 under Section 4(2) that are in effect on September 1, 1996.” These 18 notice requirements are found in Section 302(c) of this chapter. 19 A majority of states have adopted a Uniform Limited Offering 20 Exemption, coordinate to varying degrees with Regulation D. The 21 authority to adopt this and other exemptive rules is provided in 22 Section 203. 23 16. Section 202(15): Transactions with existing security 24 holders: Prior Provisions: 1956 Act Section 402(b)(11); RUSA 25 Section 402(14). Section 3(a)(9) of the Securities Act of 1933 26 exempts exchange offerings with existing security holders. Under 27 Section 18(b)(4)(C) transactions subject to Section 3(a)(9) are 28 federal covered securities. See Section 102(7). 29 Notice requirements in the earlier 1956 Act and RUSA 30 accordingly would be preempted by the Securities Act of 1933. 31 See Section 18(a) of the Securities Act of 1933. Otherwise this 32 exemption is substantively identical to the 1956 Act and RUSA. 33 17. Section 202(16): Offerings registered under this chapter 34 and the Securities Act of 1933: 35 Prior Provisions: 1956 Act Section 402(b)(12); RUSA Section 36 402(15). This exemption generally follows the 1956 Act and 37 RUSA. Rule 165 of the Securities Act of 1933, which was 38 adopted in 1999, allows the offeror of securities in a business 39 combination to make written communications that offer securities 40 for sale before a registration statement is filed as long as specified 41 conditions are satisfied. 42 RUSA Section 402(15)(ii) also required that a registration 43 statement be filed under this chapter, but not yet be effective. By

1 [588] 100 1 eliminating the filing requirement this exemption will reach the 2 offer (but not the sale) of a security that is anticipated to be a 3 federal covered security by applying for listing on the New York 4 Stock Exchange or other exchange specified in Section 18(b)(1) of 5 the Securities Act of 1933, but the listing and federal covered 6 security status has not yet become effective. 7 18. Section 202(17): Offerings when registration has been 8 filed, but is not effective under this chapter and exempt from the 9 Securities Act of 1933: Prior Provisions: RUSA Section 402(16). 10 If a rule is adopted by the administrator a solicitation of interest 11 document must accompany a registration by qualification as 12 specified in Section 304(b)(13). 13 Oral offers may be made after a registration statement has been 14 filed, both before and after a registration statement is effective. 15 This exemption does not operate unless the administrator adopts 16 a rule under 202(17)(B). 17 19. Section 202(18): Control transactions: Prior Provision: 18 RUSA Section 402(17). Until 1972 mergers and similar 19 transactions were not considered to involve sales and did not have 20 to register under the Securities Act of 1933. In 1972 the Securities 21 and Exchange Commission adopted Rule 145 defining many 22 mergers and similar transactions to be sales and abandoned its 23 earlier “no sale” doctrine. See 3 Louis Loss & Joel Seligman, 24 Securities Regulation 1262-1280 (3d ed. rev. 1999). 25 Because most merger and similar transactions require 26 shareholder approval and shareholders often have appraisal rights 27 if they choose to dissent, the potential for abuse is less than in an 28 offering of securities for cash. When appropriate the administrator 29 can deny, condition, limit or revoke this exemption under Section 30 204. Section 202(18) does not follow the requirement in RUSA 31 Section 402(17) that written notice of the transactions and a copy 32 of the solicitation materials be given to the administrator 10 days 33 before the consummation of the transaction and, that the 34 administrator is empowered to disallow the exemption within the 35 next 10 days. 36 20. Section 202(19): Rescission offers: No Prior Provision. 37 See Section 510 for discussion of rescission offers. 38 21. Section 202(20): Out-of-state offers or sales: Source of law: 39 Colo. Section 11-51-102(7). Compare A.S. Goldmen & Co., Inc. 40 v. New Jersey Bur. of Sec., 163 F.3d 780 (3d Cir. 1999), which 41 held that under the United States Constitution’s Commerce Clause 42 a State could authorize a securities administrator to prevent a 43 broker-dealer from selling securities from a State to purchasers in

1 [588] 101 1 other States where purchase of the securities was authorized. The 2 concluding phrase “and is not part of an unlawful plan or scheme 3 to evade this chapter” is intended to preclude reliance on this 4 exemption by boiler rooms and others engaged in illegal activities. 5 Section 202(20) provides an exemption from securities 6 registration and does not address an administrator’s power to 7 investigate and bring enforcement actions under Articles 5 and 6. 8 22. Section 202(21): Employee benefit plans: Prior Provision: 9 RUSA Section 401(b)(12). The 1956 Act Section 402(a)(11) was 10 limited to investment contracts issued in connection with specified 11 employee benefit plans if the administrator was given 30 days 12 written notice. 13 In 1979, the United States Supreme Court in International Bhd. 14 of Teamsters v. Daniel, 439 U.S. 551 (1979), held that a 15 noncontributory, mandatory pension plan subject to the Employee 16 Retirement Income Security Act of 1974 (ERISA) was not a 17 security within the meaning of the Securities Act of 1933 or the 18 Securities Exchange Act of 1934. The Securities and Exchange 19 Commission staff subsequently took the position that the interests 20 of employees in involuntary, contributory plans are not securities. 21 Sec. Act Rel. 6188, 19 SEC Dock. 465, 473 (1980). Both 22 contributory and noncontributory pension or welfare plans subject 23 to ERISA are excluded from the definition of security in Section 24 102(29). 25 In this definition, the term “advisors” does not mean 26 “investment advisers,” as defined in Section 102(15). 27 With respect to employee benefit plans that are securities, 28 Section 202(21) provides an exemption, but follows RUSA in not 29 limiting the exemption to investment contracts and not requiring 30 30 days notice to the administrator. Section 202(21) is modeled, 31 in part, on Rule 701(c) adopted under the Securities Act of 1933. 32 Compliance with Rule 701 will provide compliance with this 33 exemption. 34 Both the 1956 Act and RUSA, for unstated reasons, treated 35 employee benefit plans as exempt securities, rather than exempt 36 securities transactions. There appears to be no appropriate reason 37 to do so. 38 Resale of employee benefit plan securities can occur under 39 appropriate section 202 transaction exemptions. Section 202(21) 40 is not intended to provide a new method of publicly issuing 41 securities. 42 The administrator, when appropriate, can deny, condition, limit, 43 or revoke an exemption under Section 202(21). See Section 204.

1 [588] 102 1 23. Section 202(22): Specified dividends and tender offers and 2 judicially recognized reorganizations: Prior Provision: 1956 Act 3 Section 401(j)(6)(B) and (D); RUSA Section 101(13)(vi). 4 Section 202(22)(A) and (B) generally follow exclusions from 5 the definition of sale in the 1956 Act and RUSA. Section 202(22) 6 (C) is new and corresponds to Rule 162, recently adopted under 7 the Securities Act of 1933, which allows the offeror in a stock 8 exchange offer to solicit tenders of securities before a registration 9 statement is effective as long as no securities are purchased until 10 the registration statement is effective and the tender offer has 11 expired. 12 24. Section 202(23): Nonissuer transactions involving specified 13 foreign issuer securities traded on designated securities exchanges. 14 This exemption expressly covers Toronto Stock Exchange issuers 15 that are public reporting companies under Canadian securities law 16 and meet the 180 day continuous reporting requirement. In 17 conformance with the North American Free Trade Agreement 18 (NAFTA) and General Agreement on Trade in Services (GATS), 19 the exemption separately provides authority for the administrator 20 to designate by rule or order other specific foreign jurisdictions 21 and their trading exchanges upon an adequate showing. The 22 exemption also provides authority for an administrator to revoke 23 any designation if necessary or appropriate in the public interest 24 and for the protection of investors. 25 26 South Carolina Reporter’s Comments 27 28 1. Section 35-1-202(1): Inserts the term “by or” before 29 “through a broker-dealer or not.” No other change to prior law. 30 2. Section 35-1-202(2): This exemption is substantially 31 rewritten. 32 3. Section 35-1-202(3): No prior provision. 33 4. Section 35-1-202(4): No prior provision. 34 5. Section 35-1-202(5): No prior provision. 35 6. Section 35-1-202(6): This exemption removes the ability of 36 the Securities Commissioner to require completion and retention of 37 a form acknowledging the unsolicited nature of the transaction. As 38 pointed out in the Official Comments, this requirement is 39 preempted as to “federally covered securities.” 40 7. Section 35-1-202(7): Identical to prior law. 41 8. Section 35-1-202(8): No prior provision. 42 9. Section 35-1-202(9): No prior provision. 43 10. Section 35-1-202(10): No substantive change.

1 [588] 103 1 11. Section 35-1-202(11): Substantially modifies existing law 2 to narrow this exemption. 3 12. Section 35-1-202(12): Identical to existing law. 4 13. Section 35-1-202(13): This exemption modifies existing 5 law by broadening its coverage, but removing the exemption 6 where a federal covered investment advisor is acting on behalf of 7 others. 8 14. Section 35-1-202(14): The limited offering exemption 9 combines separate exemptions under existing law for 10 preorganization and operating company offerings. The Securities 11 Commissioner is authorized under Section 203 of the USA to 12 adopt by rule an exemption, as currently exists, to coordinate with 13 Reg. D. 14 15. Section 35-1-202(15): Substantively similar to existing law, 15 but removes the notice filing request which has been preempted by 16 NSMIA. 17 16. Section 35-1-202(16): No substantive change. 18 17. Section 35-1-202(17): No prior provision. As the Official 19 Comments explain, this exemption does not operate unless the 20 Securities Commissioner adopts a rule as provided in Section 202 21 (17)(B). 22 18. Section 35-1-202(18): No prior provision. This exemption 23 may be denied, conditioned, limited, or revoked by the Securities 24 Commissioner under Section 204. 25 19. Section 35-1-202(19): No prior provision. 26 20. Section 35-1-202(20): No prior provision. 27 21. Section 35-1-202(21): Existing law provides that 28 investment contracts issued in connection with ERISA plans were 29 exempt securities. This chapter reclassifies such investment 30 contracts as exempt transactions. 31 22. Section 35-1-202(22): Subsections (A) and (B) represent 32 existing exclusions from the definition of a “sale,” and so do not 33 substantially change existing law. Subsection (C) changes prior 34 law, but follows federal precedent, as set out in the Official 35 Comments. 36 23. Section 35-1-202(23): No prior provision. 37 38 Section 35-1-203. A rule adopted or order issued under this 39 chapter may exempt a security, transaction, or offer; a rule under 40 this chapter may exempt a class of securities, transactions, or 41 offers from any or all of the requirements of Sections 35-1-301 42 through 35-1-306 and 35-1-504; and an order under this chapter

1 [588] 104 1 may waive, in whole or in part, any or all of the conditions for an 2 exemption or offer under Sections 35-1-201 and 35-1-202. 3 4 Official Comments 5 6 Prior Provision: RUSA Section 403. 7 1. Under this type of authority, 50 of 53 jurisdictions through 8 September 2002 had adopted the Uniform Limited Offering 9 Exemption (ULOE) or a Regulation D exemption, and 32 10 jurisdictions had adopted a Rule 144A exemption. This chapter 11 does not incorporate ULOE or a Rule 144A exemption because of 12 their complexity and the likelihood of periodic updating of their 13 provisions. Rule 144A, and similar exemptions in ULOE, can be 14 most effectively implemented by rule rather than statute. 15 2. Under Section 203 a state would also be authorized to adopt 16 by rule or order new exemptions as circumstances warrant for new 17 technologies such as the Internet. Cf. NASAA Resolution 18 Regarding Securities Offered on Internet, NASAA Rep. ¶7040 19 (Jan. 7, 1996). 20 3. It is the intent of this Section that ULOE, Rule 144A, and 21 additional exemptions or waivers be adopted uniformly by states, 22 to the extent this is practicable. 23 24 South Carolina Reporter’s Comments 25 26 This provision grants authority to the Securities Commissioner 27 to respond to changing circumstances by relaxing the conditions to 28 qualify for an exemption. Specifically, it is the authority under 29 which a rule such as is found in existing law at S.C. Reg. 113-21 30 may provide for exemption of transactions which meet the 31 requirements of Securities Act of 1933, Regulation D. 32 33 Section 35-1-204. (a) Except with respect to a federal covered 34 security or a transaction involving a federal covered security, an 35 order under this chapter may deny, suspend application of, 36 condition, limit, or revoke an exemption created under Section 37 35-1-201(3)(C), (7) or (8) or 35-1-202 or an exemption or waiver 38 created under Section 35-1-203 with respect to a specific security, 39 transaction, or offer. An order under this section may be issued 40 only pursuant to the procedures in Section 35-1-306(d) or 41 35-1-604 and only prospectively. 42 (b) A person does not violate Section 35-1-301, 35-1-303 43 through 35-1-306, 35-1-504, or 35-1-510 by an offer to sell, offer

1 [588] 105 1 to purchase, sale, or purchase effected after the entry of an order 2 issued under this section if the person did not know, and in the 3 exercise of reasonable care could not have known, of the order. 4 5 Official Comments 6 7 Prior Provisions: 1956 Act Section 402(c); RUSA Section 404. 8 1. Section 204 is potentially far reaching. The ability to deny, 9 condition, limit, or revoke the exemptions specified in Sections 10 201(3)(C), 201(7), 201(8), 202, or 203 is adopted concomitant 11 with the breadth of these exemptions. One or more than one 12 security, transaction, or offer can be covered by a Section 204 13 order. 14 2. The courts have given a securities administrator’s decision to 15 deny or revoke an exemption substantial deference when there was 16 compliance with applicable due process and statutory 17 requirements. See, e.g., Johnson-Bowles Co., Inc. v. Div. of Sec., 18 829 P.2d 101 (Utah Ct. App. 1992). 19 20 South Carolina Reporter’s Comments 21 22 The Securities Commissioner has broad powers under existing 23 law to regulate certain exemptions with regard to specific 24 transactions. This section continues that authority and provides 25 that the procedure will be the same as that for the denial, 26 suspension, or revocation of a securities registration in Section 27 35-1-306. 28 29 Article 3 30 31 Registration of Securities and Notice Filing of Federal Covered 32 Securities 33 34 Section 35-1-301. It is unlawful for a person to offer or sell a 35 security in this State unless: 36 (1) the security is a federal covered security; 37 (2) the security, transaction, or offer is exempted from 38 registration under Sections 35-1-201 through 35-1-203; or 39 (3) the security is registered under this chapter. 40 41 Official Comments 42 43 Prior Provisions: 1956 Act Section 301; RUSA Section 301.

1 [588] 106 1 1. This Section is substantively identical to the 1956 Act and 2 RUSA except for the addition of Section 301(1), which is 3 necessitated by the National Securities Markets Improvement Act 4 of 1996. See Section 102(7). 5 2. Except for federal covered securities, exempt securities, or 6 securities offered or sold in exempt transactions, no sale of a 7 security may be made in this State before the security is registered. 8 “Sale” is defined in Section 102(26); “in this State” is addressed in 9 Section 610; and securities registration is addressed in Sections 10 303 through 306. 11 3. The Securities Act of 1933 permits certain types of offers 12 during the “waiting period” between the filing and effectiveness of 13 a registration statement. The exemptive provisions of Sections 14 202(16) and (17) operate to permit similar offers for securities that 15 are not federal covered securities and are in the process of 16 registration under federal or state statutes or both. 17 4. Notice filings and fees applicable to federal covered 18 securities, see Section 102(7), are addressed in Section 302. 19 20 South Carolina Reporter’s Comments 21 22 This section is substantively identical to prior law found at 23 former Section 35-1-810. The 1997 amendment to Section 24 35-1-810 reflected the changes in registration requirements 25 mandated by NSMIA. South Carolina adopted the Uniform Act 26 alternative by providing that the Securities Commissioner may set 27 fees by rule or order, thus avoiding the need for new legislation in 28 order to change fees or penalties for noncompliance. 29 30 Section 35-1-302. (a) With respect to a federal covered 31 security, as defined in Section 18(b)(2) of the Securities Act of 32 1933 (15 U.S.C. Section 77r(b)(2)), that is not otherwise exempt 33 under Sections 35-1-201 through 35-1-203, a rule adopted or order 34 issued under this chapter may require the filing of one or more of 35 the following records: 36 (1) before the initial offer of a federal covered security in 37 this State, all records that are part of a federal registration 38 statement filed with the Securities and Exchange Commission 39 under the Securities Act of 1933 and a consent to service of 40 process complying with Section 35-1-611 signed by the issuer and 41 the payment of a fee set forth by the Securities Commissioner by 42 rule or order;

1 [588] 107 1 (2) after the initial offer of the federal covered security in 2 this State, all records that are part of an amendment to a federal 3 registration statement filed with the Securities and Exchange 4 Commission under the Securities Act of 1933; and 5 (3) to the extent necessary or appropriate to compute fees, a 6 report of the value of the federal covered securities sold or offered 7 to persons present in this State, if the sales data are not included in 8 records filed with the Securities and Exchange Commission and 9 payment of a fee set forth by the Securities Commissioner by rule 10 or order. 11 (b) A notice filing under subsection (a) is effective for one year 12 commencing on the later of the notice filing or the effectiveness of 13 the offering filed with the Securities and Exchange Commission. 14 On or before expiration, the issuer may renew a notice filing by 15 filing a copy of those records filed by the issuer with the Securities 16 and Exchange Commission that are required by rule or order under 17 this chapter to be filed and by paying a renewal fee set forth by the 18 Securities Commissioner by rule or order. A previously filed 19 consent to service of process complying with Section 35-1-611 20 may be incorporated by reference in a renewal. A renewed notice 21 filing becomes effective upon the expiration of the filing being 22 renewed. 23 (c) With respect to a security that is a federal covered security 24 under Section 18(b)(4)(D) of the Securities Act of 1933(15 U.S.C. 25 Section 77r(b)(4)(D)), a rule adopted or order issued under this 26 chapter may require a notice filing by or on behalf of an issuer to 27 include a copy of Form D, including the Appendix, as promulgated 28 by the Securities and Exchange Commission, and a consent to 29 service of process complying with Section 35-1-611 signed by the 30 issuer not later than fifteen days after the first sale of the federal 31 covered security in this State and the payment of any applicable 32 fee, including any fee for late filing. 33 (d) Except with respect to a federal security under Section 34 18(b)(1) of the Securities Act of 1933 (15 U.S.C. Section 77r(b) 35 (1)), if the Securities Commissioner finds that there is a failure to 36 comply with a notice or fee requirement of this section, the 37 Securities Commissioner may issue a stop order suspending the 38 offer and sale of a federal covered security in this State. If the 39 deficiency is corrected, the stop order is void as of the time of its 40 issuance and a penalty for noncompliance may be imposed by the 41 Securities Commissioner in an amount established by rule or order. 42 43 Official Comments

1 [588] 108 1 No Prior Provision. 2 1. The little used “registration by notification” in the 1956 Act 3 Section 302 or “registration by filing” in RUSA Section 302 are 4 omitted from this chapter because of the notice filing approach 5 required by Section 18(b)(2) of the Securities Act of 1933 for 6 federal covered securities, which, in essence, replaces the need for 7 registration by notification. 8 2. For Rule 506 offerings which are addressed by Section 18(d) 9 (4)(D) of the Securities Act of 1933, the Securities and Exchange 10 Commission requires the filing of Form D. See Rule 503. When 11 an issuer meets the conditions of Rule 506, Section 302(c) is 12 intended to limit required state filings to no more than a 13 requirement of filing a copy of Form D, including the Appendix, a 14 consent to service of process, and a fee. 15 3. The definition of “filing” in Section 102(8) will permit states 16 to receive electronic filing of records under this Section. An 17 administrator may also accept under this section a signed consent 18 filed electronically with a designee of the administrator. See 19 Section 105. 20 4. If a State prefers to have the fees in this section established by 21 rule, replace the phrase “a fee of $[___]” in subsections (a), (b), 22 and (c) with the phrase “a fee established by the administrator by 23 rule”. See Comment 3 to Section 410. 24 25 South Carolina Reporter’s Comments 26 27 This section is new and replaces “registration by notification” 28 found in former Sections 35-1-820 and 830, and Section 29 35-1-1100. Since the 1933 Act now allows notice filing for 30 “federal covered securities,” this section is designed to create a 31 uniform approach at the state level. The new provision in 32 subsection 302(a), which applies to nonexempt federal covered 33 securities, gives the Securities Commissioner the authority to 34 require the filing of SEC notice documents, together with 35 information relevant to assessing a State fee. 36 37 Section 35-1-303. (a) A security for which a registration 38 statement has been filed under the Securities Act of 1933 in 39 connection with the same offering may be registered by 40 coordination under this section. 41 (b) A registration statement and accompanying records under 42 this section must contain or be accompanied by the following 43 records in addition to the information specified in Section

1 [588] 109 1 35-1-305 and a consent to service of process complying with 2 Section 35-1-611: 3 (1) a copy of the latest form of prospectus filed under the 4 Securities Act of 1933; 5 (2) a copy of the articles of incorporation and bylaws or their 6 substantial equivalents currently in effect; a copy of any agreement 7 with or among underwriters; a copy of any indenture or other 8 instrument governing the issuance of the security to be registered; 9 and a specimen, copy, or description of the security that is required 10 by rule adopted or order issued under this chapter; 11 (3) copies of any other information or any other records filed 12 by the issuer under the Securities Act of 1933 requested by the 13 Securities Commissioner; and 14 (4) an undertaking to forward each amendment to the federal 15 prospectus, other than an amendment that delays the effective date 16 of the registration statement, promptly after it is filed with the 17 Securities and Exchange Commission. 18 (c) A registration statement under this section becomes 19 effective simultaneously with or subsequent to the federal 20 registration statement when all the following conditions are 21 satisfied: 22 (1) a stop order under subsection (d) or Section 35-1-306 or 23 issued by the Securities and Exchange Commission is not in effect 24 and a proceeding is not pending against the issuer under Section 25 35-1-306; and 26 (2) the registration statement has been on file for at least 27 twenty days or a shorter period provided by rule adopted or order 28 issued under this chapter. 29 (d) The registrant shall promptly notify the Securities 30 Commissioner in a record of the date when the federal registration 31 statement becomes effective and the content of any price 32 amendment and shall promptly file a record containing the price 33 amendment. If the notice is not timely received, the Securities 34 Commissioner may issue a stop order, without prior notice or 35 hearing, retroactively denying effectiveness to the registration 36 statement or suspending its effectiveness until compliance with 37 this section. The Securities Commissioner shall promptly notify 38 the registrant of an order by telegram, telephone, facsimile, or 39 other electronic means and promptly confirm this notice by a 40 record. If the registrant subsequently complies with the notice 41 requirements of this section, the stop order is void as of the date of 42 its issuance.

1 [588] 110 1 (e) If the federal registration statement becomes effective 2 before each of the conditions in this section is satisfied or is 3 waived by the Securities Commissioner, the registration statement 4 is automatically effective under this chapter when all the 5 conditions are satisfied or waived. If the registrant notifies the 6 Securities Commissioner of the date when the federal registration 7 statement is expected to become effective, the Securities 8 Commissioner shall promptly notify the registrant by telegram, 9 telephone, facsimile, or other electronic means and promptly 10 confirm this notice by a record, indicating whether all the 11 conditions are satisfied or waived and whether the Securities 12 Commissioner intends the institution of a proceeding under 13 Section 35-1-306. The notice by the Securities Commissioner 14 does not preclude the institution of such a proceeding. 15 16 Official Comments 17 18 Prior Provisions: 1956 Act Section 303; RUSA Section 303. 19 1. Registration by coordination was one of the key innovations 20 of the 1956 Act. As in the 1956 Act, Section 303 streamlines the 21 content of the registration statement and the procedure by which a 22 registration statement becomes effective, but not the substantive 23 standards governing the effectiveness of a registration statement. 24 2. The phrase “in connection with the same offering” in Section 25 303 does not require that the federal and state registration 26 statements be filed simultaneously or become effective 27 simultaneously. A registration by coordination can be filed in a 28 State after the effectiveness of the federal registration statement as 29 long as the administrator does not conclude that the interval was 30 too long to consider the State registration statement “the same 31 offering.” 32 3. Section 303 is similar to the 1956 Act except that these 33 provisions have been modernized to include electronic filing and 34 electronic notification. Cf. Sections 102(8), 102(25), 105. It is 35 anticipated that this will facilitate simultaneous filing with the 36 Securities and Exchange Commission and the States which is 37 consistent with the uniformity intended by this chapter. 38 Simultaneous or sequential filing could be administered through 39 a designee similar to the current Web-CRD or in conjunction with 40 the Securities and Exchange Commission’s Electronic Data 41 Gathering, Analysis, and Retrieval (EDGAR) system or otherwise.

1 [588] 111 1 4. Section 303(b) is not intended to limit the administrator to 2 requiring only the information and records filed with the Securities 3 and Exchange Commission. 4 5. Sections 303(c) through (e) describe the conditions to be 5 satisfied to achieve effectiveness of a coordinated filing. “Price 6 amendment” is defined in Section 102(23). The administrator 7 retains the right to test the registration statement by the substantive 8 standards of Section 306(a) and may issue a stop or denial order if 9 the administrator believes any of those provisions are applicable. 10 11 South Carolina Reporter’s Comments 12 13 1. Section 35-1-303(a) and (b) is similar to prior law found at 14 former Sections 35-1-840 and 850. Also under prior law, the 15 Securities Commissioner issued S.C. Regs. 113-10 concerning the 16 submission of financial statements with a registration application. 17 Pursuant to Sections 605(a) and (c) the “Administrator” will have 18 the authority to issue a similar regulation. 19 2. Subsections 35-1-303(c) through (e) are new and describe the 20 conditions for achieving effective coordinated filing. They apply 21 to SEC registered securities which do not meet the standards of 22 listing exchanges and are therefore not “federally covered 23 securities.” 24 Issues which are not “federally covered securities” must register 25 either by coordination or qualification. Under the coordination 26 approach, issuers file copies of their federal registration statements 27 and amendments with the state, plus additional documents, such as 28 the underwriter’s agreement or articles of incorporation. The 29 effective date of the state registration statement is coordinated with 30 the effective date of the federal registration by virtue of Section 31 35-1-303(c) and (e). 32 33 Section 35-1-304. (a) A security may be registered by 34 qualification under this section. 35 (b) A registration statement under this section must contain the 36 information or records specified in Section 35-1-305, a consent to 37 service of process complying with Section 35-1-611, and, if 38 required by rule adopted under this chapter, the following 39 information or records: 40 (1) with respect to the issuer and any significant subsidiary, 41 its name, address, and form of organization; the State or foreign 42 jurisdiction and date of its organization; the general character and 43 location of its business; a description of its physical properties and

1 [588] 112 1 equipment; and a statement of the general competitive conditions 2 in the industry or business in which it is or will be engaged; 3 (2) with respect to each director and officer of the issuer, and 4 other person having a similar status or performing similar 5 functions, the person’s name, address, and principal occupation for 6 the previous five years; the amount of securities of the issuer held 7 by the person as of the thirtieth day before the filing of the 8 registration statement; the amount of the securities covered by the 9 registration statement to which the person has indicated an 10 intention to subscribe; and a description of any material interest of 11 the person in any material transaction with the issuer or a 12 significant subsidiary effected within the previous three years or 13 proposed to be effected; 14 (3) with respect to persons covered by paragraph (2), the 15 aggregate sum of the remuneration paid to those persons during the 16 previous twelve months and estimated to be paid during the next 17 twelve months, directly or indirectly, by the issuer, and all 18 predecessors, parents, subsidiaries, and affiliates of the issuer; 19 (4) with respect to a person owning of record or owning 20 beneficially, if known, ten percent or more of the outstanding 21 shares of any class of equity security of the issuer, the information 22 specified in paragraph (2) other than the person’s occupation; 23 (5) with respect to a promoter, if the issuer was organized 24 within the previous three years, the information or records 25 specified in paragraph (2), any amount paid to the promoter within 26 that period or intended to be paid to the promoter, and the 27 consideration for the payment; 28 (6) with respect to a person on whose behalf any part of the 29 offering is to be made in a nonissuer distribution, the person’s 30 name and address; the amount of securities of the issuer held by 31 the person as of the date of the filing of the registration statement; 32 a description of any material interest of the person in any material 33 transaction with the issuer or any significant subsidiary effected 34 within the previous three years or proposed to be effected; and a 35 statement of the reasons for making the offering; 36 (7) the capitalization and long term debt, on both a current 37 and pro forma basis, of the issuer and any significant subsidiary, 38 including a description of each security outstanding or being 39 registered or otherwise offered, and a statement of the amount and 40 kind of consideration, whether in the form of cash, physical assets, 41 services, patents, goodwill, or anything else of value, for which the 42 issuer or any subsidiary has issued its securities within the 43 previous two years or is obligated to issue its securities;

1 [588] 113 1 (8) the kind and amount of securities to be offered; the 2 proposed offering price or the method by which it is to be 3 computed; any variation at which a proportion of the offering is to 4 be made to a person or class of persons other than the 5 underwriters, with a specification of the person or class; the basis 6 on which the offering is to be made if otherwise than for cash; the 7 estimated aggregate underwriting and selling discounts or 8 commissions and finders’ fees, including separately cash, 9 securities, contracts, or anything else of value to accrue to the 10 underwriters or finders in connection with the offering or, if the 11 selling discounts or commissions are variable, the basis of 12 determining them and their maximum and minimum amounts; the 13 estimated amounts of other selling expenses, including legal, 14 engineering, and accounting charges; the name and address of each 15 underwriter and each recipient of a finder’s fee; a copy of any 16 underwriting or selling group agreement under which the 17 distribution is to be made or the proposed form of any such 18 agreement whose terms have not yet been determined; and a 19 description of the plan of distribution of any securities that are to 20 be offered otherwise than through an underwriter; 21 (9) the estimated monetary proceeds to be received by the 22 issuer from the offering; the purposes for which the proceeds are to 23 be used by the issuer; the estimated amount to be used for each 24 purpose; the order or priority in which the proceeds will be used 25 for the purposes stated; the amounts of any funds to be raised from 26 other sources to achieve the purposes stated; the sources of the 27 funds; and, if a part of the proceeds is to be used to acquire 28 property, including goodwill, otherwise than in the ordinary course 29 of business, the names and addresses of the vendors, the purchase 30 price, the names of any persons that have received commissions in 31 connection with the acquisition, and the amounts of the 32 commissions and other expenses in connection with the 33 acquisition, including the cost of borrowing money to finance the 34 acquisition; 35 (10) a description of any stock options or other security 36 options outstanding, or to be created in connection with the 37 offering, and the amount of those options held or to be held by 38 each person required to be named in paragraph (2), (4), (5), (6), or 39 (8) and by any person that holds or will hold ten percent or more in 40 the aggregate of those options; 41 (11) the dates of, parties to, and general effect concisely 42 stated of each managerial or other material contract made or to be 43 made otherwise than in the ordinary course of business to be

1 [588] 114 1 performed in whole or in part at or after the filing of the 2 registration statement or that was made within the previous two 3 years, and a copy of the contract; 4 (12) a description of any pending litigation, action, or 5 proceeding to which the issuer is a party and that materially affects 6 its business or assets, and any litigation, action, or proceeding 7 known to be contemplated by governmental authorities; 8 (13) a copy of any prospectus, pamphlet, circular, form letter, 9 advertisement, or other sales literature intended as of the effective 10 date to be used in connection with the offering and any solicitation 11 of interest used in compliance with Section 35-1-202(17)(B); 12 (14) a specimen or copy of the security being registered, 13 unless the security is uncertificated; a copy of the issuer’s articles 14 of incorporation and bylaws or their substantial equivalents, in 15 effect; and a copy of any indenture or other instrument covering 16 the security to be registered; 17 (15) a signed or conformed copy of an opinion of counsel 18 concerning the legality of the security being registered, with an 19 English translation if it is in a language other than English, which 20 states whether the security when sold will be validly issued, fully 21 paid, and nonassessable and, if a debt security, a binding 22 obligation of the issuer; 23 (16) a signed or conformed copy of a consent of any 24 accountant, engineer, appraiser, or other person whose profession 25 gives authority for a statement made by the person, if the person is 26 named as having prepared or certified a report or valuation, other 27 than an official record, that is public, which is used in connection 28 with the registration statement; 29 (17) a balance sheet of the issuer as of a date within four 30 months before the filing of the registration statement; a statement 31 of income and a statement of cash flows for each of the three fiscal 32 years preceding the date of the balance sheet and for any period 33 between the close of the immediately previous fiscal year and the 34 date of the balance sheet, or for the period of the issuer’s and any 35 predecessor’s existence if less than three years; and, if any part of 36 the proceeds of the offering is to be applied to the purchase of a 37 business, the financial statements that would be required if that 38 business were the registrant; provided, however, that financial 39 statements meeting the requirements of Regulation S-B shall be 40 permitted to be substituted by issuers that are “small business 41 issuers” as defined by Regulation S-B (17 C.F.R. part 228); and 42 (18) any additional information or records required by rule 43 adopted or order issued under this chapter.

1 [588] 115 1 (c) A registration statement under this section becomes 2 effective thirty days, or any shorter period provided by rule 3 adopted or order issued under this chapter, after the date the 4 registration statement or the last amendment other than a price 5 amendment is filed, if: 6 (1) a stop order is not in effect and a proceeding is not 7 pending under Section 35-1-306; 8 (2) the Securities Commissioner has not issued an order 9 under Section 35-1-306 delaying effectiveness; or 10 (3) the applicant or registrant has not requested that 11 effectiveness be delayed. 12 (d) The Securities Commissioner may delay effectiveness once 13 for not more than ninety days if the Securities Commissioner 14 determines the registration statement is not complete in all material 15 respects and promptly notifies the applicant or registrant of that 16 determination. The Securities Commissioner also may delay 17 effectiveness for a further period of not more than thirty days if the 18 Securities Commissioner determines that the delay is necessary or 19 appropriate. 20 (e) A rule adopted or order issued under this chapter may 21 require as a condition of registration under this section that a 22 prospectus containing a specified part of the information or record 23 specified in subsection (b) be sent or given to each person to which 24 an offer is made, before or concurrently, with the earliest of: 25 (1) the first offer made in a record to the person otherwise 26 than by means of a public advertisement, by or for the account of 27 the issuer or another person on whose behalf the offering is being 28 made or by an underwriter or broker-dealer that is offering part of 29 an unsold allotment or subscription taken by the person as a 30 participant in the distribution; 31 (2) the confirmation of a sale made by or for the account of 32 the person; 33 (3) payment pursuant to such a sale; or 34 (4) delivery of the security pursuant to such a sale. 35 36 Official Comments 37 38 Prior Provisions: 1956 Act Section 304; RUSA Section 304. 39 1. This Section generally follows the 1956 Act and RUSA. Any 40 security may be registered by qualification, whether or not another 41 type of registration is available. Ordinarily, however, registration 42 by qualification will only be used by an issuer when no other 43 procedure is available.

1 [588] 116 1 2. Section 304(b) originally was modeled on Schedule A of the 2 Securities Act of 1933. 3 3. In Section 304(b)(12) pending litigation can include litigation 4 that has not yet been filed. 5 4. Section 304(b)(17) uses the same terminology as is used 6 currently in Regulation S-X of the Securities and Exchange 7 Commission. Under Sections 605(a) and (c) the administrator is 8 authorized to specify the form and content of rules and forms 9 governing registration statements and the form and content of 10 financial statements required under this chapter. 11 5. Under Sections 304(b)(18) and 307 the administrator may 12 require additional information or may waive in whole or in part or 13 condition any of the requirements of Section 304(b). Section 14 304(b)(18), for example, would authorize the administrator to 15 require that a report by an accountant, engineer, appraiser or other 16 professional person be filed. Section 304(b)(18) would also 17 authorize that securities of designated classes under a trust 18 indenture contain additional specified information. 19 20 South Carolina Reporter’s Comments 21 22 1. Section 35-1-304(a) and (b) is similar to prior law found at 23 former Section 35-1-880. South Carolina amended Section 24 35-1-304(b)(17) to provide that small business issuers may comply 25 with the financial statement requirement by meeting the SEC Reg. 26 S-B requirements for financial statements. 27 2. Section 35-1-304(c) and (e) is new and describe the 28 conditions for achieving an effective filing by qualification. 29 Ordinarily, registration by qualification will be the last procedure 30 an issuer will choose to use. The “full-fledged” registration 31 requirements of this Section are similar to the federal registration 32 application, and will be used primarily by those smaller issuers 33 whose securities are either intrastate offerings or are exempt from 34 SEC registration because of their small size. 35 3. Section 35-1-304(e) provides that the Securities 36 Commissioner may, by rule or order, require a prospectus 37 containing specified portions of the registration statement be 38 provided to each person to which an offer is made. This 39 subsection changes prior law found at former Section 35-1-990 by 40 making delivery of a prospectus approved by the securities 41 commissioner a matter of rulemaking authority rather than being 42 mandated by statute. Also under prior law, the Securities 43 Commissioner issued S.C. Regs. 113-10 concerning the

1 [588] 117 1 submission of financial statements with a registration application. 2 Pursuant to Section 35-1-605(a) and (c), the Securities 3 Commissioner will have the authority to issue a similar regulation. 4 5 Section 35-1-305. (a) A registration statement may be filed by 6 the issuer, a person on whose behalf the offering is to be made, or 7 a broker-dealer registered under this chapter. 8 (b) A person filing a registration statement shall pay a filing 9 fee set forth by the Securities Commissioner by rule or order. If a 10 registration statement is withdrawn before the effective date or a 11 preeffective stop order is issued under Section 35-1-306, the 12 Securities Commissioner shall retain a fee set forth by the 13 Securities Commissioner by rule or order. 14 (c) A registration statement filed under Section 35-1-303 or 15 35-1-304 must specify: 16 (1) the amount of securities to be offered in this State; 17 (2) the States in which a registration statement or similar 18 record in connection with the offering has been or is to be filed; 19 and 20 (3) any adverse order, judgment, or decree issued in 21 connection with the offering by a State securities regulator, the 22 Securities and Exchange Commission, or a court. 23 (d) A record filed under this chapter or the predecessor chapter 24 within five years preceding the filing of a registration statement or 25 filed with the Securities and Exchange Commission and is 26 available to the public without charge via the Internet may be 27 incorporated by reference in the registration statement to the extent 28 that the record is currently accurate. 29 (e) In the case of a nonissuer distribution, information or a 30 record may not be required under subsection (i) or Section 31 35-1-304, unless it is known to the person filing the registration 32 statement or to the person on whose behalf the distribution is to be 33 made or unless it can be furnished by those persons without 34 unreasonable effort or expense. 35 (f) A rule adopted or order issued under this chapter may 36 require as a condition of registration that a security issued within 37 the previous five years or to be issued to a promoter for a 38 consideration substantially less than the public offering price or to 39 a person for a consideration other than cash be deposited in 40 escrow; and that the proceeds from the sale of the registered 41 security in this State be impounded until the issuer receives a 42 specified amount from the sale of the security either in this State or 43 elsewhere. The conditions of any escrow or impoundment

1 [588] 118 1 required under this subsection may be established by rule adopted 2 or order issued under this chapter, but the Securities Commissioner 3 may not reject a depository institution solely because of its 4 location in another State. 5 (g) A rule adopted or order issued under this chapter may 6 require as a condition of registration that a security registered 7 under this chapter be sold only on a specified form of subscription 8 or sale contract and that a signed or conformed copy of each 9 contract be filed under this chapter or preserved for a period 10 specified by the rule or order, which may not be longer than five 11 years. 12 (h) Except while a stop order is in effect under Section 13 35-1-306, a registration statement is effective for one year after its 14 effective date, or for any longer period designated in an order 15 under this chapter during which the security is being offered or 16 distributed in a nonexempted transaction by or for the account of 17 the issuer or other person on whose behalf the offering is being 18 made or by an underwriter or broker-dealer that is still offering 19 part of an unsold allotment or subscription taken as a participant in 20 the distribution. For the purposes of a nonissuer transaction, all 21 outstanding securities of the same class identified in the 22 registration statement as a security registered under this chapter are 23 considered to be registered while the registration statement is 24 effective. If any securities of the same class are outstanding, a 25 registration statement may not be withdrawn until one year after its 26 effective date. A registration statement may be withdrawn only 27 with the approval of the Securities Commissioner. 28 (i) While a registration statement is effective, a rule adopted or 29 order issued under this chapter may require the person that filed 30 the registration statement to file reports, not more often than 31 quarterly, to keep the information or other record in the 32 registration statement reasonably current, and to disclose the 33 progress of the offering. 34 (j) A registration statement may be amended after its effective 35 date. The posteffective amendment becomes effective when the 36 Securities Commissioner so orders. If a posteffective amendment 37 is made to increase the number of securities specified to be offered 38 or sold, the person filing the amendment shall pay a registration 39 fee set forth by the Securities Commissioner by rule or order. A 40 posteffective amendment relates back to the date of the offering of 41 the additional securities being registered if, within one year after 42 the date of the sale, the amendment is filed and the additional 43 registration fee is paid.

1 [588] 119 1 Official Comments 2 3 Prior Provisions: 1956 Act Section 305; RUSA Section 305. 4 1. Section 305 generally follows the 1956 Act and RUSA except 5 that earlier provisions in both Acts referring to Investment 6 Company Act of 1940 securities, which are federal covered 7 securities, see Section 102(7), have been deleted. 8 2. Section 305 is applicable both to registration by coordination, 9 see Section 303, and to registration by qualification, see Section 10 304. 11 3. Section 305(a) expressly authorizes registration by “a person 12 on whose behalf the offering is to be made.” This would permit a 13 nonissuer, cf. Section 102(18), or a broker-dealer to file a 14 registration statement independent of the issuer. 15 4. This chapter is intended, to the extent practicable, to be 16 revenue neutral in its impact on existing state law, see Comment 3 17 to Section 608. Accordingly, Section 305(b) does not specify what 18 fees states should provide. If a State prefers to have the fees in this 19 section established by rule, replace the phrase “a fee of $[___]” in 20 subsections (b) and (j) with the phrase “a fee established by the 21 administrator by rule pursuant to the [state administrative 22 procedure act]” and replace the phrase “$[___] of the fee” in 23 subsection (b) with the phrase “an amount of the fee established by 24 the administrator by rule”. See Comment 3 to Section 410. 25 5. Section 305(c), which generally follows the 1956 Act and 26 RUSA, does not require in Section 305(c)(3) disclosure of an order 27 permitting the withdrawal of a registration statement. The 28 administrator may, however, require disclosure of this information 29 in a registration by qualification under Section 304(b)(18). 30 6. Section 305(c), like every other provision concerned with the 31 content of the registration statement, must be read with Section 32 306(a)(1) which judges the accuracy and completeness of the 33 registration statement as of its effective date unless an order 34 denying effectiveness had been entered before the effective date. 35 A registration statement must be kept current with changing 36 developments until the effectiveness date, but a registration 37 statement is not required to be amended after the effective date 38 except to correct inaccuracies or deficiencies which existed as of 39 the effective date. An administrator, however, separately may 40 require under Section 305(i) or (j) periodic reports or amendments 41 to keep reasonably current the information contained in the 42 registration statement.

1 [588] 120 1 7. Under Section 305(d) incorporation by reference is permitted 2 as a matter of administrative practice. 3 8. Section 305(e) is the substantive equivalent to provisions in 4 the 1956 Act and RUSA. This subsection is designed to address 5 nonissuer offerings where the seller cannot obtain certified 6 financial statements and other normally required records. The 7 phrase “without unreasonable effort or expense” originated in 8 Section 10(a)(3) of the Securities Act of 1933. It is not meant to 9 apply to expenses incidental to supplying required information 10 required for registration in the case of a nonissuer distribution by a 11 person in a control relationship with the issuer or otherwise having 12 access to or contractual rights to obtain the required information. 13 Section 305(e) applies only to registration by qualification under 14 Section 304 and periodic reports for either registration by 15 coordination or registration by qualification under Section 305(i). 16 9. Section 305(f), follows the 1956 Act and RUSA, and 17 authorizes the administrator to require the impoundment of funds 18 until the issuer receives a specified amount from the sale of the 19 security in this State or elsewhere and to require the escrow of 20 promotional stock until specific conditions are met. This section is 21 limited to a security issued within the past five years or to be 22 issued to a promoter for a consideration substantially different 23 from the public offering price or to a person for a consideration 24 other than cash. The typical distribution subject to Section 305(f) 25 will be a relatively new promotional or speculative offering. 26 Section 305(f) follows the 1956 Act and RUSA and provides that 27 the administrator may not reject a depository solely because of its 28 location in another state. Unlike the statute in Schwaemmle Const. 29 Co. v. Michigan Dep’t of Commerce, 360 N.W.2d 141 (Mich. 30 1984), Section 305(f) broadly provides that the administrator “may 31 determine the conditions of any escrow or impoundment under this 32 subsection.” As in Schwaemmle, this power will operate only until 33 the impounded funds or escrowed shares are released. 34 10. Section 305(g) follows the 1956 Act in authorizing the 35 administrator to specify the form of a subscription or sale contract. 36 11. Section 305(h) generally follows the 1956 Act and RUSA. 37 The term “nonissuer transaction” or “nonissuer distribution” is 38 defined in Section 102(18). A sale by a nonissuer would have to 39 be registered under Section 301 unless it is exempted or involves a 40 federal covered security. Section 202(1) exempts “isolated 41 nonissuer transactions.” When a nonissuer transaction is not 42 exempt under Section 202(1), it may still be exempted under other 43 transaction exemptions.

1 [588] 121 1 If no exemption is available for a nonissuer distribution, and it 2 does not involve a federal covered security, the security must be 3 registered under Article 3. Under the first sentence of Section 4 305(h) each registration statement remains effective for at least 5 one year and for any longer period the administrator may 6 determine. However, no registration statement is effective while a 7 stop order with respect to it is in effect under Section 306. 8 For the purposes of a nonissuer transaction, all outstanding 9 securities of the same class as a registered security are considered 10 to be registered as long as the registration statement remains 11 effective. This means that during the effective period of a 12 registration statement under this chapter all outstanding securities 13 of the same class can be traded by anyone, including nonissuers, as 14 if they were registered. 15 Section 305(h) also provides that, unless the administrator 16 determines otherwise, a registration statement cannot be 17 withdrawn until one year after its effective date if any securities of 18 the same class are outstanding. This is designed to protect sellers 19 who would be unaware of a withdrawal from being subject to civil 20 liability. 21 12. Section 305(j) follows RUSA and a procedure limited to 22 investment companies in the 1956 Act in allowing posteffective 23 date amendments. Under Section 305(j), when a posteffective 24 amendment increases the number of securities to be offered or 25 sold, an additional registration fee is required. 26 27 South Carolina Reporter’s Comments 28 29 1. This section generally follows prior law found at former 30 Sections 35-1-890 through 35-1-970, except that references to the 31 Investment Company Act of 1940 securities have been deleted 32 since those are now “federally covered securities.” South Carolina 33 chose to have the Securities Commissioner set filing fees, as was 34 provided under prior law found at former Section 35-1-900. 35 2. Subsection (c) is substantially similar to prior law found at 36 former Section 35-1-910. 37 3. Subsection (d) is substantially similar to former Section 38 35-1-920, except that the incorporation by reference provision was 39 amended by South Carolina to include SEC Edgar filings. 40 4. Subsection (e) is substantially similar to prior law found at 41 former Section 35-1-940. 42 5. Subsection (f) revises prior law found at Section 35-1-950 by 43 going back five years instead of three years in determining whether

1 [588] 122 1 “cheap stock” should be ordered to be escrowed as a condition of 2 registration. Subsection (f) also provides that the Securities 3 Commissioner may not reject a deposit solely because it is in 4 another state. 5 6. Subsection (g) is substantially similar to prior law found in 6 the second paragraph of former Section 35-1-950, except it extends 7 the time period to five years. 8 7. Subsection (h) is similar to prior law found at former Section 9 35-1-960, except that it provides the effective period of a 10 registration statement may be extended beyond one year by order 11 and it is more specific in designating who may make the offering. 12 8. Subsection (i) is substantially similar to prior law found at 13 former Section 35-1-970. 14 9. Subsection (j) allowing post effective amendments is a new 15 provision. South Carolina amended subsection (j) to allow the 16 Securities Commissioner to set registration fees. 17 18 Section 35-1-306. (a) The Securities Commissioner may issue 19 a stop order denying effectiveness to, or suspending or revoking 20 the effectiveness of, a registration statement if the Securities 21 Commissioner finds that the order is in the public interest and that: 22 (1) the registration statement as of its effective date or before 23 the effective date in the case of an order denying effectiveness, an 24 amendment under Section 35-1-305(j) as of its effective date, or a 25 report under Section 35-1-305(i), is incomplete in a material 26 respect or contains a statement that, in the light of the 27 circumstances under which it was made, was false or misleading 28 with respect to a material fact; 29 (2) this chapter or a rule adopted or order issued under this 30 chapter or a condition imposed under this chapter has been wilfully 31 violated, in connection with the offering, by the person filing the 32 registration statement; by the issuer, a partner, officer, or director 33 of the issuer or a person having a similar status or performing a 34 similar function; a promoter of the issuer; or a person directly or 35 indirectly controlling or controlled by the issuer; but only if the 36 person filing the registration statement is directly or indirectly 37 controlled by or acting for the issuer; or by an underwriter; 38 (3) the security registered or sought to be registered is the 39 subject of a permanent or temporary injunction of a court of 40 competent jurisdiction or an administrative stop order or similar 41 order issued under any federal, foreign, or state law other than this 42 chapter applicable to the offering, but the Securities Commissioner 43 may not institute a proceeding against an effective registration

1 [588] 123 1 statement under this paragraph more than one year after the date of 2 the order or injunction on which it is based, and the Securities 3 Commissioner may not issue an order under this paragraph on the 4 basis of an order or injunction issued under the securities act of 5 another State unless the order or injunction was based on conduct 6 that would constitute, as of the date of the order, a ground for a 7 stop order under this section; 8 (4) the issuer’s enterprise or method of business includes or 9 would include activities that are unlawful where performed; 10 (5) with respect to a security sought to be registered under 11 Section 35-1-303, there has been a failure to comply with the 12 undertaking required by Section 35-1-303(b)(4); 13 (6) the applicant or registrant has not paid the filing fee, but 14 the Securities Commissioner shall void the order if the deficiency 15 is corrected; or 16 (7) the offering: 17 (A) will work or tend to work a fraud upon purchasers or 18 would so operate; or 19 (B) has been or would be made with unreasonable 20 amounts of underwriters’ and sellers’ discounts, commissions, or 21 other compensation, or promoters’ profits or participations, or 22 unreasonable amounts or kinds of options. 23 (b) To the extent practicable, the Securities Commissioner by 24 rule adopted or order issued under this chapter shall publish 25 standards that provide notice of conduct that violates subsection 26 (a)(7). 27 (c) The Securities Commissioner may not institute a stop order 28 proceeding against an effective registration statement on the basis 29 of conduct or a transaction known to the Securities Commissioner 30 when the registration statement became effective unless the 31 proceeding is instituted within thirty days after the registration 32 statement became effective. 33 (d) The Securities Commissioner may summarily revoke, deny, 34 postpone, or suspend the effectiveness of a registration statement 35 pending final determination of an administrative proceeding. 36 Upon the issuance of the order, the Securities Commissioner shall 37 promptly notify each person specified in subsection (e) that the 38 order has been issued, the reasons for the revocation, denial, 39 postponement, or suspension, and that within fifteen days after the 40 receipt of a request in a record from the person the matter will be 41 scheduled for a hearing. If a hearing is not requested and none is 42 ordered by the Securities Commissioner, within thirty days after 43 the date of service of the order, the order becomes final. If a

1 [588] 124 1 hearing is requested or ordered, the Securities Commissioner, after 2 notice of and opportunity for hearing for each person subject to the 3 order, may modify or vacate the order or extend the order until 4 final determination. 5 (e) A stop order may not be issued under this section without: 6 (1) appropriate notice to the applicant or registrant, the 7 issuer, and the person on whose behalf the securities are to be or 8 have been offered; 9 (2) an opportunity for hearing; and 10 (3) findings of fact and conclusions of law in a record. 11 (f) The Securities Commissioner may modify or vacate a stop 12 order issued under this section if the Securities Commissioner 13 finds that the conditions that caused its issuance have changed or 14 that it is necessary or appropriate in the public interest or for the 15 protection of investors. 16 17 Official Comments 18 19 Prior Provisions: 1956 Act Section 306; RUSA Section 306. 20 1. This Section generally follows the 1956 Act and RUSA and 21 applies to both registration by coordination under Section 303 and 22 registration by qualification under Section 304. 23 2. Section 306(a)(1) follows the 1956 Act and RUSA in testing 24 in a suspension or revocation proceeding the completeness and 25 accuracy of a registration statement as of the registration 26 statement’s effective date. A registration statement that becomes 27 misleading because of a development that occurs after its effective 28 date is not a ground for the issuance of a stop order under Section 29 306(a)(1). An administrator, however, may require periodic 30 reports under Section 305(i) or a posteffective amendment under 31 Section 305(j). With respect to periodic reports under Section 32 305(i), a misleading report would be the basis of a stop order under 33 Section 306(a)(1) if it is materially inaccurate as of the date it was 34 filed. 35 3. On the meaning of “wilfully,” see Comment 2 under Section 36 508. 37 4. A violation by an issuer has the same consequences whether 38 the issuer has filed a registration statement or has had a 39 broker-dealer file it. But this is not the case when the registration 40 statement is filed by a broker-dealer acting independently. 41 5. The verb “is” at the beginning of Section 306(a)(3) means that 42 a stop order or injunction that has expired or been vacated is not 43 the ground for action under this paragraph.

1 [588] 125 1 6. Section 306(a)(4) applies to activity that is conducted in a 2 State where that activity is illegal. It does not apply if the activity 3 is not illegal under that State’s law. This paragraph is not meant to 4 apply to activity which is lawful where conducted but would be 5 illegal if conducted in the State where the registration statement is 6 filed. 7 7. Sections 306(a)(5) and (6) follow the 1956 Act and RUSA. 8 8. Sections 306(a)(7) and (b) address merit regulation. Sections 9 306(E) and (F) of the 1956 Act authorized a stop order when an 10 “offering has worked or tended to work a fraud upon purchasers or 11 would so operate” or “the offering has been or would be made with 12 unreasonable amounts of underwriters’ and sellers’ discounts, 13 commissions, or other compensation, or promoters’ profits or 14 participation, or unreasonable amounts or kinds of options.” By 15 1985 a majority of states which had adopted the 1956 Act had 16 adopted this approach to merit regulation rather than the earlier 17 and broader “unfair, unjust or inequitable” standard that then 18 applied in a minority of States. 19 RUSA Sections 306(a)(5) and (6) adopted provisions 20 substantively identical to the 1956 Act and included in brackets an 21 “unfair, unjust, or inequitable” alternative. 22 The National Securities Markets Improvement Act of 1996 23 subsequently preempted merit regulation of federal covered 24 securities. See Section 102(7). 25 Sections 306(a)(7) and (b) take a different approach. Subject to 26 the National Securities Markets Improvement Act of 1996, merit 27 standards are retained but hortatory paragraph 306(b) encourages 28 the administrator, to the extent practicable, to adopt, by rule or 29 order, standards that provide notice to issuers of a state’s merit 30 standards. Notice will address one criticism of merit regulation. 31 See generally 1 Louis Loss & Joel Seligman, Securities Regulation 32 111-124 (3d ed. rev. 1998). Statements of Policy of the North 33 American Securities Administrator Association that have been 34 adopted by a state would provide notice in compliance with 35 Section 306(b). Similarly other state rules or orders could be 36 adopted in the future to address new types of securities as they 37 occur. 38 An order under Section 306(b) can be adopted after a securities 39 registration statement has been filed. Under Section 306(b) an 40 administrator, by rule or order, for example, could adopt a standard 41 that would provide the basis for a stop order denying effectiveness 42 to a development stage company that has no specific business 43 purpose or plan or has indicated that its primary business plan is to

1 [588] 126 1 engage in a merger or acquisition with an unidentified company, 2 entity, or person. “Blank check offerings” are subject to Rule 419 3 adopted under the Securities Act of 1933. See Comment 3 to 4 Section 202. 5 9. Section 306(c) follows the 1956 Act and RUSA and allows an 6 administrator up to 30 days after a registration statement becomes 7 effective to institute a stop order proceeding on the basis of a fact 8 or transaction known when the registration statement became 9 effective. This is to avoid the necessity of an administrator issuing 10 a stop order prematurely. 11 10. Sections 306(d) and (e) assure each person subject to a stop 12 order of notice, opportunity for a hearing, and findings of fact and 13 conclusions of law contained in a record. 14 11. An administrator must consider the public interest when 15 issuing a stop order and may under Section 306(f) consider the 16 public interest when modifying or vacating a stop order. See, e.g., 17 TechnoMedical Lab., Inc. v. Utah Sec. Div., 744 P.2d 320, 18 324-325 (Utah Ct. App. 1987) (a state has a valid public interest in 19 stopping the issuance of hundreds of thousands of public shares 20 that did not comply with the disclosure requirements of securities 21 registration); cf. stop orders under the Securities Act of 1933, see 1 22 Louis Loss & Joel Seligman, Securities Regulation 576-589 (3d 23 ed. rev. 1998). 24 12. As of September 2002 46 jurisdictions had adopted a form 25 of Section 306(a)(7)(A) (“will tend to work a fraud or would so 26 operate”); 34 jurisdictions had adopted a form of Section 306(a)(7) 27 (B) (“unreasonable amounts of underwriters’ and sellers’ 28 discounts, commissions, or other compensation, or promoter 29 profits or participations, or unreasonable amounts or kinds of 30 options”); and 16 jurisdictions had adopted a form of bracketed 31 Section 306(a)(7)(C) (“terms that are unfair, unjust, or 32 inequitable”). 33 34 South Carolina Reporter’s Comments 35 36 1. Section 35-1-306(a)(1)-(6) is substantially similar to prior law 37 found at former Section 35-1-1010(a) and (b)(i)-(ix). This section 38 tests the registration statement as of the date of effectiveness. The 39 minor nonsubstantive changes from prior law include Section 40 35-1-306(a)(2) specifying a “promoter of the issuer,” and 41 35-1-306(a)(3) adding administrative stop orders. 42 2. Section 35-1-306(a)(7)(A) and (B) is substantially similar to 43 prior law found at former Section 35-1-1010(b)(v) and (vi).

1 [588] 127 1 3. Proposed subsection 35-1-306(a)(7)(C) represented a 2 substantial change from prior law. By substituting a standard of 3 “unfair, unjust or inequitable” which has been adopted in sixteen 4 states, proposed subsection (C) presented a broader standard than 5 either the “fraud upon purchasers” standard or the list of specific 6 inquiry areas, found in prior law found at former Section 7 35-1-1010(b)(v) and (vi). For these reasons, South Carolina 8 declined to adopt proposed alternative Section 35-1-306(a)(7)(C). 9 Section 35-1-306(b) is a new provision. It is a merit review 10 provision which complements the merit review approach in 11 Section 35-1-306(a)(7). Prior provisions, found at S. C. Regs. 12 113-11 through 113-15, provided standards for the specific areas in 13 Section 35-1-306(a)(7)(B). 14 4. The new provision in Section 35-1-306(b) encourages, to the 15 extent practicable, the publication of standards by rule adopted or 16 order issued by the Securities Commissioner of the types of 17 conduct which violate Section 35-1-306(a)(7). Such standards are 18 found in prior law at S.C. Regs. 113-11 through 113-14. 19 5. Section 35-1-306(c) is a new provision. Former Section 20 35-1-1020 provided a thirty-day period for the Securities 21 Commissioner to institute a stop order proceeding based on facts 22 known at the time of registration, but Section 35-1-1020 was 23 subsequently repealed. 24 6. Section 35-1-306(d) is substantially similar to prior law found 25 at former Section 35-1-1030. The new provision gives the 26 Security Commissioner the authority to resolve or deny a 27 registration statement in addition to postponing or suspending the 28 registration statement. The new provision also provides that the 29 order becomes final if no hearing is requested or ordered. 30 7. Section 35-1-306(e) is substantially similar to prior law found 31 at former Section 35-1-1040. 32 8. Section 35-1-306(f) refines prior law found at former Section 33 35-1-1050 by allowing a stop order to be modified or vacated 34 where it is “necessary or appropriate” for the protection of 35 investors. 36 37 Section 35-1-307. The Securities Commissioner may waive or 38 modify, in whole or in part, any or all of the requirements of 39 Sections 35-1-302, 35-1-303, and 35-1-304(b) or the requirement 40 of any information or record in a registration statement or in a 41 periodic report filed pursuant to Section 35-1-305(i). 42 43 Official Comments

1 [588] 128 1 Prior Provision: RUSA Section 303(h). Section 307 follows 2 RUSA Section 303(h) and empowers the administrator to waive or 3 modify any of the requirements of 302, 303, 304(b), or the 4 requirement of any information or record in a registration 5 statement. An example would be the expedited procedure several 6 states have adopted to coordinate with shelf registration under 7 Rule 415 of the Securities Act of 1933. In waiving or modifying 8 requirements the administrator must make a finding satisfying the 9 requirements of Section 605(b). 10 11 South Carolina Reporter’s Comments 12 13 This provision is new. 14 15 Article 4 16 17 Broker-Dealers, Agents, Investment Advisers, 18 Investment Adviser Representatives, and Federal Covered 19 Investment Advisers 20 21 Section 35-1-401. (a) It is unlawful for a person to transact 22 business in this State as a broker-dealer unless the person is 23 registered under this chapter as a broker-dealer or is exempt from 24 registration as a broker-dealer under subsection (b) or (d). 25 (b) The following persons are exempt from the registration 26 requirement of subsection (a): 27 (1) a broker-dealer without a place of business in this State if 28 its only transactions effected in this State are with: 29 (A) the issuer of the securities involved in the transactions; 30 (B) a broker-dealer registered as a broker-dealer under this 31 chapter or not required to be registered as a broker-dealer under 32 this chapter; 33 (C) an institutional investor; 34 (D) a nonaffiliated federal covered investment adviser with 35 investments under management in excess of one hundred million 36 dollars acting for the account of others pursuant to discretionary 37 authority in a signed record; 38 (E) a bona fide preexisting customer whose principal place 39 of residence is not in this State and the person is registered as a 40 broker-dealer under the Securities Exchange Act of 1934 or not 41 required to be registered under the Securities Exchange Act of 42 1934 and is registered under the securities act of the State in which 43 the customer maintains a principal place of residence;

1 [588] 129 1 (F) a bona fide preexisting customer whose principal place 2 of residence is in this State but was not present in this State when 3 the customer relationship was established, if: 4 (i) the broker-dealer is registered under the Securities 5 Exchange Act of 1934 or not required to be registered under the 6 Securities Exchange Act of 1934 and is registered under the 7 securities laws of the State in which the customer relationship was 8 established and where the customer had maintained a principal 9 place of residence; and 10 (ii) within forty-five days after the customer’s first 11 transaction in this State, the person files an application for 12 registration as a broker-dealer in this State and a further transaction 13 is not effected more than seventy-five days after the date on which 14 the application is filed, or, if earlier, the date on which the 15 Securities Commissioner notifies the person that the Securities 16 Commissioner has denied the application for registration or has 17 stayed the pendency of the application for good cause; 18 (G) not more than three customers in this State during the 19 previous twelve months, in addition to those customers specified in 20 subparagraphs (A) through (F) and under subparagraph (H), if the 21 broker-dealer is registered under the Securities Exchange Act of 22 1934 or not required to be registered under the Securities 23 Exchange Act of 1934 and is registered under the securities act of 24 the State in which the broker-dealer has its principal place of 25 business; and 26 (H) any other person exempted by rule adopted or order 27 issued under this chapter; and 28 (2) a person that deals solely in United States government 29 securities and is supervised as a dealer in government securities by 30 the Board of Governors of the Federal Reserve System, the 31 Comptroller of the Currency, the Federal Deposit Insurance 32 Corporation, or the Office of Thrift Supervision. 33 (c) It is unlawful for a broker-dealer, or for an issuer engaged 34 in offering, offering to purchase, purchasing, or selling securities 35 in this State, directly or indirectly, to employ or associate with an 36 individual to engage in an activity related to securities transactions 37 in this State if the registration of the individual is suspended or 38 revoked or the individual is barred from employment or 39 association with a broker-dealer, an issuer, an investment adviser, 40 or a federal covered investment adviser by an order of the 41 Securities Commissioner under this chapter, the Securities and 42 Exchange Commission, or a self-regulatory organization. A 43 broker-dealer or issuer does not violate this subsection if the

1 [588] 130 1 broker-dealer or issuer did not know and in the exercise of 2 reasonable care could not have known, of the suspension, 3 revocation, or bar. Upon request from a broker-dealer or issuer 4 and for good cause, an order under this chapter may modify or 5 waive, in whole or in part, the application of the prohibitions of 6 this subsection. 7 (d) A rule adopted or order issued under this chapter may 8 permit: 9 (1) a broker-dealer that is registered in Canada or other 10 foreign jurisdiction and that does not have a place of business in 11 this State to effect transactions in securities with or for, or attempt 12 to effect the purchase or sale of any securities by: 13 (A) an individual from Canada or other foreign jurisdiction 14 who is temporarily present in this State and with whom the 15 broker-dealer had a bona fide customer relationship before the 16 individual entered the United States; 17 (B) an individual from Canada or other foreign jurisdiction 18 who is present in this State and whose transactions are in a 19 self-directed tax advantaged retirement plan of which the 20 individual is the holder or contributor in that foreign jurisdiction; 21 or 22 (C) an individual who is present in this State, with whom 23 the broker-dealer customer relationship arose while the individual 24 was temporarily or permanently resident in Canada or the other 25 foreign jurisdiction; and 26 (2) an agent who represents a broker-dealer that is exempt 27 under this subsection to effect transactions in securities or attempt 28 to effect the purchase or sale of securities in this State as permitted 29 for a broker-dealer described in paragraph (1). 30 31 Official Comments 32 33 Prior Provisions: 1956 Act Section 201; RUSA Sections 34 201-202. 35 1. “Broker-dealer” is defined in Section 102(4). The scope of 36 the Section 401(a) reference “to transact business in this State” is 37 specified in Section 610. “Transacts a business” has been held to 38 mean “more than a trivial or de minimis business.” United States 39 v. Schwartz, 464 F.2d 499, 506 (2d Cir. 1972), cert. denied, 409 40 U.S. 1009 (1972). 41 2. Under Section 401(a) a person can be required to register as a 42 securities broker-dealer only if the person transacts business in 43 securities. See, e.g., AMR Realty Co. v. State, 373 A.2d 1002

1 [588] 131 1 (N.J. Supr. Ct. App. Div. 1977) (requirement that the transactions 2 involve securities). 3 3. “Bona fide” is a much construed term particularly in the 4 U.C.C. context. See, e.g., MCC Proceeds, Inc. v. Advest, Inc., 743 5 N.Y.S.2d 1 (N.Y. A.D. 2002) (comparing bona fide to good faith 6 standard). 7 4. Section 401(b)(1)(D) was added to provide relief in situations 8 where a broker-dealer is accepting orders from a sophisticated 9 financial professional who is making the investment decisions for 10 its customers. 11 5. Under 401(b)(1)(E) and (F) preexisting customers must be 12 bona fide. A principal place of residence, for example, normally 13 would be the residence where the customer spends a majority of 14 time. These exemptions were intended to facilitate ongoing 15 broker-customer relationships with customers who have 16 established a second or other residence for such purposes as a 17 winter home (i.e. “snowbirds”). 18 6. Section 401(c) prohibits a broker-dealer or issuer from 19 employing or associating with an individual in a capacity for 20 which that individual has been suspended by the administrator. 21 Violation of this provision does not result in strict liability. In 22 order for a broker-dealer or issuer to be liable, the broker-dealer or 23 issuer must have known or should have known of the 24 administrator’s order to the individual suspended or barred. Cf. 25 Comment 17 to Section 412. 26 7. Section 401(d) recognizes the increasingly transnational 27 nature of securities brokerage and permits, if the administrator 28 adopts a rule or order, transactions by a Canadian or a foreign 29 broker-dealer with a person from Canada or other foreign 30 jurisdiction who is resident in this State. This subsection is not 31 self-executing and is effective only if the administrator adopts a 32 rule or order. 33 8. To give effect to action taken by rule or order under Section 34 401(d), there must be a transaction registration exemption that will 35 enable securities transactions to take place in customer accounts 36 involving the broker-dealers and agents contemplated in Section 37 401(d). See Sections 202 and 203. 38 39 South Carolina Reporter’s Comments 40 41 1. Section 35-1-401(a): This section follows existing law by 42 requiring a broker-dealer to be either registered or exempt from 43 registration.

1 [588] 132 1 2. Section 35-1-401(b)(1): This section extends the exemption 2 from registration in prior law to include broker-dealers dealing 3 with a federal covered investment adviser, as set out in Section 4 35-1-401(b)(1)(D), and allows a window within which to register 5 for broker-dealers who continue an existing “bona fide” 6 relationship with a client who establishes a principal residence in 7 South Carolina under Section 35-1-401(b)(1)(F). Section 8 35-1-401(b)(1)(G) modifies existing law by reducing the number 9 of “other” customers from five to three and by excluding from that 10 count all customers itemized in Section 35-1-401(b)(1)(A)-(H). 11 Prior law excluded only issuers, financial and institutional 12 investors, and other broker-dealers. 13 3. Section 35-1-401(b)(2): This section modifies existing law by 14 expanding the list of supervising federal agencies. 15 4. Section 35-1-401(c): This section modifies existing law by 16 removing strict liability of a broker-dealer or issuer for employing 17 or associating an individual whose registration is suspended or 18 revoked. Liability is contingent on whether such disciplinary 19 action was or reasonably could have been known. A mechanism is 20 provided to seek a waiver or modification of the prohibition 21 against such employment or association. This section varies from 22 the official text of the Uniform Securities Act by deleting the 23 phrase “to the broker-dealer” in the last sentence to clarify that 24 such waiver or modification may apply to an issuer as well as a 25 broker-dealer. 26 5. Section 35-1-401(d): This section allows the Securities 27 Commissioner to adopt a rule or order exempting from registration 28 a broker-dealer licensed in Canada or other foreign jurisdiction. 29 30 Section 35-1-402. (a) It is unlawful for an individual to 31 transact business in this State as an agent unless the individual is 32 registered under this chapter as an agent or is exempt from 33 registration as an agent under subsection (b). 34 (b) The following individuals are exempt from the registration 35 requirement of subsection (a): 36 (1) an individual who represents a broker-dealer in effecting 37 transactions in this State limited to those described in Section 38 15(h)(2) of the Securities Exchange Act of 1934 (15 U.S.C. 39 Section 78o(h)(2)); 40 (2) an individual who represents a broker-dealer that is 41 exempt under Section 35-1-401(b) or (d); 42 (3) an individual who represents an issuer with respect to an 43 offer or sale of the issuer’s own securities or those of the issuer’s

1 [588] 133 1 parent or any of the issuer’s subsidiaries, and who is not 2 compensated in connection with the individual’s participation by 3 the payment of commissions or other remuneration based, directly 4 or indirectly, on transactions in those securities; 5 (4) an individual who represents an issuer and who effects 6 transactions in the issuer’s securities exempted by Section 7 35-1-202, other than Section 35-1-202(11) and (14); 8 (5) an individual who represents an issuer that effects 9 transactions solely in federal covered securities of the issuer, but 10 an individual who effects transactions in a federal covered security 11 under Section 18(b)(3) or 18(b)(4)(D) of the Securities Act of 1933 12 (15 U.S.C. Section 77r(b)(3) or 77r(b)(4)(D)) is not exempt if the 13 individual is compensated in connection with the agent’s 14 participation by the payment of commissions or other 15 remuneration based, directly or indirectly, on transactions in those 16 securities; 17 (6) an individual who represents a broker-dealer registered 18 in this State under Section 35-1-401(a) or exempt from registration 19 under Section 35-1-401(b) in the offer and sale of securities for an 20 account of a nonaffiliated federal covered investment adviser with 21 investments under management in excess of one hundred million 22 dollars acting for the account of others pursuant to discretionary 23 authority in a signed record; 24 (7) an individual who represents an issuer in connection with 25 the purchase of the issuer’s own securities; 26 (8) an individual who represents an issuer and who restricts 27 participation to performing clerical or ministerial acts; or 28 (9) any other individual exempted by rule adopted or order 29 issued under this chapter. 30 (c) The registration of an agent is effective only while the 31 agent is employed by or associated with a broker-dealer registered 32 under this chapter or an issuer that is offering, selling, or 33 purchasing its securities in this State. 34 (d) It is unlawful for a broker-dealer, or an issuer engaged in 35 offering, selling, or purchasing securities in this State, to employ 36 or associate with an agent who transacts business in this State on 37 behalf of broker-dealers or issuers unless the agent is registered 38 under subsection (a) or exempt from registration under subsection 39 (b). 40 (e) An individual may not act as an agent for more than one 41 broker-dealer or one issuer at a time, unless the broker-dealer or 42 the issuer for which the agent acts are affiliated by direct or

1 [588] 134 1 indirect common control or are authorized by rule or order under 2 this chapter. 3 4 Official Comments 5 6 Prior Provisions: RUSA Sections 201-202. 7 1. “Agent” is defined in Section 102(2). The scope of the 8 Section 402(a) reference to “transact business in this State” is 9 specified in Section 610. An administrator may by rule or order 10 take action under Section 401(d)(2) to address an agent. 11 2. An independent contractor must be either a broker-dealer or 12 an agent if the individual transacts business as a broker-dealer or 13 agent. There is no other status permitted under this chapter for 14 securities activities. 15 3. A broker-dealer in violation of Section 402(a) may be 16 disciplined under Section 412 and be subject to a civil or 17 administrative enforcement action under Section 603 or 604. 18 4. Under Sections 402(b)(3) and (5) an agent may be exempt if 19 acting for an issuer and receiving compensation (for example, as a 20 corporate executive), as long as the compensation is not a 21 commission or other remuneration based on transactions in the 22 issuer’s own securities. Such an agent could receive a salary with 23 conventional benefits, including an annual bonus (related to his or 24 her performance) as an executive, and still be within this 25 exemption unless the agent is also being compensated directly or 26 indirectly for participation in the specified securities transactions. 27 5. Section 402(b)(6) was added to provide relief in situations 28 where an agent is accepting orders from a sophisticated financial 29 professional who is making the investment decisions for its 30 customers. 31 6. Ministerial or clerical acts in Section 402(b)(8) might include 32 preparing routine written communications or responding to 33 inquiries. 34 7. Section 402(e) limits agents to a single employment or 35 affiliation unless a rule or order of the administrator authorizes 36 multiple affiliations. In any event an agent must be registered, see 37 Section 402(a), or exempt from registration, see Section 402(b). 38 Registration is effective only while an agent is employed by or 39 associated with a broker-dealer or an issuer. See Section 402(c). 40 41 South Carolina Reporter’s Comments 42

1 [588] 135 1 1. Section 35-1-402(a): This section follows existing law by 2 requiring an agent to be either registered or exempt from 3 registration. 4 2. Section 35-1-402(b)(1): This section continues prior law. 5 3. Section 35-1-402(b)(2): This section continues prior law. 6 4. Section 35-1-402(b)(3): This section broadens the existing 7 exemption for uncompensated agents of an issuer to include any 8 offer or sale of securities, whereas prior law limited the exemption 9 to transactions involving employees, partners, officers or directors. 10 5. Section 35-1-402(b)(4): This section continues prior law. 11 6. Section 35-1-402(b)(5): This section continues prior law. 12 7. Section 35-1-402(b)(6): This section mirrors the 13 “sophisticated financial professional” exemption for broker-dealers 14 in Section 35-1-401(b)(1)(D). 15 8. Section 35-1-402(b)(7): This section is new. 16 9. Section 35-1-402(b)(8): This section is new. 17 10. Section 35-1-402(b)(9): This section continues prior law. 18 11. Section 35-1-402(c): This section continues prior law. 19 12. Section 35-1-402(d): This section continues prior law. 20 13. Section 35-1-402(e): These provisions were previously 21 found in S.C. Regs. 113-1. 22 23 Section 35-1-403. (a) It is unlawful for a person to transact 24 business in this State as an investment adviser unless the person is 25 registered under this chapter as an investment adviser or is exempt 26 from registration as an investment adviser under subsection (b). 27 (b) The following persons are exempt from the registration 28 requirement of subsection (a): 29 (1) a person without a place of business in this State that is 30 registered under the securities act of the State in which the person 31 has its principal place of business if its only clients in this State 32 are: 33 (A) federal covered investment advisers, investment 34 advisers registered under this chapter, or broker-dealers registered 35 under this chapter; 36 (B) institutional investors; 37 (C) bona fide preexisting clients whose principal places of 38 residence are not in this State if the investment adviser is 39 registered under the securities act of the State in which the clients 40 maintain principal places of residence; or 41 (D) any other client exempted by rule adopted or order 42 issued under this chapter;

1 [588] 136 1 (2) a person without a place of business in this State if the 2 person has had, during the preceding twelve months, not more than 3 five clients that are resident in this State in addition to those 4 specified under paragraph (1); or 5 (3) any other person exempted by rule adopted or order 6 issued under this chapter. 7 (c) It is unlawful for an investment adviser, directly or 8 indirectly, to employ or associate with an individual to engage in 9 an activity related to investment advice regarding securities in this 10 State if the registration of the individual is suspended or revoked 11 or the individual is barred from employment or association with an 12 investment adviser, federal covered investment adviser, or 13 broker-dealer by an order under this chapter, the Securities and 14 Exchange Commission, or a self-regulatory organization, unless 15 the investment adviser did not know, and in the exercise of 16 reasonable care could not have known, of the suspension, 17 revocation, or bar. Upon request from the investment adviser and 18 for good cause, the Securities Commissioner, by order, may waive, 19 in whole or in part, the application of the prohibitions of this 20 subsection to the investment adviser. 21 (d) It is unlawful for an investment adviser to employ or 22 associate with an individual required to be registered under this 23 chapter as an investment adviser representative who transacts 24 business in this State on behalf of the investment adviser unless the 25 individual is registered under Section 35-1-404(a) or is exempt 26 from registration under Section 35-1-404(b). 27 28 Official Comments 29 30 Prior Provisions: 1956 Act Section 201; RUSA Sections 31 203-204. 32 1. “Investment adviser” is defined in Section 102(15). The 33 scope of the Section 403(a) reference to “transact business in this 34 State” is specified in Section 610. 35 2. Excluded from the definition of investment adviser in Section 36 102(15)(C) is a broker-dealer who receives no special 37 compensation for investment advisory services. Such a 38 broker-dealer would not have to register as both a broker-dealer 39 and investment adviser in this State. A broker-dealer that does 40 receive special compensation, on the other hand, would also meet 41 the statutory definition of investment adviser and would be 42 required to register in both capacities.

1 [588] 137 1 3. Section 403(b)(2) is consistent with the National Securities 2 Markets Improvement Act of 1996 which prohibits a State from 3 regulating an investment adviser that does not have a place of 4 business in this State and had fewer than six clients who were state 5 residents during the preceding twelve months. 6 4. Section 403(c) prohibits an investment adviser from 7 employing an individual who is prohibited from such employment 8 or association by the administrator. Violation of this provision 9 does not result in strict liability. To be liable the investment 10 adviser must have known or should have known of the 11 administrator’s order to the individual suspended or barred. 12 13 South Carolina Reporter’s Comments 14 15 1. Section 35-1-403(a): This section continues prior law. As 16 Section 35-1-403(b)(1)(A) makes clear, federal covered investment 17 advisors are exempt from this registration requirement. 18 2. Section 35-1-403(b)(1): This section continues prior law but, 19 in subsection (b)(1)(C) extends the “snow bird” exemption, i.e., 20 customers with a second home in South Carolina, available to 21 broker-dealers and agents to investment advisors. 22 3. Section 35-1-403(c): This section mirrors similar provisions 23 applicable to broker-dealers that an investment advisor knows or 24 should have known of any disciplinary action against any 25 individual employed or associated by it before facing liability. 26 4. Section 35-1-403(d): This section continues prior law. 27 28 Section 35-1-404. (a) It is unlawful for an individual to 29 transact business in this State as an investment adviser 30 representative unless the individual is registered under this chapter 31 as an investment adviser representative or is exempt from 32 registration as an investment adviser representative under 33 subsection (b). 34 (b) The following individuals are exempt from the registration 35 requirement of subsection (a): 36 (1) an individual who is employed by or associated with an 37 investment adviser that is exempt from registration under Section 38 35-1-403(b) or a federal covered investment adviser that is 39 excluded from the notice filing requirements of Section 35-1-405; 40 and 41 (2) any other individual exempted by rule adopted or order 42 issued under this chapter.

1 [588] 138 1 (c) The registration of an investment adviser representative is 2 not effective while the investment adviser representative is not 3 employed by or associated with an investment adviser registered 4 under this chapter or a federal covered investment adviser that has 5 made or is required to make a notice filing under Section 35-1-405. 6 (d) An individual may not transact business as an investment 7 adviser representative for more than one investment adviser or 8 federal covered investment adviser unless a rule adopted or order 9 issued under this chapter allows an individual to act as an 10 investment adviser representative for more than one investment 11 adviser or federal covered investment adviser. 12 (e) It is unlawful for an individual acting as an investment 13 adviser representative, directly or indirectly, to conduct business in 14 this State on behalf of an investment adviser or a federal covered 15 investment adviser if the registration of the individual as an 16 investment adviser representative is suspended or revoked or the 17 individual is barred from employment or association with an 18 investment adviser or a federal covered investment adviser by an 19 order under this chapter, the Securities and Exchange Commission, 20 or a self-regulatory organization. Upon request from a federal 21 covered investment adviser and for good cause, the Securities 22 Commissioner, by order issued, may waive, in whole or in part, the 23 application of the requirements of this subsection to the federal 24 covered investment adviser. 25 (f) An investment adviser registered under this chapter, a 26 federal covered investment adviser that has filed a notice under 27 Section 35-1-405, or a broker-dealer registered under this chapter 28 is not required to employ or associate with an individual as an 29 investment adviser representative if the only compensation paid to 30 the individual for a referral of investment advisory clients is paid 31 to an investment adviser registered under this chapter, a federal 32 covered investment adviser who has filed a notice under Section 33 35-1-405, or a broker-dealer registered under this chapter with 34 which the individual is employed or associated as an investment 35 adviser representative. 36 37 Official Comments 38 39 No Prior Provision. 40 1. “Investment adviser representative” is defined in Section 41 102(16). The scope of the Section 404(a) reference to “transacts 42 business in this State” is specified in Section 610.

1 [588] 139 1 2. Neither the 1956 act nor RUSA provided for the registration 2 of investment adviser representatives. In recent years, however, 3 the states increasingly have done so. 4 3. Under this chapter a sole practitioner may register as an 5 investment adviser. See Section 403. The Investment Adviser 6 Registration Depository currently provides for entry of the legal 7 name of the individual as the investment adviser and the entry of 8 any name the individual is doing business under that is different 9 from the individual’s name. A sole practitioner is not required to 10 register under Section 404 as an investment adviser representative, 11 unless the administrator requires such registration. 12 4. Section 404(e) prohibits an investment adviser representative 13 from association with a federal covered investment adviser when 14 such association is prohibited by an order of the administrator. 15 Unlike similar provisions in Sections 401 and 403, there is no 16 culpability requirement that the investment adviser representative 17 “knows or in the exercise of reasonable care should have known” 18 of a suspension or bar because the order should be received by the 19 investment adviser representative. As with Sections 401 and 403, 20 the administrator may waive this prohibition. Cf. Comment 17 to 21 Section 412. 22 5. The administrator may adopt rules or orders under Section 23 404(f) in accordance with Section 605. The Securities and 24 Exchange Commission has adopted a rule that addresses referral 25 fees in Rule 206(4)-3 of the Investment Advisers Act of 1940. 26 6. For a state that intends to extend Section 404(f) to those 27 broker-dealers and investment advisers who are not required to 28 register and those federal covered investment advisers not required 29 to file a notice, this subsection should read: 30 (f) [Referral Fees.] An investment adviser registered under 31 this [chapter], a federal covered investment adviser that has filed a 32 notice under Section 405, or a broker-dealer registered under this 33 [chapter] is not required to employ or associate with an individual 34 as an investment adviser representative if the only compensation 35 paid to the individual for a referral of investment advisory clients 36 is paid to an investment adviser registered under this [chapter], or 37 not required to register under this [chapter], a federal covered 38 investment who has filed a notice under Section 405 or is not 39 required to file a notice under Section 405, or a broker-dealer 40 registered under this [chapter] or not required to register under this 41 [chapter] with which the individual is employed or associated as an 42 investment adviser representative. 43

1 [588] 140 1 South Carolina Reporter’s Comments 2 3 1. Section 35-1-404(a): This section continues prior law. 4 2. Section 35-1-404(b): This section clarifies existing law but 5 makes no substantive changes. 6 3. Section 35-1-404(c): This section continues prior law. 7 4. Section 35-1-404(d): This section is new. Prior law did not 8 prohibit an investment adviser representative from multiple 9 associations, but this section specifically allows the Securities 10 Commissioner to do so. 11 5. Section 35-1-404(e): This section specifically prohibits a 12 representative under suspension or revocation of a license from 13 association with an investment adviser, including a federally 14 covered investment adviser, when such association is prohibited by 15 the order of suspending or revoking the license. 16 6. Section 35-1-404(f): This section is new. 17 18 Section 35-1-405. (a) Except with respect to a federal covered 19 investment adviser described in subsection (b), it is unlawful for a 20 federal covered investment adviser to transact business in this 21 State as a federal covered investment adviser unless the federal 22 covered investment adviser complies with subsection (c). 23 (b) The following federal covered investment advisers are not 24 required to comply with subsection (c): 25 (1) a federal covered investment adviser without a place of 26 business in this State if its only clients in this State are: 27 (A) federal covered investment advisers, investment 28 advisers registered under this chapter, and broker-dealers 29 registered under this chapter; 30 (B) institutional investors; 31 (C) bona fide preexisting clients whose principal places of 32 residence are not in this State; or 33 (D) other clients specified by rule adopted or order issued 34 under this chapter; 35 (2) a federal covered investment adviser without a place of 36 business in this State if the person has had, during the preceding 37 twelve months, not more than five clients that are resident in this 38 State in addition to those specified under paragraph (1); and 39 (3) any other person excluded by rule adopted or order 40 issued under this chapter. 41 (c) A person acting as a federal covered investment adviser, 42 not excluded under subsection (b), shall file a notice, a consent to 43 service of process complying with Section 35-1-611, and such

1 [588] 141 1 records as have been filed with the Securities and Exchange 2 Commission under the Investment Advisers Act of 1940 required 3 by rule adopted or order issued under this chapter and pay the fees 4 specified in Section 35-1-410(e). 5 (d) The notice under subsection (c) becomes effective upon its 6 filing. 7 8 Official Comments 9 10 No Prior Provision. 11 1. “Federal covered investment adviser” is defined in Section 12 102(6). The scope of the Section 405(a) reference to “transacts 13 business in this State” is specified in Section 610. 14 2. Section 405(b)(2) is necessitated by the National Securities 15 Markets Improvement Act of 1996 and is intended to coordinate 16 this chapter with the Investment Advisers Act of 1940. 17 3. Section 404(c) provides limits on those who can be employed 18 by or associated with a federal covered investment adviser. 19 4. The succession provision of Section 407(a) is available to a 20 federal covered investment adviser who has filed a notice under 21 Section 405. 22 23 South Carolina Reporter’s Comments 24 25 Section 35-1-405: This entire section is new. 26 27 Section 35-1-406. (a) A person shall register as a 28 broker-dealer, agent, investment adviser, or investment adviser 29 representative by filing an application and a consent to service of 30 process complying with Section 35-1-611, passing one or more 31 examinations as required by the Securities Commissioner, paying 32 the fee specified pursuant to Section 35-1-410, and paying any 33 reasonable fees charged by the designee of the Securities 34 Commissioner for processing the filing. The application must 35 contain: 36 (1) the information or record required for the filing of a 37 uniform application; and 38 (2) upon request by the Securities Commissioner, any other 39 financial or other information or record that the Securities 40 Commissioner determines is appropriate. 41 (b) If the information or record contained in an application 42 filed under subsection (a) is or becomes inaccurate or incomplete

1 [588] 142 1 in a material respect, the registrant shall promptly file a correcting 2 amendment. 3 (c) If an order is not in effect and a proceeding is not pending 4 under Section 35-1-412, registration becomes effective at noon on 5 the forty-fifth day after a completed application is filed, unless the 6 registration is denied. A rule adopted or order issued under this 7 chapter may set an earlier effective date or may defer the effective 8 date until noon on the forty-fifth day after the filing of any 9 amendment completing the application. 10 (d) A registration is effective until midnight on December 11 thirty-first of the year for which the application for registration is 12 filed. Unless an order is in effect under Section 35-1-412, a 13 registration may be automatically renewed each year by filing such 14 records as are required by rule adopted or order issued under this 15 chapter, by meeting the filing fee and examination requirements 16 specified pursuant to Section 35-1-410, and by paying costs 17 charged by the designee of the Securities Commissioner for 18 processing the filings. 19 (e) A rule adopted or order issued under this chapter may 20 impose other conditions, not inconsistent with the National 21 Securities Markets Improvement Act of 1996. An order issued 22 under this chapter may waive, in whole or in part, specific 23 requirements in connection with registration as are in the public 24 interest and for the protection of investors. 25 26 Official Comments 27 28 Prior Provisions: 1956 Act Section 202; RUSA Sections 205, 29 208. 30 1. Under Section 406(a), the administrator is authorized to 31 accept standardized forms such as Form B-D for broker-dealers; 32 Form U-4 for agents and investment adviser representatives; and 33 Form ADV for investment advisers, which are filed today through 34 such designees as the Web-CRD or the Investment Adviser 35 Registration Depository (IARD). While this chapter generally 36 encourages uniformity, Sections 406(a) and (e) are intended to 37 give the administrator authority to augment or waive disclosure 38 requirements in appropriate cases. 39 2. Section 406(a) eliminates the listing of specified information 40 delineated in Section 202 of the 1956 Act. As with RUSA Section 41 205, the intent is to facilitate coordination with widely used 42 standardized forms.

1 [588] 143 1 3. Under this chapter a single person may act both as an agent 2 and investment adviser representative if the person satisfies 3 applicable registration requirements to be both an agent and 4 investment adviser representative. 5 6 South Carolina Reporter’s Comments 7 8 1. Section 35-1-406(a): This section allows the Securities 9 Commissioner to accept standardized forms and changes prior law 10 by removing a listing of information generally contained on such 11 forms. Section 35-1-406(a)(2) gives the Securities Commissioner 12 the ability to obtain additional relevant information. 13 2. Section 35-1-406(b): This section continues prior law. 14 3. Section 35-1-406(c): This section changes prior law by 15 requiring the Securities Commissioner to act within forty-five days 16 of the filing of an application or it becomes effective. The 17 Securities Commissioner may shorten this time period by rule, or 18 delay the running of the forty-five-day period from the date of an 19 amendment to the application. 20 4. Section 35-1-406(d): This section continues prior law. 21 5. Section 35-1-406(e): This section is new and gives the 22 Securities Commissioner discretion to impose the conditions not 23 inconsistent with federal law. 24 25 Section 35-1-407. (a) A broker-dealer or investment adviser 26 may succeed to the current registration of another broker-dealer or 27 investment adviser or a notice filing of a federal covered 28 investment adviser, and a federal covered investment adviser may 29 succeed to the current registration of an investment adviser or 30 notice filing of another federal covered investment adviser, by 31 filing as a successor an application for registration pursuant to 32 Section 35-1-401 or 35-1-403 or a notice pursuant to Section 33 35-1-405 for the unexpired portion of the current registration or 34 notice filing. 35 (b) A broker-dealer or investment adviser that changes its form 36 of organization or State of incorporation or organization may 37 continue its registration by filing an amendment to its registration 38 if the change does not involve a material change in its financial 39 condition or management. The amendment becomes effective 40 when filed or on a date designated by the registrant in its filing. 41 The new organization is a successor to the original registrant for 42 the purposes of this chapter. If there is a material change in 43 financial condition or management, the broker-dealer or

1 [588] 144 1 investment adviser shall file a new application for registration. A 2 predecessor registered under this chapter shall stop conducting its 3 securities business other than winding down transactions and shall 4 file for withdrawal of broker-dealer or investment adviser 5 registration within forty-five days after filing its amendment to 6 effect succession. 7 (c) A broker-dealer or investment adviser that changes its 8 name may continue its registration by filing an amendment to its 9 registration. The amendment becomes effective when filed or on a 10 date designated by the registrant. 11 (d) A change of control of a broker-dealer or investment 12 adviser may be made in accordance with a rule adopted or order 13 issued under this chapter. 14 15 Official Comments 16 17 Prior Provisions: 1956 Act Section 202(c); RUSA 210. 18 1. Section 407 is intended to avoid unnecessary interruptions of 19 business by specifying procedures for a successor broker-dealer or 20 investment adviser; a broker-dealer or investment adviser to 21 maintain its registration if it changes its form of organization or 22 name; or, in accordance with a rule or order adopted under this 23 chapter, a change of control of a broker-dealer or investment 24 adviser. 25 2. There is no filing fee under Section 407. 26 27 South Carolina Reporter’s Comments 28 29 Section 35-1-407: This section substantially continues prior law. 30 Subsection (d) is not intended to imply that a change of control is 31 not permitted in the absence of a rule or order, but rather it gives 32 the Securities Commissioner the authority to enact such a rule or 33 order. 34 35 Section 35-1-408. (a) If an agent registered under this chapter 36 terminates employment by or association with a broker-dealer or 37 issuer, or if an investment adviser representative registered under 38 this chapter terminates employment by or association with an 39 investment adviser or federal covered investment adviser, or if 40 either registrant terminates activities that require registration as an 41 agent or investment adviser representative, the broker-dealer, 42 issuer, investment adviser, or federal covered investment adviser 43 shall promptly file a notice of termination. If the registrant learns

1 [588] 145 1 that the broker-dealer, issuer, investment adviser, or federal 2 covered investment adviser has not filed the notice, the registrant 3 may do so. 4 (b) If an agent registered under this chapter terminates 5 employment by or association with a broker-dealer registered 6 under this chapter and begins employment by or association with 7 another broker-dealer registered under this chapter; or if an 8 investment adviser representative registered under this chapter 9 terminates employment by or association with an investment 10 adviser registered under this chapter or a federal covered 11 investment adviser that has filed a notice under Section 35-1-405 12 and begins employment by or association with another investment 13 adviser registered under this chapter or a federal covered 14 investment adviser that has filed a notice under Section 35-1-405; 15 then upon the filing by or on behalf of the registrant, within thirty 16 days after the termination, of an application for registration that 17 complies with the requirement of Section 35-1-406(a) and payment 18 of the filing fee required under Section 35-1-410, the registration 19 of the agent or investment adviser representative is: 20 (1) immediately effective as of the date of the completed 21 filing, if the agent’s Central Registration Depository record or 22 successor record or the investment adviser representative’s 23 Investment Adviser Registration Depository record or successor 24 record does not contain a new or amended disciplinary disclosure 25 within the previous twelve months; or 26 (2) temporarily effective as of the date of the completed 27 filing, if the agent’s Central Registration Depository record or 28 successor record or the investment adviser representative’s 29 Investment Adviser Registration Depository record or successor 30 record contains a new or amended disciplinary disclosure within 31 the preceding twelve months. 32 (c) The Securities Commissioner may withdraw a temporary 33 registration if there are or were grounds for discipline as specified 34 in Section 35-1-412 and the Securities Commissioner does so 35 within thirty days after the filing of the application. If the 36 Securities Commissioner does not withdraw the temporary 37 registration within the thirty-day period, registration becomes 38 automatically effective on the thirty-first day after filing. 39 (d) The Securities Commissioner may prevent the effectiveness 40 of a transfer of an agent or investment adviser representative under 41 subsection (b)(1) or (2) based on the public interest and the 42 protection of investors.

1 [588] 146 1 (e) If the Securities Commissioner determines that a registrant 2 or applicant for registration is no longer in existence or has ceased 3 to act as a broker-dealer, agent, investment adviser, or investment 4 adviser representative, or is the subject of an adjudication of 5 incapacity or is subject to the control of a committee, conservator, 6 or guardian, or cannot reasonably be located, a rule adopted or 7 order issued under this chapter may require the registration be 8 canceled or terminated or the application denied. The Securities 9 Commissioner may reinstate a canceled or terminated registration, 10 with or without hearing, and may make the registration retroactive. 11 12 Official Comments 13 14 Prior Provision: 1956 Act Section 204(d). 15 1. Under Sections 402(c) and 404(c) registration of an agent or 16 investment adviser representative is effective only while the agent 17 or investment adviser representative is employed by or associated 18 with a broker-dealer, issuer, or investment adviser, as may be the 19 case. Section 408(a) specifies a procedure to inform the 20 administrator of a notice of termination. 21 2. To expedite transfer to a new broker-dealer or investment 22 adviser, Section 408(b) provides a procedure by which agents or 23 investment adviser representative registration will be effective 24 immediately as of the date of new employment when there is no 25 new or added disciplinary disclosure in the relevant Central 26 Research Depository or Investment Adviser Registration 27 Depository records. Both electronic systems are currently 28 administered by the National Association of Securities Dealers. 29 Section 408(d) is intended to ensure that the administrator has the 30 authority to prevent immediate effectiveness in appropriate cases. 31 32 South Carolina Reporter’s Comments 33 34 Section 35-1-408: Prior law required prompt notification of the 35 termination of employment of an agent or representative. This 36 section continues that obligation, but also includes, in Section 37 35-1-408(b), provisions to expedite the transfer to a new 38 broker-dealer or investment adviser. That temporary registration 39 may be revoked by the Securities Commissioner under Section 40 35-1-408(c). 41 42 Section 35-1-409. Withdrawal of registration by a 43 broker-dealer, agent, investment adviser, or investment adviser

1 [588] 147 1 representative becomes effective sixty days after the filing of the 2 application to withdraw or within any shorter period as provided 3 by rule adopted or order issued under this chapter unless a 4 revocation or suspension proceeding is pending when the 5 application is filed. If a proceeding is pending, withdrawal 6 becomes effective when and upon such conditions as required by 7 rule adopted or order issued under this chapter. The Securities 8 Commissioner may institute a revocation or suspension proceeding 9 under Section 35-1-412 within one year after the withdrawal 10 became effective automatically and issue a revocation or 11 suspension order as of the last date on which registration was 12 effective if a proceeding is not pending. 13 14 Official Comments 15 16 Prior Provisions: 1956 Act Section 204(e); RUSA Section 214 17 1. This section generally follows the 1956 Act Section 204(e) 18 and RUSA Section 214. This section does not affect any 19 applicant’s privilege of withdrawal of an application from 20 registration before the registration becomes effective. It is simply 21 designed to prevent withdrawal of an effective registration under 22 fire. The last sentence preserves the ability of the administrator to 23 initiate an action under Section 412 when the administrator does 24 not know of a reason to object to withdrawal until after withdrawal 25 has become effective. 26 2. Ordinarily today a registrant will file a standardized form 27 such as Form U-5, BD-W or ADV-W to withdraw registration. 28 29 South Carolina Reporter’s Comments 30 31 Section 35-1-409: This section extends the time period for the 32 effective date of withdrawal to sixty days, but otherwise 33 substantially follows prior law. 34 35 Section 35-1-410. (a) The Securities Commissioner shall 36 establish fees by rule or order for: 37 (1) an initial filing of an application as a broker-dealer and 38 renewal of an application by a broker-dealer for registration; 39 (2) an application for registration as an agent and renewal of 40 registration as an agent; 41 (3) an application for registration as an investment adviser 42 and renewal of registration as an investment adviser;

1 [588] 148 1 (4) an application for registration as an investment adviser 2 representative, a renewal of registration as an investment adviser 3 representative, and a change of registration as an investment 4 adviser representative; and 5 (5) an initial fee and annual notice fee for a federal covered 6 investment adviser required to file a notice under Section 7 35-1-405. 8 (b) A person required to pay a filing or notice fee under this 9 section may transmit the fee through or to a designee as a rule or 10 order provides under this chapter. 11 (c) When an application or other filing fee is denied or 12 withdrawn, the filing fee shall not be refunded, except upon order 13 by the Securities Commissioner. 14 (d) A rule adopted or order issued under this chapter may 15 require that an examination, including an examination developed 16 or approved by an organization of securities regulators, be 17 successfully completed by a class of individuals or all individuals. 18 An order issued under this chapter may waive, in whole or in part, 19 an examination as to an individual and a rule adopted under this 20 chapter may waive, in whole or in part, an examination as to a 21 class of individuals if the Securities Commissioner determines that 22 the examination is not necessary or appropriate in the public 23 interest and for the protection of investors. 24 25 Official Comments 26 27 Prior Provisions: 1956 Act Section 202(b); RUSA Section 206. 28 1. Each state should determine the appropriate fee for each type 29 of registration and for each type of renewal, denial, or withdrawal 30 of a registration. 31 2. Similarly each state should determine whether it wishes to 32 remove the brackets from Section 410(g) and charge a single fee 33 for dually registered agents and investment adviser representatives. 34 35 South Carolina Reporter’s Comments 36 37 1. Section 35-1-410: Prior law allowed the Securities 38 Commissioner to establish filing fees by rule or order. This 39 section continues that practice. 40 2. Section 35-1-410(d): This section, which deals with 41 examinations, is found in the Model Act at Section 412(e). It is 42 more appropriately located in this section relating to filing fees 43 than in Section 35-1-412, which deals with disciplinary actions.

1 [588] 149 1 Section 35-1-411. (a) Subject to Section 15(h) of the 2 Securities Exchange Act of 1934 (15 U.S.C. Section 78o(h)) or 3 Section 222 of the Investment Advisers Act of 1940 (15 U.S.C. 4 Section 80b-22), a rule adopted or order issued under this chapter 5 may establish minimum financial requirements for broker-dealers 6 registered or required to be registered under this chapter and 7 investment advisers registered or required to be registered under 8 this chapter. 9 (b) Subject to Section 15(h) of the Securities Exchange Act of 10 1934 (15 U.S.C. Section 78o(h)) or Section 222(b) of the 11 Investment Advisers Act of 1940 (15 U.S.C. Section 80b-22), a 12 broker-dealer registered or required to be registered under this 13 chapter and an investment adviser registered or required to be 14 registered under this chapter shall file such financial reports as are 15 required by a rule adopted or order issued under this chapter. If 16 the information contained in a record filed under this subsection is 17 or becomes inaccurate or incomplete in a material respect, the 18 registrant shall promptly file a correcting amendment. 19 (c) Subject to Section 15(h) of the Securities Exchange Act of 20 1934 (15 U.S.C. Section 78o(h)) or Section 222 of the Investment 21 Advisers Act of 1940 (15 U.S.C. Section 80b-22): 22 (1) a broker-dealer registered or required to be registered 23 under this chapter and an investment adviser registered or required 24 to be registered under this chapter shall make and maintain the 25 accounts, correspondence, memoranda, papers, books, and other 26 records required by rule adopted or order issued under this chapter; 27 (2) broker-dealer records required to be maintained under 28 paragraph (1) may be maintained in any form of data storage 29 acceptable under Section 17(a) of the Securities Exchange Act of 30 1934 (15 U.S.C. Section 78q(a)) if they are readily accessible to 31 the Securities Commissioner; and 32 (3) investment adviser records required to be maintained 33 under paragraph (1) may be maintained in any form of data storage 34 required by rule adopted or order issued under this chapter. 35 (d) The records of a broker-dealer registered or required to be 36 registered under this chapter and of an investment adviser 37 registered or required to be registered under this chapter are 38 subject to such reasonable periodic, special, or other audits or 39 inspections by a representative of the Securities Commissioner, 40 within or without this State, as the Securities Commissioner 41 considers necessary or appropriate in the public interest and for the 42 protection of investors. An audit or inspection may be made at any 43 time and without prior notice. The Securities Commissioner may

1 [588] 150 1 copy, and remove for audit or inspection copies of, all records the 2 Securities Commissioner reasonably considers necessary or 3 appropriate to conduct the audit or inspection. The Securities 4 Commissioner may assess a reasonable charge for conducting an 5 audit or inspection under this subsection. 6 (e) Subject to Section 15(h) of the Securities Exchange Act of 7 1934 (15 U.S.C. Section 78o(h)) or Section 222 of the Investment 8 Advisers Act of 1940 (15 U.S.C. Section 80b-22), a rule adopted 9 or order issued under this chapter may require a broker-dealer or 10 investment adviser that has custody of or discretionary authority 11 over funds or securities of a customer or client to obtain insurance 12 or post a bond or other satisfactory form of security in an amount 13 prescribed by rule or order. The Securities Commissioner may 14 determine the requirements of the insurance, bond, or other 15 satisfactory form of security. Insurance or a bond or other 16 satisfactory form of security may not be required of a 17 broker-dealer registered under this chapter whose net capital 18 exceeds, or of an investment adviser registered under this chapter 19 whose minimum financial requirements exceed, the amounts 20 required by rule or order under this chapter. The insurance, bond, 21 or other satisfactory form of security must permit an action by a 22 person to enforce any liability on the insurance, bond, or other 23 satisfactory form of security if instituted within the time 24 limitations in Section 35-1-509(j)(2). 25 (f) Subject to Section 15(h) of the Securities Exchange Act of 26 1934 (15 U.S.C. Section 78o(h)) or Section 222 of the Investment 27 Advisers Act of 1940 (15 U.S.C. Section 80b-22), an agent may 28 not have custody of funds or securities of a customer except under 29 the supervision of a broker-dealer and an investment adviser 30 representative may not have custody of funds or securities of a 31 client except under the supervision of an investment adviser or a 32 federal covered investment adviser. A rule adopted or order issued 33 under this chapter may prohibit, limit, or impose conditions on a 34 broker-dealer regarding custody of funds or securities of a 35 customer and on an investment adviser regarding custody of 36 securities or funds of a client. 37 (g) With respect to an investment adviser registered or required 38 to be registered under this chapter, a rule adopted or order issued 39 under this chapter may require that information or other record be 40 furnished or disseminated to clients or prospective clients in this 41 State as necessary or appropriate in the public interest and for the 42 protection of investors and advisory clients.

1 [588] 151 1 (h) A rule adopted or order issued under this chapter may 2 require an individual registered under Section 35-1-402 or 3 35-1-404 to participate in a continuing education program 4 approved by the Securities and Exchange Commission and 5 administered by a self-regulatory organization or, in the absence of 6 such a program, a rule adopted or order issued under this chapter 7 may require continuing education for an individual registered 8 under Section 35-1-404. 9 10 Official Comments 11 12 Prior Provisions: 1956 Act Sections 102(c), 202(d) and (e) and 13 203; RUSA Sections 209, 211 and 215. 14 1. Sections 411(a) through (c) and (e) through (f) implicitly refer 15 to “capital, custody, margin, financial responsibility, making and 16 keeping records, bonding, or financial or operational reporting 17 requirements.” Under the National Securities Markets 18 Improvement Act of 1996, States may not impose such 19 requirements on covered broker-dealers and investment advisers 20 greater than those specified in Section 15(h) of the Securities 21 Exchange Act of 1934 and Section 222 of the Investment Advisors 22 Act of 1940. 23 2. Minimum financial requirements must be maintained during 24 the entire time a person is registered and not merely at the time of 25 the registration. See, e.g., National Grange Mut. Ins. Co. v. 26 Prioleau, 236 S.E.2d 808 (S.C. 1977) (continuing bond 27 requirement); Ridgeway, McLeod & Assoc., 281 A.2d 390 (N.J. 28 Super. Ct. App. Div. 1971) (continuing minimum capital 29 requirement). 30 3. The duty in Section 411(b) to correct or update information is 31 limited to material information which a reasonable investor would 32 continue to consider important in deciding whether to purchase or 33 sell securities. Cf. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 34 438, 444-450 (1970); Securities Act Release No. 6084, 17 SEC 35 Dock. 1048, 1054 (1979) (“persons are continuing to rely on all or 36 any material portion of the statements”). 37 4. Section 411(c)(1) authorizes the administrator to require all 38 records to be preserved for the period the administrator prescribes 39 by rule or order. 40 5. Rule 17a-4 is the current rule under Section 17(a) of the 41 Securities Exchange Act referred to in Section 411(c)(2) that 42 addresses acceptable forms of data storage.

1 [588] 152 1 6. The administrator’s power to copy and examine records in 2 Section 411(d) is subject to all applicable privileges. See, e.g., 10 3 Louis Loss & Joel Seligman, Securities Regulation 4921-4925 4 n.69 (3d ed. rev. 1996). The power in Section 411(d) to conduct 5 audits or inspections is distinguishable from the administrator’s 6 enforcement powers under Section 602. No subpoena is necessary 7 under Section 411(d). Failure to submit to a reasonable audit or 8 inspection is a violation of this chapter which may result in an 9 action by the administrator under Section 412(d)(8), a criminal 10 prosecution under Section 508, or an injunction under Section 603. 11 An unreasonable audit, inspection or demand for information or 12 documents would be subject to challenge in an appropriate court. 13 7. Section 411(f) broadens 1956 Act Section 102(c) and RUSA 14 Section 215 to apply to agents as well as investment adviser 15 representatives. Subject to Section 15(h) of the Securities 16 Exchange Act of 1934 and Section 222 of the Investment Adviser 17 Act of 1940, the administrator is given broad authority to prohibit, 18 limit, or condition custody arrangements. 19 8. Section 411(g) parallels Rule 204-3, adopted under the 20 Investment Advisers Act of 1940, popularly known as the brochure 21 rule, which authorizes the SEC to require dissemination to 22 investment adviser clients of specified information about the 23 investment adviser and investment advice. 24 25 South Carolina Reporter’s Comments 26 27 1. Section 35-1-411: This section recognizes the limitation of 28 State control over federal covered broker-dealers and investment 29 advisers. The record keeping requirements under prior law were 30 set out in S.C. Regs. 113-7. 31 2. Section 35-1-411(h) allows the Securities Commissioner to 32 adopt a continuing education requirement. 33 3. This section varies from the uniform text in Section 34 35-1-411(e) by allowing the Securities Commissioner to set the 35 amount of bond or other security by rule or order. 36 37 Section 35-1-412. (a) If the Securities Commissioner finds 38 that the order is in the public interest and subsection (d) authorizes 39 the action, an order issued under this chapter may deny an 40 application, or may condition or limit registration of an applicant 41 to be a broker-dealer, agent, investment adviser, or investment 42 adviser representative, and, if the applicant is a broker-dealer or 43 investment adviser, of a partner, officer, director, or person having

1 [588] 153 1 a similar status or performing similar functions, or a person 2 directly or indirectly in control, of the broker-dealer or investment 3 adviser. 4 (b) If the Securities Commissioner finds that the order is in the 5 public interest and subsection (d) authorizes the action, an order 6 issued under this chapter may revoke, suspend, condition, or limit 7 the registration of a registrant and, if the registrant is a 8 broker-dealer or investment adviser, of a partner, officer, director, 9 or person having a similar status or performing similar functions, 10 or a person directly or indirectly in control, of the broker-dealer or 11 investment adviser. However, the Securities Commissioner may 12 not: 13 (1) institute a revocation or suspension proceeding under this 14 subsection based on an order issued under a law of another State 15 that is reported to the Securities Commissioner or a designee of the 16 Securities Commissioner more than one year after the date of the 17 order on which it is based; or 18 (2) under subsection (d)(5)(A) or (B), issue an order on the 19 basis of an order issued under the securities act of another State 20 unless the other order was based on conduct for which subsection 21 (d) would authorize the action had the conduct occurred in this 22 State. 23 (c) If the Securities Commissioner finds that the order is in the 24 public interest and subsection (d)(1) through (6), (8), (9), (10), or 25 (12) and (13) authorizes the action, an order under this chapter 26 may censure, impose a bar, and/or impose a civil penalty in an 27 amount not to exceed $10,000 for each violation, on a registrant, 28 and, if the registrant is a broker-dealer or investment adviser, a 29 partner, officer, director, or person having a similar status or 30 performing similar functions, or a person directly or indirectly in 31 control, of the broker-dealer or investment adviser. 32 (d) A person may be disciplined under subsections (a) through 33 (c) if the person: 34 (1) has filed an application for registration in this State under 35 this chapter or the predecessor chapter within the previous 10 36 years, which, as of the effective date of registration or as of any 37 date after filing in the case of an order denying effectiveness, was 38 incomplete in any material respect or contained a statement that, in 39 light of the circumstances under which it was made, was false or 40 misleading with respect to a material fact; 41 (2) wilfully violated or wilfully failed to comply with this 42 chapter or the predecessor chapter or a rule adopted or order issued

1 [588] 154 1 under this chapter or the predecessor chapter within the previous 2 10 years; 3 (3) has been convicted of a felony or within the previous 10 4 years has been convicted of a misdemeanor involving a security, a 5 commodity future or option contract, or an aspect of a business 6 involving securities, commodities, investments, franchises, 7 insurance, banking, or finance; 8 (4) is enjoined or restrained by a court of competent 9 jurisdiction in an action instituted by the Securities Commissioner 10 under this chapter or the predecessor chapter, a State, the 11 Securities and Exchange Commission, or the United States from 12 engaging in or continuing an act, practice, or course of business 13 involving an aspect of a business involving securities, 14 commodities, investments, franchises, insurance, banking, or 15 finance; 16 (5) is the subject of an order, issued after notice and 17 opportunity for hearing by: 18 (A) the securities or other financial services regulator of a 19 State or the Securities and Exchange Commission or other federal 20 agency denying, revoking, barring, or suspending registration as a 21 broker-dealer, agent, investment adviser, federal covered 22 investment adviser, or investment adviser representative; 23 (B) the securities regulator of a State or the Securities and 24 Exchange Commission against a broker-dealer, agent, investment 25 adviser, investment adviser representative, or federal covered 26 investment adviser; 27 (C) the Securities and Exchange Commission or a 28 self-regulatory organization suspending or expelling the registrant 29 from membership in the self-regulatory organization; 30 (D) a court adjudicating a United States Postal Service 31 fraud order; 32 (E) the insurance regulator of a State denying, suspending, 33 or revoking registration as an insurance agent; or 34 (F) a depository institution or financial services regulator 35 suspending or barring the person from the depository institution or 36 other financial services business; 37 (6) is the subject of an adjudication or determination, after 38 notice and opportunity for hearing, by the Securities and Exchange 39 Commission, the Commodity Futures Trading Commission; the 40 Federal Trade Commission; a federal depository institution 41 regulator, or a depository institution, insurance, or other financial 42 services regulator of a State that the person wilfully violated the 43 Securities Act of 1933, the Securities Exchange Act of 1934, the

1 [588] 155 1 Investment Advisers Act of 1940, the Investment Company Act of 2 1940, or the Commodity Exchange Act, the securities or 3 commodities law of a State, or a federal or state law under which a 4 business involving investments, franchises, insurance, banking, or 5 finance is regulated; 6 (7) is insolvent, either because the person’s liabilities exceed 7 the person’s assets or because the person cannot meet the person’s 8 obligations as they mature, but the Securities Commissioner may 9 not enter an order against an applicant or registrant under this 10 paragraph without a finding of insolvency as to the applicant or 11 registrant; 12 (8) refuses to allow or otherwise impedes the Securities 13 Commissioner from conducting an audit or inspection under 14 Section 35-1-411(d) or refuses access to a registrant’s office to 15 conduct an audit or inspection under Section 35-1-411(d); 16 (9) has failed to reasonably supervise an agent, investment 17 adviser representative, or other individual, if the agent, investment 18 adviser representative, or other individual was subject to the 19 person’s supervision and committed a violation of this chapter or 20 the predecessor chapter or a rule adopted or order issued under this 21 chapter or the predecessor chapter within the previous 10 years; 22 (10) has not paid the proper filing fee within 30 days after 23 having been notified by the Securities Commissioner of a 24 deficiency, but the Securities Commissioner shall vacate an order 25 under this paragraph when the deficiency is corrected; 26 (11) after notice and opportunity for a hearing, has been 27 found within the previous 10 years: 28 (A) by a court of competent jurisdiction to have wilfully 29 violated the laws of a foreign jurisdiction under which the business 30 of securities, commodities, investment, franchises, insurance, 31 banking, or finance is regulated; 32 (B) to have been the subject of an order of a securities 33 regulator of a foreign jurisdiction denying, revoking, or suspending 34 the right to engage in the business of securities as a broker-dealer, 35 agent, investment adviser, investment adviser representative, or 36 similar person; or 37 (C) to have been suspended or expelled from membership 38 by or participation in a securities exchange or securities 39 association operating under the securities laws of a foreign 40 jurisdiction; 41 (12) is the subject of a cease and desist order issued by the 42 Securities and Exchange Commission or issued under the

1 [588] 156 1 securities, commodities, investment, franchise, banking, finance, 2 or insurance laws of a State; 3 (13) has engaged in dishonest or unethical practices in the 4 securities, commodities, investment, franchise, banking, finance, 5 or insurance business within the previous 10 years; or 6 (14) is not qualified on the basis of factors such as training, 7 experience, and knowledge of the securities business. However, in 8 the case of an application by an agent for a broker-dealer that is a 9 member of a self-regulatory organization or by an individual for 10 registration as an investment adviser representative, a denial order 11 may not be based on this paragraph if the individual has 12 successfully completed all examinations required by Section 13 35-1-410(d). The Securities Commissioner may require an 14 applicant for registration under Section 35-1-402 or 35-1-404 who 15 has not been registered in a State within the two years preceding 16 the filing of an application in this State to successfully complete an 17 examination. 18 (e) Reserved 19 (f) The Securities Commissioner may suspend or deny an 20 application summarily; restrict, condition, limit, or suspend a 21 registration; or censure, bar, or impose a civil penalty on a 22 registrant before final determination of an administrative 23 proceeding. Upon the issuance of an order, the Securities 24 Commissioner shall promptly notify each person subject to the 25 order that the order has been issued, the reasons for the action, and 26 that within 15 days after the receipt of a request in a record from 27 the person the matter will be scheduled for a hearing. If a hearing 28 is not requested and none is ordered by the Securities 29 Commissioner within 30 days after the date of service of the order, 30 the order becomes final by operation of law. If a hearing is 31 requested or ordered, the Securities Commissioner, after notice of 32 and opportunity for hearing to each person subject to the order, 33 may modify or vacate the order or extend the order until final 34 determination. 35 (g) An order issued may not be issued under this section, 36 except under subsection (f), without: 37 (1) appropriate notice to the applicant or registrant; 38 (2) opportunity for hearing; and 39 (3) findings of fact and conclusions of law in a record. 40 (h) A person that controls, directly or indirectly, a person not in 41 compliance with this section may be disciplined by order of the 42 Securities Commissioner under subsections (a) through (c) to the 43 same extent as the noncomplying person, unless the controlling

1 [588] 157 1 person did not know, and in the exercise of reasonable care could 2 not have known, of the existence of conduct that is a ground for 3 discipline under this section. 4 (i) The Securities Commissioner may not institute a 5 proceeding under subsection (a), (b), or (c) based solely on 6 material facts actually known by the Securities Commissioner 7 unless an investigation or the proceeding is instituted within one 8 year after the Securities Commissioner actually acquires 9 knowledge of the material facts. 10 11 Official Comments 12 13 Prior Provisions: 1956 Act Section 204; RUSA Sections 207, 14 212-213. 15 1. Section 412 generally follows Section 204 of the 1956 Act 16 and Sections 207 and 212-213 of RUSA, but has been modified to 17 reflect subsequent developments that have broadened the scope 18 and remedies of counterpart federal and state statutes. 19 2. Section 412 authorizes the administrator to seek a sanction 20 based on the seriousness of the misconduct. Under Section 412 the 21 administrator must prove that the denial, revocation, suspension, 22 cancellation, withdrawal, restriction, condition, or limitation both 23 is (1) in the public interest and (2) involves one of the enumerated 24 grounds in Section 412(d). See, e.g., Mayflower Sec. Co., Inc. v. 25 Bureau of Sec., 312 A.2d 497 (N.J. 1973). The “public interest” is 26 a much litigated concept that has come to have settled meanings. 27 See generally 6 L. Loss & J. Seligman, Securities Regulation 28 3103.5-3103.18 (3d ed. rev. 2002) (under federal securities laws). 29 The public interest will not require imposition of a sanction for 30 every minor or technical violation of subsection (d). 31 3. The term “foreign” means a jurisdiction outside of the United 32 States, not a different state within the United States. 33 4. Section 412(a) through (c) authorizes the administrator to 34 proceed against an entire firm, regardless of whether the 35 administrator proceeds against any individual, when an individual 36 partner, officer, or director or person occupying a similar status or 37 performing similar functions, or a controlling person is disciplined 38 under subsection (d), but only if proceeding against the entire firm 39 is in the public interest. The discipline of such an individual may 40 not automatically be used against a broker-dealer or investment 41 adviser. When, however, there is a failure to reasonably supervise, 42 see Section 412(d)(9) or control person liability, see Section 43 412(h), the administrator is empowered to proceed against a firm

1 [588] 158 1 in an appropriate case. In Section 412, “any partner, officer, or 2 director, any person occupying a similar status or performing 3 similar function.” can include a branch manager, assistant branch 4 manager, or other supervisor. 5 5. In Section 412(d)(1) the completeness and accuracy of an 6 effective application for registration is tested as of the appropriate 7 effective date. An application that becomes incomplete or 8 inaccurate after its effective date is not a ground for discipline 9 under paragraph (d)(1). In an appropriate case, an action might be 10 available under paragraph (d)(2) and Section 406(b). On the other 11 hand, in a proceeding to deny effectiveness to a pending 12 application for registration, the completeness and accuracy of the 13 application is not limited to the effective date and can be judged on 14 any date after filing. 15 6. The term “wilfully” in Section 412(d)(2) and (11)(A) is 16 discussed in Comment 2 to Section 508. 17 7. There is no time limit or statute of limitations on felony 18 convictions in Section 412(d)(3) as a ground for disciplinary 19 action. 20 8. The present tense of the verb “is” in Sections 412(d)(4) 21 through (6) and (12) means that an injunction, order, adjudication, 22 or determination that has expired or been vacated is no longer a 23 ground for discipline. 24 9. In Sections 412(d)(5) and (6) the administrator is not required 25 to prove the validity of the ground which led to the earlier 26 disciplinary order. 27 10. Under Section 412(d)(7) the administrator may not proceed 28 against a broker-dealer or investment adviser firm on the basis of 29 the insolvency of a partner, officer, director, controlling person or 30 other person specified in subsection (b), unless it is a sole 31 proprietorship. 32 11. Section 412(d)(8) can be violated by a refusal to cooperate 33 with an administrator’s reasonable audit or inspection, including 34 by withholding or concealing records, refusing to furnish required 35 records, or refusing the administrator reasonable access to any 36 office or location within an office to conduct an audit or 37 inspection under this chapter. However, a request by a person 38 subject to an audit or inspection for a reasonable delay to obtain 39 assistance of counsel does not constitute a violation of Section 40 412(d)(8). 41 12. The term “failed to supervise reasonably” in Section 412(d) 42 (9) includes not having reasonable supervisory procedures in place 43 as well as a proper system of supervision and internal control. Cf.

1 [588] 159 1 Hollinger v. Titan Capital Corp., 914 F.2d 1564 (9th Cir. 1990), 2 cert. denied, 499 U.S. 976 (1991). Section 15(b)(4)(E) of the 3 Securities Exchange Act of 1934 similarly addresses “failure to 4 supervise reasonably.” See 6 Louis Loss & Joel Seligman, 5 Securities Regulation 3097-3101 (3d ed. rev. 2002). 6 13. The term “dishonest and unethical practices” in Section 7 412(d)(13) has been held not to be unconstitutionally vague. See, 8 e.g., Brewster v. Maryland Sec. Comm’n, 548 A.2d 157, 160 9 (M.D. Ct. Spec. App. 1988) (“a broad statutory standard is not 10 vague if it has a meaningful referent in business practice, custom 11 or usage”); Johnson-Bowles Co. v. Division of Sec., 829 P.2d 101, 12 114 (Utah Ct. App. 1992) (such legislative language bespeaks a 13 legislative intent to delegate the interpretation of what constitutes 14 “dishonest and unethical practices” in the securities industry to the 15 administrator). Ministerial or clerical violations of a statute or 16 rule, if immaterial and occurring without intent or recklessness, 17 typically would not constitute dishonest or unethical practices. 18 14. Under the counterparts to Section 412(d)(14) and (e) [S.C. 19 Code Sections 35-1-412(d)(14) and 35-1-410(d)] applicants to 20 become agents of broker-dealers typically take standardized tests 21 administered by the National Association of Securities Dealers, 22 Inc. 23 15. Sections 412(f) and (g) amplify the earlier procedures 24 found in Section 204(f) of the 1956 Act and are intended to 25 facilitate summary disciplinary proceedings, when these are 26 appropriate. 27 16. Section 412(i) parallels the language of Section 204 of the 28 1956 Act and Section 212(b) of RUSA with some significant 29 changes. The time period in which the administrator can act has 30 been extended to one year from 30 days in the 1956 Act and 90 31 days in RUSA. The limitation on instituting a proceeding can also 32 be tolled by instituting a formal investigation. The addition of the 33 word “solely” is intended to make it clear that an administrator 34 may consider the prior history of an applicant or registrant even if 35 that prior history had been known to the administrator for more 36 than one year if there are additional material facts which are 37 actually known to the administrator within the last year. 38 17. “Actually known” in Section 412(i) is used to signify that 39 the mere filing of material facts in the Central Registration 40 Depository or Investment Advisory Registration Depository 41 systems does not constitute actual knowledge, unless that 42 information was received by the administrator, or, but for a

1 [588] 160 1 decision by the administrator, would have been received by the 2 administrator. 3 South Carolina Reporter’s Comments 4 5 1. Section 35-1-412: This section substantially follows prior law, 6 but imposes some limitations on actions taken in response to 7 proceedings in other states. 8 2. Section 35-1-412(c) varies from the uniform text by use of the 9 term “and/or” in the phrase “censure, impose a bar and/or” to 10 clarify that the disciplinary actions may be cumulative in 11 appropriate circumstances. 12 3. Section 35-1-412(d)(8) specifically provides for disciplinary 13 action if there is a refusal or impediment to an audit or inspection. 14 4. Section 35-1-412(d)(13) contains the phrase “dishonest and 15 unethical practices,” which also appeared in prior law and was 16 substantially fleshed out in S.C. Regs. 113-23 and 113-25. 17 56. Model Act Section 412(e) [Examinations] was enacted as 18 South Carolina Section 35-1-410(d) in the South Carolina Act. 19 Therefore the reference in Official Comment 14 to “the 20 counterparts to Section 412(d)(14) and (e)” of the Model Act refers 21 to what is enacted in the South Carolina Act as Section 22 35-1-412(d)(14) and Section 35-1-410(d). 23 6. Section 35-1-412(h) makes clear that a controlling person 24 may be disciplined as well as the specific offender, unless such 25 controlling person did not know and reasonably could not have 26 known of the conduct involved. 27 28 Article 5 29 30 Fraud and Liabilities 31 32 Section 35-1-501. It is unlawful for a person, in connection 33 with the offer, sale, or purchase of a security, directly or indirectly: 34 (1) to employ a device, scheme, or artifice to defraud; 35 (2) to make an untrue statement of a material fact or to omit to 36 state a material fact necessary in order to make the statements 37 made, in light of the circumstances under which they were made, 38 not misleading; or 39 (3) to engage in an act, practice, or course of business that 40 operates or would operate as a fraud or deceit upon another person. 41 42 Official Comments 43

1 [588] 161 1 Prior Provisions: 1956 Act Section 101; RUSA Section 501. 2 1. Section 501, which was Section 101 in the 1956 Act, was 3 modeled on Rule 10b-5 adopted under the Securities Exchange 4 Act of 1934 and on Section 17(a) of the Securities Act of 1933. 5 There has been significant later case development interpreting 6 Rule 10b-5, Section 17(a), and Section 101 of the 1956 Act. 7 Section 501 is not identical to either Rule 10b-5 or Section 17(a). 8 2. There are no exemptions from Section 501. 9 3. Section 501 applies to any securities offer, sale or purchase, 10 including offers, sales, or purchases involving registered, exempt, 11 or federal covered securities. It would also apply to a rescission 12 offer under Section 510. 13 4. The possible consequences of violating Section 501 are many. 14 These include denial, suspension, or revocation of securities 15 registration under Section 306; denial, revocation, suspension, 16 withdrawal, restriction, condition or limitation of a broker-dealer, 17 agent, investment adviser, or investment adviser representative 18 registration under Section 412; criminal prosecution under Section 19 508; civil enforcement proceedings under Sections 603; and 20 administrative proceedings under 604. 21 5. Because Section 501, like Rule 10b-5, reaches market 22 manipulation, see 8 Louis Loss & Joel Seligman, Securities 23 Regulation Ch.10.D (3d ed. 1991), this chapter does not include 24 the RUSA market manipulation Section 502, which had no 25 counterpart in the 1956 Act. 26 6. The culpability required to be pled or proved under Section 27 501 is addressed in the relevant enforcement context. See, e.g., 28 Section 508, criminal penalties, where “willfulness” must be 29 proven; Section 509, civil liabilities, which includes a reasonable 30 care defense; or civil and administrative enforcement actions under 31 Sections 603 and 604, where no culpability is required to be pled 32 or proven. 33 7. There is no private cause of action, express or implied, under 34 Section 501. Section 509(m) expressly provides that only Section 35 509 provides a private cause of action for conduct that could 36 violate Section 501. 37 38 South Carolina Reporter’s Comments 39 40 This section, with minor grammatical exceptions, is unchanged 41 from prior law found at former Section 35-1-1210. In Atlanta Skin 42 & Cancer Clinic, P. C. v. Hallmark General Partners, Inc., 320 S. 43 C. 113, 463 S.E.2d 600 (1995), the Supreme Court held that

1 [588] 162 1 former Section 35-1-1210 did not, by itself, create a private right 2 of action. 3 4 Section 35-1-502. (a) It is unlawful for a person that advises 5 others for compensation, either directly or indirectly or through 6 publications or writings, as to the value of securities or the 7 advisability of investing in, purchasing, or selling securities or that, 8 for compensation and as part of a regular business, issues or 9 promulgates analyses or reports relating to securities: 10 (1) to employ a device, scheme, or artifice to defraud 11 another person; or 12 (2) to engage in an act, practice, or course of business that 13 operates or would operate as a fraud or deceit upon another person. 14 (b) A rule adopted under this chapter may define an act, 15 practice, or course of business in connection with giving 16 investment advice regarding securities as fraudulent, deceptive, or 17 manipulative, and prescribe means reasonably designed to prevent 18 a person from engaging in acts, practices, and courses of business 19 defined as fraudulent, deceptive, or manipulative. 20 (c) A rule adopted under this chapter may specify the contents 21 of a contract entered into, extended, or renewed in connection with 22 giving investment advice regarding securities. 23 24 Official Comments 25 26 Prior Provisions: 1956 Act Section 102(a); RUSA Section 503. 27 1. Section 502(a) applies to any person that commits fraud in 28 providing investment advice. Section 502(b) is not limited to 29 persons registered as investment advisers or investment adviser 30 representatives. 31 2. A person can violate both Section 501 and Section 502 if the 32 person violates Section 502 in connection with the offer, purchase, 33 or sale of a security. 34 3. The rulemaking authority under Sections 502(b) and (c) 35 would provide the basis for existing NASAA rules concerning 36 investment advisers, to the extent these rules are not preempted by 37 the National Securities Markets Improvement Act of 1996. 38 4. Under Section 203A(b)(2) of the Investment Advisers Act 39 States retain their authority to investigate and bring enforcement 40 actions with respect to fraud or deceit against a federal covered 41 investment adviser or a person associated with a federal covered 42 investment adviser. Under Section 502(a), which applies to any 43 person, a State could bring an enforcement action against a federal

1 [588] 163 1 covered investment adviser, including a federal covered 2 investment adviser excluded from the definition of investment 3 adviser in Section 102(15)(E). 4 5. There is no private cause of action, express or implied, under 5 Section 502. Section 509(m) expressly provides that only Section 6 509 provides for a private cause of action for prohibited conduct in 7 providing investment advice that could violate Section 502. 8 9 South Carolina Reporter’s Comments 10 11 1. This section replaces prior law found at former Sections 12 35-1-120, 35-1-1230, and 35-1-1240. 13 2. Subsection (a) is similar to prior law found at Section 14 35-1-1220(1) and (2). 15 3. Subsections (b) and (c) provide rulemaking authority to 16 succeed the statutory provisions in prior law found at former 17 Sections 35-1-1220 through 1240 concerning unlawful activities of 18 investment advisers, exemptions from such prohibitions, and 19 taking or retaining possession of securities. The flexibility in the 20 broad rulemaking authority signals a recognition that most state 21 regulation of investment advisers recently has been adopted 22 through rules. 23 4. South Carolina deleted the references to “supervised person[s] 24 of a federal covered investment adviser” in Section 35-1-502(b) to 25 enable the Securities Commissioner, to the extent not preempted 26 by federal law, to promulgate rules concerning fraudulent conduct 27 by those “supervised persons.” South Carolina also clarified that 28 Section 35-1-501(b) and (c) is limited to investment advice 29 “regarding securities.” 30 31 Section 35-1-503. (a) In a civil action or administrative 32 proceeding under this chapter, a person claiming an exemption, 33 exception, preemption, or exclusion has the burden to prove the 34 applicability of the claim. 35 (b) In a criminal proceeding under this chapter, a person 36 claiming an exemption, exception, preemption, or exclusion has 37 the burden of going forward with evidence of the claim. 38 39 Official Comments 40 41 Prior Provisions: 1956 Act Section 402(d); RUSA Section 608. 42 1. As specified in Section 503(a), in a civil or administrative

1 [588] 164 1 action, the person claiming an exemption, exception, preemption, 2 or exclusion has the burden of persuasion. 3 2. In contrast, in a criminal action under Section 503(b), the 4 prosecutor is required to prove each element of a crime “beyond a 5 reasonable doubt.” The defendant only has the burden of 6 producing evidence of an exemption, exception, preemption, or 7 exclusion. Some court decisions have characterized this burden as 8 an affirmative defense. See, e.g., United States ex. rel. Schott v. 9 Tehan, 365 F.2d 191, 195 (6th Cir. 1966) (Ohio blue sky law 10 constitutionally shifts burden of production to defendant); 11 Commonwealth v. David, 309 N.E.2d 484, 488 (Mass. 1974) 12 (exemption is an affirmative defense); State v. Frost, 387 N.E.2d 13 235, 238-239 (Ohio 1979) (it is not unconstitutional to require the 14 burden of proof as an affirmative defense to prove a securities law 15 exemption); State v. Andersen, 773 A.2d 328 (Conn. 2001) (an 16 exemption from registration is an affirmative defense to the charge 17 of selling unregistered securities). 18 19 South Carolina Reporter’s Comments 20 21 “Evidentiary burden”. This provision is substantially similar to 22 prior law found at former Section 35-1-340. 23 24 Section 35-1-504. (a) Except as otherwise provided in 25 subsection (b), a rule adopted or order issued under this chapter 26 may require the filing of a prospectus, pamphlet, circular, form 27 letter, advertisement, sales literature, or other advertising record 28 relating to a security or investment advice regarding securities, 29 addressed or intended for distribution to prospective investors, 30 including clients or prospective clients of a person registered or 31 required to be registered as an investment adviser under this 32 chapter. 33 (b) This section does not apply to sales and advertising 34 literature specified in subsection (a) which relates to a federal 35 covered security, a federal covered investment adviser, or a 36 security or transaction exempted by Section 35-1-201, 35-1-202, or 37 35-1-203 except as required pursuant to Section 35-1-201(7). 38 39 Official Comments 40 41 Prior Provisions: 1956 Act Section 403; RUSA Section 405. 42 1. The prospectuses, pamphlets, circulars, form letters, 43 advertisements, sales literature or advertising communications,

1 [588] 165 1 include material disseminated electronically or available on a web 2 site. 3 2. The administrator may bring a civil enforcement action in a 4 court under Section 603 or institute administrative enforcement 5 under Section 604 to prevent publication, circulation or use of any 6 materials required by the administrator to be filed under Section 7 504 that have not been filed. 8 3. Section 504(b) is meant to refer to the communications 9 described in Section 504(a). 10 11 South Carolina Reporter’s Comments 12 13 This section is similar to prior law found at former Section 14 35-1-50. 15 16 Section 35-1-505. It is unlawful for a person to make or cause 17 to be made, in a record that is used in an action or proceeding or 18 filed under this chapter, a statement that, at the time and in the 19 light of the circumstances under which it is made, is false or 20 misleading in a material respect, or, in connection with the 21 statement, to omit to state a material fact necessary to make the 22 statement made, in the light of the circumstances under which it 23 was made, not false or misleading. 24 25 Official Comment 26 27 Prior Provisions: 1956 Act Section 404; RUSA Section 504. 28 The definition of “materiality” in TSC Indus., Inc. v. Northway, 29 Inc., 426 U.S. 438, 449 (1976) (“an omitted fact is material if there 30 is a substantial likelihood that a reasonable shareholder would 31 consider it important in deciding how to vote”) has generally been 32 followed in both federal and state securities law. See 4 Louis 33 Loss & Joel Seligman, Securities Regulation 2071-2105 (3d ed. 34 rev. 2000). 35 36 South Carolina Reporter’s Comments 37 38 This section is similar to prior law found at former Section 39 35-1-160 except that it adds the definition of “materially”. 40 41 Section 35-1-506. The filing of an application for registration, a 42 registration statement, a notice filing under this chapter, the 43 registration of a person, the notice filing by a person, or the

1 [588] 166 1 registration of a security under this chapter does not constitute a 2 finding by the Securities Commissioner that a record filed under 3 this chapter is true, complete, and not misleading. The filing or 4 registration or the availability of an exemption, exception, 5 preemption, or exclusion for a security or a transaction does not 6 mean that the Securities Commissioner has passed upon the merits 7 or qualifications of, or recommended or given approval to, a 8 person, security, or transaction. It is unlawful to make, or cause to 9 be made, to a purchaser, customer, client, or prospective customer 10 or client a representation inconsistent with this section. 11 12 Official Comment 13 14 Prior Provisions: 1956 Act Section 405; RUSA Section 505. 15 This Section follows the 1956 Act and RUSA, as well as state 16 securities statutes generally, in providing that a misrepresentation 17 concerning registration or an exemption is unlawful. 18 19 South Carolina Reporter’s Comments 20 21 This section is substantially similar to prior law found at former 22 Section 35-1-170. 23 24 Section 35-1-507. A broker-dealer, agent, investment adviser, 25 federal covered investment adviser, or investment adviser 26 representative is not liable to another broker-dealer, agent, 27 investment adviser, federal covered investment adviser, or 28 investment adviser representative for defamation relating to a 29 statement that is contained in a record required by the Securities 30 Commissioner, or designee of the Securities Commissioner, the 31 Securities and Exchange Commission, or a self-regulatory 32 organization, unless the person knew, or should have known at the 33 time that the statement was made, that it was false in a material 34 respect or the person acted in reckless disregard of the statement’s 35 truth or falsity. 36 37 Official Comments 38 39 Source of Law: National Association of Securities Dealers, Inc. 40 Proposal Relating to Qualified Immunity in Arbitration 41 Proceedings for Statements Made in Forms U-4 and U-5. 42 1. In 1994 The Securities and Exchange Commission Division 43 of Market Regulation published The Large Firm Project: A

1 [588] 167 1 Review of Hiring, Retention, and Supervisory Practices (1994), 2 which found that a small number of “rogue brokers” were 3 responsible for a significant proportion of customer disciplinary 4 complaints. These brokers in some instances moved from one 5 broker-dealer firm to another, it was explained, without full and 6 complete disclosure of disciplinary problems by the broker-dealer, 7 because of broker-dealer firms’ fear of state law defamation 8 claims. See also GAO, Actions Needed to Better Protect Investors 9 against Unscrupulous Brokers 3 (1994); Testimony of SEC 10 Chairman Arthur Levitt Concerning the Large Firm Project, 11 Subcomm. on Telecommunications & Fin., House Comm. on 12 Energy & Commerce (Sept. 14, 1994), reprinted in 1994-1995 13 Fed. Sec. L. Rep. (CCH) ¶85,433 (1994). 14 2. In 1998, the National Association of Securities Dealers 15 proposed qualified immunity for statements made in Forms U-4 16 and U-5 to address this problem. This proposal was reprinted in 17 Securities Exchange Act Release 39,892, 66 SEC Dock. 2473 18 (1998). This proposal was limited to arbitration proceedings. It 19 was not acted on by the Securities and Exchange Commission. 20 3. An alternative approach would be a standard providing for 21 absolute immunity. See generally Anne Wright, Form U-5 22 Defamation, 52 Wash. & Lee L. Rev. 1299 (1995); Acciardo v. 23 Millennium Sec. Corp., 83 F. Supp. 2d 413 (S.D.N.Y. 2000) 24 (discussing both New York qualified and absolute immunity 25 cases). 26 4. Securities administrators or self-regulatory organizations 27 generally are subject to absolute or qualified immunity for actions 28 of their employees within the course of their official duties. See 29 10 Louis Loss & Joel Seligman, Securities Regulation 4818-4821 30 (3d ed. rev. 1996). 31 5. As is generally the law “truth is a complete defense to a 32 defamation action.” Andrews v. Prudential Sec., Inc., 160 F.3d 33 304, 308 (6th Cir. 1998). 34 6. An agent who has been the subject of a Form U-5, Uniform 35 Termination Notice for Securities Industry Registration, may 36 respond to specified adverse disclosures and have her or his 37 responses reprinted on the published version of Form U-5. 38 7. Through September 2002 no state had adopted an immunity 39 provision in its securities statute. No state has rejected immunity 40 in this context by judicial decision. A number of states have 41 adopted qualified immunity by judicial decision. See, e.g., Eaton 42 Vance Distrib., Inc. v. Ulrich, 692 So.2d 915 (Fla. Dist. Ct. App. 43 1997); Bavarati v. Josephal, Lyon & Ross, Inc., 28 F.3d 704 (7th

1 [588] 168 1 Cir. 1994) (Illinois); Andrews v. Prudential Sec., Inc., 160 F.3d 2 304 (6th Cir. 1998) (Michigan); Prudential Sec., Inc. v. Dalton, 3 929 F. Supp. 1411 (N.D. Okla. 1996) (Oklahoma); Glennon v. 4 Dean Witter Reynolds Inc., 83 F.3d 132 (6th Cir. 1996) 5 (Tennessee). 6 7 South Carolina Reporter’s Comments 8 9 This section is new. It reflects a balance between no immunity 10 from defamation which might deter disclosure of problems with 11 departing employees, as opposed to full immunity which might 12 allow broker-dealers and investment advisers to unfairly 13 characterize employees in order to protect their “book” of clients. 14 Instead, this section establishes a qualified immunity. 15 16 Section 35-1-508. (a) A person that wilfully violates this 17 chapter, or a rule adopted or order issued under this chapter, except 18 Section 35-1-504 or the notice filing requirements of Section 19 35-1-302 or 35-1-405, or that wilfully violates Section 35-1-505 20 knowing that the statement made is false or misleading in a 21 material respect, is guilty of a: 22 (1) felony and, upon conviction, must be fined not more than 23 fifty thousand dollars or imprisoned not more than ten years, or 24 both, if the person’s actions result in loss to an investor of twenty 25 thousand dollars or more; 26 (2) felony and, upon conviction, must be fined in the 27 discretion of the court or imprisoned not more than five years, or 28 both, if the person’s actions result in loss to an investor of more 29 than one thousand dollars but less than twenty thousand dollars; 30 (3) misdemeanor and, upon conviction, must be fined not 31 more than thirty thousand dollars or imprisoned not more than 32 three years, or both, if the person’s actions result in loss to an 33 investor of one thousand dollars or less, or if no losses are proven. 34 An individual convicted of violating a rule or order under this 35 chapter may be fined, but may not be imprisoned, if the individual 36 did not have knowledge of the rule or order. 37 (b) The Securities Commissioner may refer that evidence as is 38 available concerning violations of this chapter or of any rule or 39 order under this chapter to the appropriate Division of the Attorney 40 General’s Office or other appropriate prosecution, law 41 enforcement, or licensing authorities who may institute the 42 appropriate proceedings under this chapter.

1 [588] 169 1 (c) This chapter does not limit the power of this State to punish 2 a person for conduct that constitutes a crime under other laws of 3 this State. 4 5 Official Comments 6 7 Prior Provisions: 1956 Act Section 409; RUSA Section 604; 8 Securities Exchange Act of 1934 Section 32(a). 9 1. This section follows the 1956 Act and the federal securities 10 laws in imposing criminal penalties for any willful violation of the 11 chapter. RUSA Section 604 distinguished between felonies and 12 misdemeanors, limiting willful violations of cease and desist 13 orders to a misdemeanor. 14 2. The term “wilfully” has the same meaning in Section 508 as it 15 did in the 1956 Act. All that is required is proof that a person 16 acted intentionally in the sense that the person was aware of what 17 he or she was doing. Proof of evil motive or intent to violate the 18 law or knowledge that the law was being violated is not required. 19 3. The final sentence of Section 508(a) is based on Section 32(a) 20 of the Securities Exchange Act of 1934, which provides: “[N]o 21 person shall be subject to imprisonment under this section in 22 violation of any rule or regulation if he proves that he had no 23 knowledge of such rule or regulation.” The “no knowledge” clause 24 in Section 508(a) is relevant only to sentencing. The person 25 convicted has the burden of persuasion to prove no knowledge at 26 sentencing. Because this does not impose a burden on the 27 defendant to disprove the elements of a crime, Section 32(a) of the 28 Securities Exchange Act of 1934 has been held not to raise a 29 constitutional problem. United States v. Mandel, 296 F. Supp. 30 1038, 1040 (S.D.N.Y. 1969). 31 4. The appropriate state prosecutor under Section 508(b) may 32 decide whether to bring a criminal action under this statute, 33 another statute, or, when applicable, common law. In certain states 34 the administrator has full or limited criminal enforcement powers. 35 5. This section does not specify maximum dollar amounts for 36 criminal fines, maximum terms for imprisonment, nor the years of 37 limitation, but does provide for each state to specify appropriate 38 magnitudes for criminal fines or maximum terms for 39 imprisonment. 40 6. The definition of willfulness in Comment 2 to Section 508 has 41 been followed by most courts. See, e.g., State v. Hodge, 460 P.2d 42 596, 604 (Kan. 1969) (“No specific intent is necessary to constitute 43 the offense where one violates the securities act except the intent

1 [588] 170 1 to do the act denounced by the statute”); State v. Nagel, 279 2 N.W.2d 911, 915 (S.D. 1979) (“[I]t is widely understood that the 3 legislature may forbid the doing of an act and make its commission 4 a crime without regard to the intent or knowledge of the doer”); 5 State v. Fries, 337 N.W.2d 398, 405 (Neb. 1983) (proof of a 6 specific intent, evil motive, or knowledge that the law was being 7 violated is not required to sustain a criminal conviction under a 8 state’s blue sky law); People v. Riley, 708 P.2d 1359, 1362 (Colo. 9 1985) (“A person acts ‘knowingly’ or ‘wilfully’ with respect to 10 conduct . . . when he is aware that his conduct . . . exists”); State v. 11 Larsen, 865 P.2d 1355, 1358 (Utah 1993) (willful implies a 12 willingness to commit the act, not an intent to violate the law or to 13 injure another or acquire any advantage); State v . Montgomery, 14 17 P.3d 292, 294 (Idaho 2001) (bad faith is not required for a 15 violation of a state securities act; willful implies “simply a 16 purpose or willingness to commit the act or make the omission 17 referred to”); State v. Dumke, 901 S.W.2d 100, 102 (Mo. Ct. App. 18 1995) (mens rea not required); State v. Mueller, 549 N.W.2d 455, 19 460 (Wis. Ct. App. 1996) (willfulness does not require proof that 20 the defendant acted with intent to defraud or knowledge that the 21 law was violated); United States v. Lilley, 291 F. Supp. 989, 993 22 (S.D. Tex. 1968) (“no knowledge” clause in federal statute not 23 available to defendant claiming lack of knowledge of particular 24 SEC rule). 25 26 South Carolina Reporter’s Comments 27 28 1. Subsection (a) is substantially similar to prior law found at 29 former Section 35-1-1590. The anti-fraud remedies apply to all 30 entities and persons, whether or not they are exempt from state 31 registration and reporting requirements. 32 2. Subsection (b) continues and extends the Securities 33 Commissioner’s authority to refer evidence not only to appropriate 34 law enforcement or licensing authorities within this State, 35 including the proper division within the Attorney General’s Office 36 and the Statewide Grand Jury, but also to appropriate authorities in 37 other states. 38 39 Section 35-1-509. (a) Enforcement of civil liability under this 40 section is subject to the Securities Litigation Uniform Standards 41 Act of 1998. 42 (b) A person is liable to the purchaser if the person sells a 43 security in violation of Sections 35-1-301 or 35-1-501 or, by

1 [588] 171 1 means of an untrue statement of a material fact or an omission to 2 state a material fact necessary in order to make the statement 3 made, in light of the circumstances under which it is made, not 4 misleading, the purchaser not knowing the untruth or omission and 5 the seller not sustaining the burden of proof that the seller did not 6 know and, in the exercise of reasonable care, could not have 7 known of the untruth or omission. An action under this subsection 8 is governed by the following: 9 (1) The purchaser may maintain an action to recover the 10 consideration paid for the security, less the amount of any income 11 received on the security, and interest at the legal rate of interest 12 from the date of the purchase, costs, and reasonable attorneys’ fees 13 determined by the court, upon the tender of the security, or for 14 actual damages as provided in paragraph (3). 15 (2) The tender referred to in paragraph (1) may be made any 16 time before entry of judgment. Tender requires only notice in a 17 record of ownership of the security and willingness to exchange 18 the security for the amount specified. A purchaser that no longer 19 owns the security may recover actual damages as provided in 20 paragraph (3). 21 (3) Actual damages in an action arising under this subsection 22 are the amount that would be recoverable upon a tender less the 23 value of the security when the purchaser disposed of it, and interest 24 at the legal rate of interest from the date of the purchase, costs, and 25 reasonable attorneys’ fees determined by the court. 26 (c) A person is liable to the seller if the person buys a security 27 in violation of Section 35-1-501 or by means of an untrue 28 statement of a material fact or omission to state a material fact 29 necessary in order to make the statement made, in light of the 30 circumstances under which it is made, not misleading, the seller 31 not knowing of the untruth or omission, and the purchaser not 32 sustaining the burden of proof that the purchaser did not know, and 33 in the exercise of reasonable care, could not have known of the 34 untruth or omission. An action under this subsection is governed 35 by the following: 36 (1) The seller may maintain an action to recover the security, 37 and any income received on the security, costs, and reasonable 38 attorneys’ fees determined by the court, upon the tender of the 39 purchase price, or for actual damages as provided in paragraph (3). 40 (2) The tender referred to in paragraph (1) may be made any 41 time before entry of judgment. Tender requires only notice in a 42 record of the present ability to pay the amount tendered and 43 willingness to take delivery of the security for the amount

1 [588] 172 1 specified. If the purchaser no longer owns the security, the seller 2 may recover actual damages as provided in paragraph (3). 3 (3) Actual damages in an action arising under this subsection 4 are the difference between the price at which the security was sold 5 and the value the security would have had at the time of the sale in 6 the absence of the purchaser’s conduct causing liability, and 7 interest at the legal rate of interest from the date of the sale of the 8 security, costs, and reasonable attorneys’ fees determined by the 9 court. 10 (d) A person acting as a broker-dealer or agent that sells or 11 buys a security in violation of Section 35-1-401(a), 35-1-402(a), or 12 35-1-506 is liable to the customer. The customer, if a purchaser, 13 may maintain an action for recovery of actual damages as specified 14 in subsections (b)(1) through (3), or, if a seller, for a remedy as 15 specified in subsections (c)(1) through (3). 16 (e) A person acting as an investment adviser or investment 17 adviser representative that provides investment advice regarding 18 securities for compensation in violation of Section 35-1-403(a), 19 35-1-404(a), or 35-1-506 is liable to the client. The client may 20 maintain an action to recover the consideration paid for the advice, 21 interest at the legal rate of interest from the date of payment, costs, 22 and reasonable attorneys’ fees determined by the court. 23 (f) A person that receives directly or indirectly any 24 consideration for providing investment advice regarding securities 25 to another person and that employs a device, scheme, or artifice to 26 defraud the other person or engages in an act, practice, or course of 27 business that operates or would operate as a fraud or deceit on the 28 other person, is liable to the other person. An action under this 29 subsection is governed by the following: 30 (1) The person defrauded may maintain an action to recover 31 the consideration paid for the advice and the amount of any actual 32 damages caused by the fraudulent conduct, interest at the legal rate 33 of interest from the date of the fraudulent conduct, costs, and 34 reasonable attorneys’ fees determined by the court, less the amount 35 of any income received as a result of the fraudulent conduct. 36 (2) This subsection does not apply to a broker-dealer or its 37 agents if the investment advice regarding securities that is 38 provided is solely incidental to transacting business as a 39 broker-dealer and no special compensation is received for the 40 investment advice regarding securities. 41 (g) The following persons are liable jointly and severally with 42 and to the same extent as persons liable under subsections (b) 43 through (f):

1 [588] 173 1 (1) a person that directly or indirectly controls a person 2 liable under subsections (b) through (f), unless the controlling 3 person sustains the burden of proof that the person did not know, 4 and in the exercise of reasonable care could not have known, of the 5 existence of conduct by reason of which the liability is alleged to 6 exist; 7 (2) an individual who is a managing partner, executive 8 officer, or director of a person liable under subsections (b) through 9 (f), including an individual having a similar status or performing 10 similar functions, unless the individual sustains the burden of proof 11 that the individual did not know and, in the exercise of reasonable 12 care could not have known, of the existence of conduct by reason 13 of which the liability is alleged to exist; 14 (3) an individual who is an employee, or a person occupying 15 a similar status or performing a similar function, of a person liable 16 under subsections (b) through (f) and who materially aids the 17 conduct giving rise to the liability, unless the individual sustains 18 the burden of proof that the individual did not know and, in the 19 exercise of reasonable care could not have known, of the existence 20 of conduct by reason of which the liability is alleged to exist; and 21 (4) a person that is a broker-dealer, agent, investment 22 adviser, or investment adviser representative that materially aids 23 the conduct giving rise to the liability under subsections (b) 24 through (f), unless the person sustains the burden of proof that the 25 person did not know and, in the exercise of reasonable care could 26 not have known, of the existence of conduct by reason of which 27 liability is alleged to exist. 28 (5) a person who, with actual knowledge that a person is 29 committing acts sufficient to violate Sections 35-1-501 and 30 35-1-502, nonetheless intentionally furthers the violation with 31 actual awareness that the person is rendering substantial assistance 32 to the person committing the violation of Sections 35-1-501 and 33 35-1-502, thereby becomes an aider and abettor of the violation, 34 and is therefore jointly and severally liable with and to the same 35 extent as the assisted person who engaged in the fraudulent 36 activity, provided, however, this subsection (5) does not require 37 any due diligence investigation nor impose liability for failure to 38 perform any due diligence investigation otherwise required. 39 (h) A person liable under this section has a right of 40 contribution as in cases of contract against any other person liable 41 under this section for the same conduct. 42 (i) A cause of action under this section survives the death of 43 an individual who might have been a plaintiff or defendant.

1 [588] 174 1 (j) A person may not obtain relief: 2 (1) under subsection (b) for violation of Section 35-1-301, or 3 under subsection (d) or (e), unless the action is instituted within 4 three years after the violation occurred; or 5 (2) under subsection (b), other than for violation of Section 6 35-1-301, or under subsection (c) or (f), unless the action is 7 instituted within the earlier of three years after discovery of the 8 facts constituting the violation or five years after the violation. 9 (k) A person that has made, or has engaged in the performance 10 of, a contract in violation of this chapter or a rule adopted or order 11 issued under this chapter, or that has acquired a purported right 12 under the contract with knowledge of conduct by reason of which 13 its making or performance was in violation of this chapter, may not 14 base an action on the contract. 15 (l) A condition, stipulation, or provision including, but not 16 limited to, any choice of law provision directly or indirectly 17 binding a person purchasing or selling a security or receiving 18 investment advice regarding securities to waive compliance with 19 this chapter or a rule adopted or order issued under this chapter is 20 void. 21 (m) The rights and remedies provided by this chapter are in 22 addition to any other rights or remedies that may exist, but this 23 chapter does not create a cause of action not specified in this 24 section or Section 35-1-411(e). 25 26 Official Comments 27 28 Prior Provisions: 1956 Act Section 410; RUSA Sections 29 605-607, 609, 802. 30 1. Under Section 509 violations of two or more sections can be 31 proven, but the remedy is limited either to rescission or actual 32 damages. Actual damages means compensatory damages. 33 Punitive or “double” damages are not provided by this section 34 which also is the standard under Section 28(a) of the Securities 35 Exchange Act of 1934. See 9 Louis Loss & Joel Seligman, 36 Securities Regulation 4408-4427 (3d ed. rev. 1992). 37 2. The Securities Litigation Uniform Standards Act of 1998 38 cited in Section 509(a) modifies the entire Section 509. 39 3. As with Section 12(a)(2) of the Securities Act of 1933, 40 Section 509(b) contains a type of privity requirement in that the 41 purchaser is required to bring an action against the seller. Section 42 509(b) is broader than Section 12(a)(2) in that it will reach all sales 43 in violation of Section 301, not just sales “by means of a

1 [588] 175 1 prospectus” as is the law under Section 12(a)(2). See Gustafson v. 2 Alloyd Co., Inc., 513 U.S. 561 (1995). 3 4. Unlike the current standards on implied rights of action under 4 Rule 10b-5, neither causation nor reliance has been held to be an 5 element of a private cause of action under the precursor to Section 6 509(b). See Gerhard W. Gohler, IRA v. Wood, 919 P.2d 561 7 (Utah 1996); Ritch v. Robinson-Humprhey Co., 748 So. 2d 861 8 (Ala. 1999); Kaufman v. I-Stat Corp., 754 A.2d 1188 (N.J. 2000). 9 5. The measure of damages in Section 509(b)(3) is that 10 contemplated by Section 12 of the Securities of 1933. See 9 Louis 11 Loss and Joel Seligman, Securities Regulations 4242-4246 (3d ed. 12 1992). The measure of damages in Section 509(c)(3), however, is 13 that contemplated by Rule 10b-5. Sec. 9 id. 4408-4427. In 14 providing for damages as an alternative to rescission, Section 15 509(b)(3) follows the 1956 Act and is an improvement upon many 16 earlier state provisions, which conditioned the plaintiff’s right of 17 recovery on his or her being in a position to make a good tender. 18 A plaintiff is not given the right under this type of statutory 19 formula to retain stock and also seek damages. 20 6. Sections 509(e) and (f) are based on a proposed NASAA 21 amendment to the Uniform Securities Act adopted in order “to 22 establish civil liability for individuals who wilfully violate Section 23 102 dealing with fraudulent practices pertaining to advisory 24 activities.” Neither provision is intended to limit other state law 25 claims for providing investment advice. 26 7. Broker-dealer employees, including research analysts, who 27 receive no special compensation from third parties for investment 28 advice would not be liable under Section 509(f). 29 8. The control liability provision in Section 509(g)(1) is modeled 30 on that in the 1956 Act. On the meaning of “control,” see 4 Louis 31 Loss & Joel Seligman, Securities Regulations 1703-1727 (3d ed. 32 rev. 2000). 33 9. The defense of lack of knowledge in Sections 509(g) is also 34 modeled on the 1956 Act. 35 10. Under Section 509(g)(2) partners, officers, and directors 36 are liable, subject to the defense afforded by that subsection, 37 without proof that they aided in the sale. In Section 509(g)(2), the 38 term “partner” is intended to be limited to partners with 39 management responsibilities, rather than a partner with a passive 40 investment. 41 11. Under 509(g)(4), the performance by a clearing broker of 42 the clearing broker’s contractual functions – even though 43 necessary to the processing of a transaction – without more would

1 [588] 176 1 not constitute material aid or result in liability under this 2 subsection. See, e.g., Ross v. Bolton, 904 F.2d 819 (2d Cir. 1990). 3 12. The “reasonable attorneys’ fees” specified in Section 509 4 are permissive, not mandatory. See, e.g., Andrews v. Blue, 489 5 F.2d 367, 377 (10th Cir. 1973), (Colorado statute). 6 13. The contribution provision in Section 509(h) is a safeguard 7 to avoid the common law principle that prohibited contribution 8 among joint tortfeasors. 9 14. The statute of limitations in Section 509(j) is a hybrid of 10 the 1956 Act and federal securities law approaches. The 1956 Act 11 Section 410(p) provided that: “No person may sue under this 12 section more than two years after the contract of sale.” Under this 13 provision, the state courts generally decline to extend a statute of 14 limitations period on grounds of fraudulent concealment or 15 equitable tolling. 16 Before the July 2002 enactment of the Sarbanes-Oxley Act, 17 Rule 10b-5 of the Securities Exchange Act as construed by the 18 United States Supreme Court in Lampf, Pleva, Lipkind, Prepis & 19 Petigrew v. Gilbertson, 501 U.S. 350 (1991), prohibited equitable 20 tolling under the federal securities law one year after discovery and 21 three years after the act formula. See generally 10 Louis Loss & 22 Joel Seligman, Securities Regulation 4505-4525 (3d. ed. rev. 23 1996). The Sarbanes-Oxley Act added 28 U.S.C. Section 1658(b) 24 which provides 25 . . . a private right of action that involves a claim of fraud, deceit, 26 manipulation, or contrivance in contravention of a regulatory 27 requirement concerning the securities laws, as defined in section 28 3(a)(47) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a) 29 (47)), may be brought not later than the earlier of --- 30 (1) 2 years after the discovery of the facts constituting the 31 violation; or 32 (2) 5 years after such violation. 33 Section 509(j)(1), as with the 1956 Act, is a unitary statute of 34 repose, requiring an action to be commenced within one year after 35 a violation occurred. It is not intended that equitable tolling be 36 permitted. 37 Section 509(j)(2), in contrast, generally follows the federal 38 securities law model. An action must be brought within the earlier 39 of two years after discovery or five years after the violation. As 40 with federal courts construing the statute of limitations under Rule 41 10b-5, it is intended that the plaintiff’s right to proceed is limited 42 to two years after actual discovery “or after such discovery should 43 have been made by the exercise of reasonable diligence” (inquiry

1 [588] 177 1 notice), see, e.g., Law v. Medco Research, Inc., 113 F.3d 781 (7th 2 Cir. 1997), or five years after the violation. 3 The rationale for replicating the basic federal statute of 4 limitations in this chapter is to discourage forum shopping. If the 5 statute of limitations applicable to Rule 10b-5 were to be changed 6 in the future, identical changes should be made in Section 509(j) 7 (2). 8 15. Section 509(k) is similar to Section 29(b) of the Securities 9 Exchange Act and is intended to apply only to actions to enforce 10 illegal contracts. See Louis Loss, Commentary on the Uniform 11 Securities Act 150 (1976). 12 16. Section 509(m) follows the 1956 Act. 13 17. Section 509 and Section 411(e) provide the exclusive 14 private causes of action under this chapter. 15 16 South Carolina Reporter’s Comments 17 18 1. This section rewrites prior law found at former Section 19 35-1-1490 through Section 35-1-1560. The anti-fraud remedies 20 apply to all entities and persons, whether or not they are exempt 21 from state registration and reporting requirements. 22 2. Subsections (a), (e) and (f) reflect preemptive changes added 23 as a result of the Securities Litigation Uniform Standards Act of 24 1998 (SLUSA). 25 3. Subsection (b) is substantially similar to prior law found at 26 former Section 35-1-1490 and 35-1-1510; however, South 27 Carolina added a reference to Section 501 in subsections 509(b) 28 and (c) in order to ensure there is no gap in fraud liability. In 29 Gordon v. Drews, 358 S. C. 598, 595 S.E.2d 864 (Ct. App. 2004), 30 the Court of Appeals refused to apply the doctrine of laches where 31 the tender offer was made four years after the defendant ceased 32 operations. Since the tender was made during trial, it fell within 33 the provisions of former Section 35-1-1510, and therefore laches 34 would not bar the relief. 35 4. South Carolina also adopted the proposed alternative 36 concerning “legal rate of interest” throughout Section 35-1-509. 37 5. Subsection (c) is new in that the chapter is expanded to cover 38 those who sell to a buyer who violates the chapter. The remedy is 39 either rescission or damages. 40 6. Subsections (d), (e), and (f) are new. 41 7. South Carolina clarified Section 35-1-509(g)(3) by removing 42 the phrase “associated with” and replacing it with an individual 43 who is an employee, or occupying a similar status or performing a

1 [588] 178 1 similar purpose. The change was made to eliminate an 2 interpretation of the “associated with” language as creating an 3 unintended “aider and abettor” liability. 4 8. South Carolina, by a close vote within the task force that 5 studied the Uniform Securities Act, added a new item (g)(5) which 6 adopts aider and abettor liability for violations of Sections 7 35-1-501 and 35-1-502. This subsection is a departure from prior 8 law, found at former Section 35-1-1500, and from the draft of the 9 Uniform Securities Act propounded by the National Conference of 10 Commissioners on Uniform State Laws. Item (g)(5) adopts the 11 “actual knowledge” and “actual awareness” standards in lieu of 12 “reckless disregard,” “constructive knowledge,” or mere 13 “knowledge.” This subsection also states that it cannot be read to 14 create a duty of due diligence where one does not already exist nor 15 can it be read to create liability for mere failure to exercise due 16 diligence where a requirement exists. 17 In adopting the aider and abettor liability, South Carolina was 18 concerned that innocent parties might be named as defendants 19 without a factual basis for believing those parties had “actual 20 knowledge” or “actual awareness” of the fraudulent conduct. 21 South Carolina adopted this provision based upon the expectation 22 that the Rule 9(b), S.C.R.Civ.P. pleading particularity 23 requirements would be applicable. While the last sentence of Rule 24 9(b) states “knowledge, and other conditions of mind may be 25 averred generally,” South Carolina notes that Rule 11 states that 26 the signature on a pleading certifies that “to the best of his 27 knowledge, information and belief that there is good ground to 28 support it.” South Carolina adopted this new subsection because it 29 understood a complaining party would have to demonstrate a 30 factual basis for those assertions. 31 The balance of subsection (g) is similar to prior law found at 32 former Section 35-1-1500. With respect to “control person” 33 liability, the Supreme Court has not determined what test to use in 34 determining “control person” liability. In Atlanta Skin & Cancer 35 Clinic, P. C. v. Hallmark General Partners, Inc., 320 S. C. 113, 463 36 S.E.2d 600 (1995), the Court held that a lender was not a “control 37 person” under either the Metze v. Baehler, 762 F.2d 621 (8th Cir. 38 1985), cert. denied, 474 U. S. 1057 and cert. denied 474 &. S. 39 1072, or the Orloff v. Allman, 819 F.2d 904 (9th Cir. 1987) tests 40 used by the federal courts. 41 9. Subsection (h), providing for the right of contribution, is 42 substantially similar to prior law found at former Section 43 35-1-1500.

1 [588] 179 1 10. Subsection (i) represents a continuation of prior law found 2 at former Section 35-1-1520. 3 11. Proposed subsection (j) provided a statute of limitations 4 representing a substantial departure from prior law found at former 5 Section 35-1-1530. Claims for violations of registration 6 requirements for securities (Section 301); broker-dealers and 7 agents [subsection (d)]; and investment advisers/investment 8 adviser representatives [subsection (e)], would have had to be 9 brought within one year after the violation occurred. Claims for 10 securities fraud [subsections (b) and (c)] and investment adviser 11 fraud [subsection (f)], would have had to be brought within two 12 years after discovery or five years after the violation. South 13 Carolina therefore modified the proposed statute of limitations in 14 Section 509(j) to conform to the current statute of limitations in 15 order not to weaken protections for defrauded investors. 16 12. Subsection (k) is substantially similar to prior law found at 17 former Section 35-1-1540. 18 13. Subsection (l) is substantially similar to prior law found at 19 former Section 35-1-1550. In Section 509(l), South Carolina 20 added choice of law provisions to specifically address the holding 21 in Lybrand v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 321 22 S.C. 70, 467 S.E.2d 745 (Ct. App. 1996), which could be 23 interpreted to allow a waiver of the prior act’s protections pursuant 24 to a choice of law provision. 25 14. Subsection (m) is substantially similar to prior law found at 26 former Section 35-1-1560. In Atlanta Skin & Cancer Clinic, P. C. 27 v. Hallmark General Partners, Inc., 320 S. C. 113, 463 S.E.2d 600 28 (1995), the Supreme Court, based upon former Section 35-1-1560, 29 held that there was no implied cause of action for aiding and 30 abetting violations of the former act, beyond the express remedy in 31 the former Section 35-1-1500 for statutory aiders and abetters. 32 33 Section 35-1-510. A purchaser, seller, or recipient of 34 investment advice regarding securities may not maintain an action 35 under Section 35-1-509 if: 36 (1) The purchaser, seller, or recipient of investment advice 37 regarding securities receives in a record, before the action is 38 instituted: 39 (A) an offer stating the respect in which liability under 40 Section 35-1-509 may have arisen and fairly advising the 41 purchaser, seller, or recipient of investment advice regarding 42 securities of that person’s rights in connection with the offer, and 43 any financial or other information necessary to correct all material

1 [588] 180 1 misrepresentations or omissions in the information that was 2 required by this chapter to be furnished to that person at the time 3 of the purchase, sale, or investment advice regarding securities; 4 (B) if the basis for relief under this section may have been a 5 violation of Section 35-1-509(b), an offer to repurchase the 6 security for cash, payable on delivery of the security, equal to the 7 consideration paid, including without limitation all commissions 8 and fees, and interest at the legal rate of interest from the date of 9 the purchase, less the amount of any income received on the 10 security, or, if the purchaser no longer owns the security, an offer 11 to pay the purchaser upon acceptance of the offer damages in an 12 amount that would be recoverable upon a tender, less the value of 13 the security when the purchaser disposed of it, and interest at the 14 legal rate of interest from the date of the purchase in cash equal to 15 the damages computed in the manner provided in this subsection; 16 (C) if the basis for relief under this section may have been a 17 violation of Section 35-1-509(c), an offer to tender the security, on 18 payment by the seller of an amount equal to the purchase price 19 paid, less income received on the security by the purchaser and 20 interest at the legal rate of interest from the date of the sale; or if 21 the purchaser no longer owns the security, an offer to pay the seller 22 upon acceptance of the offer, in cash, damages in the amount of 23 the difference between the price at which the security was 24 purchased and the value the security would have had at the time of 25 the purchase in the absence of the purchaser’s conduct that may 26 have caused liability and interest at the legal rate of interest from 27 the date of the sale; 28 (D) if the basis for relief under this section may have been a 29 violation of Section 35-1-509(d); and if the customer is a 30 purchaser, an offer to pay as specified in subparagraph (B); or, if 31 the customer is a seller, an offer to tender or to pay as specified in 32 subparagraph (C); 33 (E) if the basis for relief under this section may have been a 34 violation of Section 35-1-509(e), an offer to reimburse in cash the 35 consideration paid for the advice and interest at the legal rate of 36 interest from the date of payment; or 37 (F) if the basis for relief under this section may have been a 38 violation of Section 35-1-509(f), an offer to reimburse in cash the 39 consideration paid for the advice, the amount of any actual 40 damages that may have been caused by the conduct, and interest at 41 the legal rate of interest from the date of the violation causing the 42 loss;

1 [588] 181 1 (2) the offer under paragraph (1) states that it must be accepted 2 by the purchaser, seller, or recipient of investment advice 3 regarding securities within 30 days after the date of its receipt by 4 the purchaser, seller, or recipient of investment advice or any 5 shorter period, of not less than three days, that the Securities 6 Commissioner, by order, specifies; 7 (3) the offeror has the present ability to pay the amount offered 8 or to tender the security under paragraph (1); 9 (4) the offer under paragraph (1) is delivered to the purchaser, 10 seller, or recipient of investment advice, or sent in a manner that 11 ensures receipt by the purchaser, seller, or recipient of investment 12 advice; and 13 (5) the purchaser, seller, or recipient of investment advice that 14 accepts the offer under paragraph (1) in a record within the period 15 specified under paragraph (2) is paid in accordance with the terms 16 of the offer. 17 18 Official Comments 19 20 Prior Provisions: 1956 Act Section 410(e); RUSA Section 607. 21 1. A rescission offer must meet the specific requirements of 22 Section 510 for civil liability under Section 509 to be extinguished. 23 Cf. Binder v. Gordian Sec., Inc., 742 F. Supp. 663, 666 (N.D. 24 Ga. 1990). See generally Rowe, Rescission Offers under Federal 25 and State Securities Law, 12 J. Corp. L. 383 (1987). 26 2. A rescission offer that does not comply with Section 510 is 27 subject to civil liability, administrative enforcement, or criminal 28 penalties under this chapter. A rescission offer, for example, could 29 violate Section 501, the general fraud provision. 30 3. The administrator may publish a form that would comply with 31 Section 510, but the form would not be the only one that could be 32 used by the parties. 33 4. A valid rescission offer will be exempt from securities 34 registration. See Section 202(19). 35 5. If a state chooses to add a notice or filing provision, it could 36 provide this provision in Section 510(6), which would state: 37 (6) The offer [or a notice] is required to be filed with the 38 administrator 10 business days before the offering and conform in 39 form and content with a rule prescribed by the administrator. 40 41 South Carolina Reporter’s Comments 42

1 [588] 182 1 1. This section revises prior law found at Section 35-1-1530. 2 The new provision offers more detail on the procedures to be used 3 in different situations. 4 2. South Carolina added language to the proposed chapter 5 clarifying in Section 35-1-510(10)(B), that the “consideration 6 paid” includes all commissions and fees. 7 3. South Carolina also adopted the “legal rate of interest” 8 measure for Section 35-1-510. 9 10 Article 6 11 12 Administration and Judicial Review 13 14 Section 35-1-601. (a) This chapter shall be administered by 15 the Attorney General who shall be ex officio the Securities 16 Commissioner and who may employ such additional assistants as 17 he deems necessary. The Securities Commissioner may delegate 18 any or all of his duties pursuant to this chapter to members of his 19 staff, as he deems necessary or appropriate. 20 (b) It is unlawful for the Securities Commissioner or an officer, 21 employee, or designee of the Securities Commissioner to use for 22 personal benefit or the benefit of others records or other 23 information obtained by or filed with the Securities Commissioner 24 that are not public under Section 35-1-607(b). This chapter does 25 not authorize the Securities Commissioner or an officer, employee, 26 or designee of the Securities Commissioner to disclose the record 27 or information, except in accordance with Section 35-1-602, 28 35-1-607(c), or 35-1-608. 29 (c) This chapter does not create or diminish a privilege or 30 exemption that exists at common law, by statute or rule, or 31 otherwise. 32 (d) The Securities Commissioner may develop and implement 33 investor education initiatives to inform the public about investing 34 in securities, with particular emphasis on responsible investing and 35 on the prevention and detection of securities fraud. In developing 36 and implementing these initiatives, the Securities Commissioner 37 may collaborate with public and nonprofit organizations with an 38 interest in investor education. The Securities Commissioner may 39 accept grants or donations to develop and implement investor 40 education initiatives. This subsection does not authorize the 41 Securities Commissioner to require participation or monetary 42 contributions of a registrant in an investor education program. 43

1 [588] 183 1 Official Comments 2 3 Prior Provisions: 1956 Act Section 406; RUSA Sections 4 701-702. 5 1. Section 601(b) should be read with Section 607. Section 6 601(b) prohibits the administrator or the administrator’s officers 7 and employees from using for personal benefit records or 8 information that Section 607(b) specifies do not constitute public 9 records. Section 601(b) is not intended to limit the operation of 10 Section 607(a). Neither Section 601(b) nor 607(b) is intended to 11 impede the ability of the agencies specified in Section 608(a) from 12 sharing records or other information in connection with an 13 examination or an investigation. 14 2. Section 601(c) makes clear that nothing in this chapter alters 15 the availability of evidentiary privileges. That question is left to 16 the general law of the particular state. 17 3. Sections 601(d) and (e) were adopted in recognition of the 18 importance of investor education. An increasing number of 19 jurisdictions are earmarking specific funds for this purpose. The 20 lack of financial acumen among public investors, seniors, and 21 students continues to be demonstrated in recent industry and 22 regulatory studies. The importance of investor financial literacy is 23 increasingly crucial given the decades long shift from defined 24 benefit retirement plans toward defined contribution plans where 25 employees are left to direct their own retirement accounts. 26 27 South Carolina Reporter’s Comments 28 29 1. Section 35-1-601(a): This section varies from the uniform 30 text. It continues current law which provides that the Attorney 31 General acts as the ex officio Securities Commissioner and 32 specifically allows the delegation of those duties to staff. 33 2. Section 35-1-601(b): This section continues prior law. 34 3. Section 35-1-601(c): This section is substantially similar to 35 prior law found at former Section 35-1-1560. 36 4. Section 35-1-601(d): This is a change in existing law to allow 37 the Securities Commissioner to develop investor education 38 programs through grants or donations. The uniform text includes 39 an optional provision, Section 601(e), which is not adopted, which 40 would have provided funding for such programs through the 41 application of civil penalties paid to the Securities Commissioner. 42

1 [588] 184 1 Section 35-1-602. (a) The Securities Commissioner may: 2 (1) conduct public or private investigations within or outside 3 of this State which the Securities Commissioner considers 4 necessary or appropriate to determine whether a person has 5 violated, is violating, or is about to violate this chapter or a rule 6 adopted or order issued under this chapter, or to aid in the 7 enforcement of this chapter or in the adoption of rules and forms 8 under this chapter; 9 (2) require or permit a person to testify, file a statement, or 10 produce a record, under oath or otherwise as the Securities 11 Commissioner determines, as to all the facts and circumstances 12 concerning a matter to be investigated or about which an action or 13 proceeding is to be instituted; and 14 (3) publish a record concerning an action, proceeding, or an 15 investigation under, or a violation of, this chapter or a rule adopted 16 or order issued under this chapter if the Securities Commissioner 17 determines it is necessary or appropriate in the public interest and 18 for the protection of investors. 19 (b) For the purpose of an investigation under this chapter, the 20 Securities Commissioner or its designated officer may administer 21 oaths and affirmations, subpoena witnesses, seek compulsion of 22 attendance, take evidence, require the filing of statements, and 23 require the production of any records that the Securities 24 Commissioner considers relevant or material to the investigation. 25 (c) If a person does not appear or refuses to testify, file a 26 statement, produce records, or otherwise does not obey a subpoena 27 as required by the Securities Commissioner under this chapter, the 28 Securities Commissioner may apply to the Richland County Court 29 of Common Pleas or a court of another State to enforce 30 compliance. The court may: 31 (1) hold the person in contempt; 32 (2) order the person to appear before the Securities 33 Commissioner; 34 (3) order the person to testify about the matter under 35 investigation or in question; 36 (4) order the production of records; 37 (5) grant injunctive relief, including restricting or prohibiting 38 the offer or sale of securities or the providing of investment advice 39 regarding securities; 40 (6) impose a civil penalty of not less than $500 and not 41 greater than $5,000 for each violation; and 42 (7) grant any other necessary or appropriate relief.

1 [588] 185 1 (d) This section does not preclude a person from applying to 2 the Richland County Court of Common Pleas or a court of another 3 State for relief from a request to appear, testify, file a statement, 4 produce records, or obey a subpoena. 5 (e) An individual is not excused from attending, testifying, 6 filing a statement, producing a record or other evidence, or 7 obeying a subpoena of the Securities Commissioner under this 8 chapter or in an action or proceeding instituted by the Securities 9 Commissioner under this chapter on the ground that the required 10 testimony, statement, record, or other evidence, directly or 11 indirectly, may tend to incriminate the individual or subject the 12 individual to a criminal fine, penalty, or forfeiture. If the 13 individual refuses to testify, file a statement, or produce a record or 14 other evidence on the basis of the individual’s privilege against 15 self-incrimination, the Securities Commissioner may apply to the 16 Richland County Court of Common Pleas to compel the testimony, 17 the filing of the statement, the production of the record, or the 18 giving of other evidence. The testimony, record, or other evidence 19 compelled under such an order may not be used, directly or 20 indirectly, against the individual in a criminal case, except in a 21 prosecution for perjury or contempt or otherwise failing to comply 22 with the order. 23 (f) At the request of the securities regulator of another State or 24 a foreign jurisdiction, the Securities Commissioner may provide 25 assistance if the requesting regulator states that it is conducting an 26 investigation to determine whether a person has violated, is 27 violating, or is about to violate a law or rule of the other State or 28 foreign jurisdiction relating to securities matters that the requesting 29 regulator administers or enforces. The Securities Commissioner 30 may provide the assistance by using the authority to investigate 31 and the powers conferred by this section as the Securities 32 Commissioner determines is necessary or appropriate. The 33 assistance may be provided without regard to whether the conduct 34 described in the request would also constitute a violation of this 35 chapter or other law of this State if occurring in this State. In 36 deciding whether to provide the assistance, the Securities 37 Commissioner may consider whether the requesting regulator is 38 permitted and has agreed to provide assistance reciprocally within 39 its State or foreign jurisdiction to the Securities Commissioner on 40 securities matters when requested; whether compliance with the 41 request would violate or prejudice the public policy of this State; 42 and the availability of resources and employees of the Securities 43 Commissioner to carry out the request for assistance.

1 [588] 186 1 2 Official Comments 3 Prior Provisions: 1956 Act Section 407; RUSA Section 601. 1. 4 Sections 602 (a) and (b) follow the 1956 Act, which was 5 modeled generally on Sections 21(a) through (d) of the Securities 6 Exchange Act of 1934 as it then read. 7 2. Standards for issuance of subpoenas have been generally 8 established in federal and state securities law. See, e.g., 10 Louis 9 Loss & Joel Seligman, Securities Regulation 4917-4937 (3d ed. 10 rev. 1996) (discussing Oklahoma Press Pub. Co. v. Walling, 327 11 U.S. 186 (1946) and other cases). The scope of subpoena 12 enforcement in each state is a general matter for judicial 13 determination. Under Section 602, an individual subpoenaed to 14 testify by the administrator is not compelled to testify within the 15 meaning of these sections simply by service of a subpoena. Under 16 Section 602(b) the individual can be subpoenaed and compelled to 17 attend. Once in attendance an individual can assert an evidentiary 18 privilege or exemption, see Section 601(c), including the Fifth 19 Amendment privilege against self-incrimination. If an individual 20 refuses to testify or give evidence, the administrator may apply (or 21 have the appropriate State attorney apply) to the appropriate court 22 for the relief specified in Section 602(c). If the individual invokes 23 the privilege against self-incrimination, Section 602(d) allows the 24 administrator to apply to the appropriate court to compel testimony 25 under the “use immunity” provision barring the record compelled 26 or other evidence obtained from being used in a criminal case. See 27 People v. District Co. of Arapahoe County, 894 P.2d 739 (Colo. 28 1995). The phrase “directly or indirectly” in Section 602(e) is 29 intended to include testimony, other evidence, or other information 30 derived from immunized testimony, statements, records, or 31 evidence. 32 3. Section 602 is intended to apply generally to securities offers 33 and sales under Article 3 and broker-dealer and investment adviser 34 activity under Article 4, when there is noncompliance with the first 35 sentence of Section 602(c). This subsection does not limit the 36 powers of an administrator under other provisions of this chapter. 37 4. A court may quash a subpoena for good cause under Section 38 602(d). The court may decline to enforce a subpoena that is 39 arbitrary, capricious, or oppressive. 40 5. Where appropriate under Section 602(f), an administrator 41 could move to authorize admission of a requesting state’s attorney 42 under existing pro hac vice rules.

1 [588] 187 1 6. Section 602(f) is consistent with the Securities Litigation 2 Uniform Standard Act of 1998 which provides in Section 102(e): 3 The Securities and Exchange Commission, in consultation with 4 State securities commissions (or any agencies or offices 5 performing like functions), shall seek to encourage the adoption of 6 State laws providing for reciprocal enforcement by State securities 7 commissions of subpoenas issued by another State securities 8 commission seeking to compel persons to attend, testify in, or 9 produce documents or records in connection with an action or 10 investigation by a State securities commission of an alleged 11 violation of State securities laws. 12 7. There are limitations on financial institutions being subject to 13 visitorial powers by State officials, such as those affecting national 14 banks contained in 12 U.S.C. 484 and 12 C.F.R. Sec. 7.4000. Law 15 outside this chapter may place similar limits on state chartered 16 financial institutions being subjected to visitorial powers. This 17 chapter does not negate these limitations. 18 19 South Carolina Reporter’s Comments 20 21 1. Section 35-1-602(a): This provision continues existing law. 22 2. Section 35-1-602(b): This provision continues existing law. 23 3. Section 35-1-602(c): This provision for the enforcement of 24 subpoenas generally follows existing law. Application for 25 enforcement or contempt should be made to the Richland County 26 Court of Common Pleas or the court of another State where 27 appropriate. This section modifies monetary penalties. Current 28 law provides for a court imposed sanction of up to Three Thousand 29 Dollars for a bad faith failure to comply with a subpoena. 30 4. Section 35-1-602(d): This provision clarifies the right of a 31 subpoenaed party to seek relief from an appropriate court. 32 5. Section 35-1-602(e): This provision provides a clarification of 33 the procedure for obtaining use immunity, but it does not change 34 current law which provides for it. 35 6. Section 35-1-602(f): This provision makes explicit the 36 inherent powers of the Attorney General to cooperate with 37 securities regulators from other jurisdictions in their investigations. 38 39 Section 35-1-603. (a) If the Securities Commissioner believes 40 that a person has engaged, is engaging, or is about to engage in an 41 act, practice, or course of business constituting a violation of this 42 chapter or a rule adopted or order issued under this chapter or that 43 a person has, is, or is about to engage in an act, practice, or course

1 [588] 188 1 of business that materially aids a violation of this chapter or a rule 2 adopted or order issued under this chapter, the Securities 3 Commissioner may maintain an action in the Richland County 4 Court of Common Pleas to enjoin the act, practice, or course of 5 business and to enforce compliance with this chapter or a rule 6 adopted or order issued under this chapter. 7 (b) In an action under this section and on a proper showing, the 8 court may: 9 (1) issue a permanent or temporary injunction, restraining 10 order, or declaratory judgment; 11 (2) order other appropriate or ancillary relief, which may 12 include: 13 (A) an asset freeze, accounting, writ of attachment, writ of 14 general or specific execution, and appointment of a receiver or 15 conservator, that may be the Securities Commissioner, for the 16 defendant or the defendant’s assets; 17 (B) ordering the Securities Commissioner to take charge 18 and control of a defendant’s property, including investment 19 accounts and accounts in a depository institution, rents, and 20 profits; to collect debts; and to acquire and dispose of property; 21 (C) imposing a civil penalty in an amount not to exceed 22 ten thousand dollars for each violation; an order of rescission, 23 restitution, or disgorgement directed to a person that has engaged 24 in an act, practice, or course of business constituting a violation of 25 this chapter or the predecessor chapter or a rule adopted or order 26 issued under this chapter or the predecessor chapter; and 27 (D) ordering the payment of prejudgment and 28 postjudgment interest; or 29 (3) order such other relief as the court considers 30 appropriate. 31 (c) The Securities Commissioner may not be required to post a 32 bond in an action or proceeding under this chapter. 33 34 Official Comments 35 36 Prior Provisions: 1956 Act Section 408; RUSA Section 603 37 1. Section 408 of the 1956 Act was limited to injunctions. This 38 Section follows RUSA in broadening the civil remedies available 39 when the administrator believes that a violation has occurred. A 40 primary purpose of a broad range of potential sanctions is to 41 enable administrators to better tailor appropriate sanctions to 42 particular misconduct.

1 [588] 189 1 2. The administrator alternatively may proceed to seek 2 administrative enforcement under Section 604; to deny, suspend, 3 or revoke a securities registration under Section 306; or to deny, 4 suspend, revoke, or take other action against a broker-dealer, 5 agent, investment adviser, or investment adviser representative 6 registration under Section 412. 7 3. Constitutional due process considerations can also be 8 addressed by rulemaking or incorporation of the applicable 9 administrative procedure act provisions of each jurisdiction. The 10 term “upon a proper showing” has a settled meaning in the federal 11 securities laws. See, e.g., Securities Act of 1933 Section 20(b). 12 4. As with Sections 509(g)(3) and (4), materially aid in Section 13 603(a) does not include ministerial or clerical acts. 14 15 South Carolina Reporter’s Comments 16 17 1. Section 35-1-603(a): This provision continues prior law. 18 Along with Section 35-1-604, Section 35-1-603 allows the 19 Attorney General to act in the event of violations not subject to 20 Sections 35-1-306 or 35-1-412, but also offers an alternative where 21 those sections are applicable. The venue provision in this section 22 continues current law which provides that civil actions are to be 23 brought in the Richland County Court of Common Pleas. 24 2. Section 35-1-603(b): This section expands the relief available 25 to the Attorney General in a civil action, but is only one of several 26 options available when there have been violations of the chapter. 27 The range of civil penalty is up to each State adopting the 2002 28 USA. There is a provision allowing the court to fashion 29 appropriate relief, which is new. 30 3. Section 35-1-603(c): This provision continues existing law. 31 32 Section 35-1-604. (a) If the Securities Commissioner 33 determines that a person has engaged, is engaging, or is about to 34 engage in an act, practice, or course of business constituting a 35 violation of this chapter or a rule adopted or order issued under this 36 chapter or that a person has materially aided, is materially aiding, 37 or is about to materially aid an act, practice, or course of business 38 constituting a violation of this chapter or a rule adopted or order 39 issued under this chapter, the Securities Commissioner may: 40 (1) issue an order directing the person to cease and desist 41 from engaging in the act, practice, or course of business or to take 42 other action necessary or appropriate to comply with this chapter;

1 [588] 190 1 (2) issue an order denying, suspending, revoking, or 2 conditioning the exemptions for a broker-dealer under Section 3 35-1-401(b)(1)(D) or (F) or an investment adviser under Section 4 35-1-403(b)(1)(C); or 5 (3) issue an order under Section 35-1-204. 6 (b) An order under subsection (a) is effective on the date of 7 issuance. Upon issuance of the order, the Securities Commissioner 8 shall promptly serve each person subject to the order with a copy 9 of the order and a notice that the order has been entered. The order 10 must include a statement of any civil penalty or costs of 11 investigation the Securities Commissioner will seek, a statement of 12 the reasons for the order, and notice that, within 15 days after 13 receipt of a request in a record from the person, the matter will be 14 scheduled for a hearing. If a person subject to the order does not 15 request a hearing and none is ordered by the Securities 16 Commissioner within 30 days after the date of service of the order, 17 the order, which may include a civil penalty or costs of the 18 investigation if a civil penalty or costs were sought becomes final 19 as to that person by operation of law. If a hearing is requested or 20 ordered, the Securities Commissioner, after notice of and 21 opportunity for hearing to each person subject to the order, may 22 modify or vacate the order or extend it until final determination. 23 (c) If a hearing is requested or ordered pursuant to subsection 24 (b), a hearing must be held. A final order may not be issued unless 25 the Securities Commissioner makes findings of fact and 26 conclusions of law in a record. The final order may make final, 27 vacate, or modify the order issued under subsection (a). 28 (d) In a final order under subsection (c), the Securities 29 Commissioner may impose a civil penalty in an amount not to 30 exceed $10,000 for each violation. 31 (e) In a final order, the Securities Commissioner may charge 32 the actual cost of an investigation or proceeding for a violation of 33 this chapter or a rule adopted or order issued under this chapter. 34 (f) If a petition for judicial review of a final order is not filed 35 in accordance with Section 35-1-609, the Securities Commissioner 36 may file a certified copy of the final order with the clerk of a court 37 of competent jurisdiction. The order so filed has the same effect as 38 a judgment of the court and may be recorded, enforced, or satisfied 39 in the same manner as a judgment of the court. 40 (g) If a person does not comply with an order under this 41 section, the Securities Commissioner may petition a court of 42 competent jurisdiction to enforce the order. The court may not 43 require the Securities Commissioner to post a bond in an action or

1 [588] 191 1 proceeding under this section. If the court finds, after service and 2 opportunity for hearing, that the person was not in compliance 3 with the order, the court may adjudge the person in civil contempt 4 of the order. The court may impose a further civil penalty against 5 the person for contempt in an amount not less than $500 but not 6 greater than $5,000 for each violation and may grant any other 7 relief the court determines is just and proper in the circumstances. 8 9 Official Comments 10 11 Prior Provisions: RUSA Sections 602, 712. 12 1. Section 604, unlike Section 603, may be initiated by the 13 administrator without prior judicial process or a prior hearing. The 14 section, among other matters, empowers the administrator to act 15 summarily in appropriate circumstances. 16 2. Sections 603 and 604 are intended to be available to the 17 administrator against persons not subject to stop orders under 18 Section 306 or proceedings against registered broker-dealers, 19 agents, investment advisers, or investment adviser representatives 20 under Section 412. All persons or securities not subject to Section 21 306 or 412 will be subject to Sections 603 and 604. A person must 22 be covered by either (1) Sections 306 or 412 or (2) Sections 603 or 23 604. 24 3. Service of an order or notice under this Section is not 25 effective unless made in accordance with Section 611. 26 27 South Carolina Reporter’s Comments 28 29 1. Section 35-1-604(a): Like Section 35-1-603, this provision is 30 intended for use by the Attorney General against persons not 31 subject to earlier provisions, although it likewise is available as an 32 alternative to those procedures. 33 2. Section 35-1-604(b): This provision is intended to provide 34 due process protections for persons against whom an order under 35 subsection (a) above is issued. 36 3. Section 35-1-604(c): This provision provides for the 37 requirement of a hearing and final order. The South Carolina 38 Administrative Procedure Act does not apply to hearings and final 39 orders under this chapter. 40 4. Section 35-1-604(d): The amount of any civil penalty is 41 optional with each enacting State in the uniform text. 42 5. Section 35-1-604(e): This provision allows the taxing of 43 costs.

1 [588] 192 1 6. Section 35-1-604(f): This provision allows the Attorney 2 General to enroll as a judgment any unappealled final order. 3 7. Section 35-1-604(g): This provision gives a court the 4 authority to enforce a final order, including the imposition of 5 additional civil penalties in an amount optional with each enacting 6 State. 7 8 Section 35-1-605. (a) The Securities Commissioner may: 9 (1) issue forms and orders and, after notice and comment, 10 may adopt and amend rules necessary or appropriate to carry out 11 this chapter and may repeal rules, including rules and forms 12 governing registration statements, applications, notice filings, 13 reports, and other records; 14 (2) by rule, define terms, whether or not used in this chapter, 15 but those definitions may not be inconsistent with this chapter; 16 (3) by rule, classify securities, persons, and transactions and 17 adopt different requirements for different classes; and 18 (4) establish fees for filings under Section 35-1-504, filings 19 required or permitted by rule or order adopted pursuant to this 20 section, and other miscellaneous filings for which no fees are 21 otherwise specified by law. 22 (b) Under this chapter, a rule or form may not be adopted or 23 amended, or an order issued or amended, unless the Securities 24 Commissioner finds that the rule, form, order, or amendment is 25 necessary or appropriate in the public interest or for the protection 26 of investors and is consistent with the purposes intended by this 27 chapter. In adopting, amending, and repealing rules and forms, 28 Section 35-1-608 applies in order to achieve uniformity among the 29 States and coordination with federal laws in the form and content 30 of registration statements, applications, reports, and other records, 31 including the adoption of uniform rules, forms, and procedures. 32 (c) Subject to Section 15(h) of the Securities Exchange Act 33 and Section 222 of the Investment Advisers Act of 1940, the 34 Securities Commissioner may require that a financial statement 35 filed under this chapter be prepared in accordance with generally 36 accepted accounting principles in the United States and comply 37 with other requirements specified by rule adopted or order issued 38 under this chapter. A rule adopted or order issued under this 39 chapter may establish: 40 (1) subject to Section 15(h) of the Securities Exchange Act 41 and Section 222 of the Investment Advisors Act of 1940, the form 42 and content of financial statements required under this chapter;

1 [588] 193 1 (2) whether unconsolidated financial statements must be 2 filed; and 3 (3) whether required financial statements must be audited by 4 an independent certified public accountant. 5 (d) The Securities Commissioner may provide interpretative 6 opinions or issue determinations that the Securities Commissioner 7 will not institute a proceeding or an action under this chapter 8 against a specified person for engaging in a specified act, practice, 9 or course of business if the determination is consistent with this 10 chapter. A rule adopted or order issued under this chapter may 11 establish a reasonable charge for interpretative opinions or 12 determinations that the Securities Commissioner will not institute 13 an action or a proceeding under this chapter. 14 (e) A penalty under this chapter may not be imposed for, and 15 liability does not arise from conduct that is engaged in or omitted 16 in good faith believing it conforms to a rule, form, or order of the 17 Securities Commissioner under this chapter. The burden of 18 proving good faith rests on the person claiming reliance. 19 (f) A hearing in an administrative proceeding under this 20 chapter must be conducted in public unless the Securities 21 Commissioner for good cause consistent with this chapter 22 determines that the hearing will not be so conducted. 23 24 Official Comments 25 26 Prior Provisions: 1956 Act Section 412; RUSA Sections 705, 27 707. 28 1. It is anticipated that the administrator will propose 29 amendments or make rules under Section 605(a) to remain 30 coordinate with relevant federal law, as well as appropriate rules of 31 the National Association of Securities Dealers, and to achieve 32 uniformity among the States. 33 2. Uniform forms such as Form B-D, U-4, U-5, and NF are 34 today common in the securities industry and are authorized by 35 Section 605(b). 36 3. Section 605(c) refers to generally accepted accounting 37 principles in the United States which currently are promulgated by 38 the Financial Accounting Standards Board and the Securities and 39 Exchange Commission. 40 4. It is anticipated that the states will employ websites, e-mail or 41 other electronic means to provide notice of proposed rulemaking 42 or adoption of new rules, rule amendments, forms or form 43 amendments, statements of policy or interpretations adopted by the

1 [588] 194 1 administrator, and issuance of orders to registrants and others who 2 have provided a current e-mail or similar address and expressed an 3 interest in receiving such notice. 4 5. Section 605(e) does not apply to staff no action or 5 interpretative opinions, but does apply to rules, forms, orders, 6 statements of policy or interpretations adopted by the 7 administrator. 8 9 South Carolina Reporter’s Comments 10 11 1. Section 35-1-605: This section generally continues existing 12 law. 13 14 Section 35-1-606. (a) The Securities Commissioner shall 15 maintain, or designate a person to maintain, a register of 16 applications for registration of securities; registration statements; 17 notice filings; applications for registration of broker-dealers, 18 agents, investment advisers, and investment adviser 19 representatives; notice filings by federal covered investment 20 advisers that are or have been effective under this chapter or the 21 predecessor chapter; notices of claims of exemption from 22 registration or notice filing requirements contained in a record; 23 orders issued under this chapter or the predecessor chapter; and 24 interpretative opinions or no action determinations issued under 25 this chapter. 26 (b) The Securities Commissioner shall make all rules, forms, 27 interpretative opinions, and orders available to the public. 28 (c) The Securities Commissioner shall furnish a copy of a 29 record that is a public record or a certification that the public 30 record does not exist to a person that so requests. A rule adopted 31 or order issued under this chapter may establish a reasonable 32 charge for furnishing the record or certification. A copy of the 33 record certified or a certificate by the Securities Commissioner of a 34 record’s nonexistence is prima facie evidence of a record or its 35 nonexistence. 36 37 Official Comments 38 39 Prior Provisions: 1956 Act Section 413; RUSA Section 709. 40 1. “Record” is defined in Section 102(25). 41 2. Compliance with a state records law will typically satisfy the 42 requirements of Section 606(a). 43

1 [588] 195 1 South Carolina Reporter’s Comments 2 3 1. Section 35-1-606(a): This provision requires the maintenance 4 of a register of various filings and registrations, including notice 5 filings, required under the 2002 USA, and of the Attorney 6 General’s orders, interpretative opinions, and no action 7 determinations issued under it. 8 2. Section 35-1-606(b): This provision states the Securities 9 Commissioner’s duty to make certain documents available to the 10 public, which parallels the duty imposed by S.C. Code Ann. 11 Section 1-23-140. 12 3. Section 35-1-606(c): This provision adds to existing law the 13 duty to certify the nonexistence of a record. 14 15 Section 35-1-607. (a) Except as otherwise provided in 16 subsection (b), records obtained by the Securities Commissioner or 17 filed under this chapter, including a record contained in or filed 18 with a registration statement, application, notice filing, or report, 19 are public records and are available for public examination. 20 (b) The following records are not public records and are not 21 available for public examination under subsection (a): 22 (1) a record obtained by the Securities Commissioner in 23 connection with an audit or inspection under Section 35-1-411(d) 24 or an investigation under Section 35-1-602; 25 (2) a part of a record filed in connection with a registration 26 statement under Sections 35-1-301 and 35-1-303 through 35-1-305 27 or a record under Section 35-1-411(d) that contains trade secrets or 28 confidential information if the person filing the registration 29 statement or report has asserted a claim of confidentiality or 30 privilege that is authorized by law; 31 (3) a record that is not required to be provided to the 32 Securities Commissioner or filed under this chapter and is 33 provided to the Securities Commissioner only on the condition that 34 the record will not be subject to public examination or disclosure; 35 (4) a nonpublic record received from a person specified in 36 Section 35-1-608(a); 37 (5) any social security number, residential address unless 38 used as a business address, and residential telephone number 39 unless used as a business telephone number, contained in a record 40 that is filed; and 41 (6) a record obtained by the Securities Commissioner 42 through a designee of the Securities Commissioner that a rule or 43 order under this chapter determines has been:

1 [588] 196 1 (A) expunged from the Securities Commissioner’s records 2 by the designee; or 3 (B) determined to be nonpublic or nondisclosable by that 4 designee if the Securities Commissioner finds the determination to 5 be in the public interest and for the protection of investors. 6 (c) If disclosure is for the purpose of a civil, administrative, or 7 criminal investigation, action, or proceeding or to a person 8 specified in Section 35-1-608(a), the Securities Commissioner may 9 disclose a record obtained in connection with an audit or 10 inspection under Section 35-1-411(d) or a record obtained in 11 connection with an investigation under Section 35-1-602. 12 13 Official Comments 14 15 Prior Provisions: RUSA Section 703; SEC Rule Section 16 200.80(b)(4); Securities Exchange Act of 1934 Sections 24(d) and 17 (e). 18 1. Section 607(a) reflects the extensive development of freedom 19 of information and open records laws since the 1956 Act was 20 adopted. 21 2. Section 607(b) may insulate from public disclosure records or 22 other information that may be available under a state freedom of 23 information or open records act. Unless the state freedom of 24 information or open records act implements a constitutional 25 provision, this chapter as the later and more specific enactment 26 should control as a matter of statutory construction. A state may 27 amend its freedom of information act, open records act or this 28 section to eliminate any inconsistencies. 29 3. Records and other information obtained by an administrator in 30 connection with an audit or inspection under subsection 411(d) or 31 an investigation under Section 602 may be made public in the 32 enforcement action, even if records and other information would 33 otherwise be subject to subsection 607(b)(1). 34 4. An administrator may orally disclose information under 35 Section 607(c) to a person specified in Section 608(a) for the 36 purposes specified in Section 607(c). 37 38 South Carolina Reporter’s Comments 39 40 Section 35-1-607: This section continues the existing 41 presumption that records are public. The exceptions contained in 42 subsection (b) generally follow the standards of the Freedom of

1 [588] 197 1 Information Act. Subsection (c) allows disclosure of nonpublic 2 records for limited purposes. 3 4 Section 35-1-608. (a) The Securities Commissioner shall, in 5 its discretion, cooperate, coordinate, consult, and, subject to 6 Section 35-1-607, share records and information with the securities 7 regulator of another State, Canada, a Canadian province or 8 territory, a foreign jurisdiction, the Securities and Exchange 9 Commission, the United States Department of Justice, the 10 Commodity Futures Trading Commission, the Federal Trade 11 Commission, the Securities Investor Protection Corporation, a 12 self-regulatory organization, a national or international 13 organization of securities regulators, a federal or state banking and 14 insurance regulator, and a governmental law enforcement agency 15 to effectuate greater uniformity in securities matters among the 16 federal government, self-regulatory organizations, States, and 17 foreign governments. 18 (b) In cooperating, coordinating, consulting, and sharing 19 records and information under this section and in acting by rule, 20 order, or waiver under this chapter, the Securities Commissioner 21 shall, in its discretion, take into consideration in carrying out the 22 public interest the following general policies: 23 (1) maximizing effectiveness of regulation for the protection 24 of investors; 25 (2) maximizing uniformity in federal and state regulatory 26 standards; and 27 (3) minimizing burdens on the business of capital formation, 28 without adversely affecting essentials of investor protection. 29 (c) The cooperation, coordination, consultation, and sharing of 30 records and information authorized by this section includes: 31 (1) establishing or employing one or more designees as a 32 central depository for registration and notice filings under this 33 chapter and for records required or allowed to be maintained under 34 this chapter; 35 (2) developing and maintaining uniform forms; 36 (3) conducting a joint examination or investigation; 37 (4) holding a joint administrative hearing; 38 (5) instituting and prosecuting a joint civil or administrative 39 proceeding; 40 (6) sharing and exchanging personnel; 41 (7) coordinating registrations under Sections 35-1-301 and 42 35-1-401 through 35-1-404 and exemptions under Section 43 35-1-203;

1 [588] 198 1 (8) sharing and exchanging records, subject to Section 2 35-1-607; 3 (9) formulating rules, statements of policy, guidelines, 4 forms, and interpretative opinions and releases; 5 (10) formulating common systems and procedures; 6 (11) notifying the public of proposed rules, forms, statements 7 of policy, and guidelines; 8 (12) attending conferences and other meetings among 9 securities regulators, which may include representatives of 10 governmental and private sector organizations involved in capital 11 formation, deemed necessary or appropriate to promote or achieve 12 uniformity; and 13 (13) developing and maintaining a uniform exemption from 14 registration for small issuers, and taking other steps to reduce the 15 burden of raising investment capital by small businesses. 16 17 Official Comments 18 19 Prior Provisions: 1956 Act Section 415; RUSA Sections 704 and 20 803; 19(c) of the Securities Act of 1933. 21 1. Uniformity of regulation among the states and coordination 22 with the Securities and Exchange Commission are principal 23 objectives of this chapter. Section 608 is intended to encourage 24 such cooperation to the maximum extent appropriate. Operative 25 phrases such as “shall, in its discretion” in Sections 608(a) and (b) 26 are intended to be precisely coordinate with the directive that 27 Congress gave to the Securities and Exchange Commission in 28 Section 19(c) of the Securities Act of 1933. 29 2. The goals of uniformity among the states and coordination 30 with related federal regulation, including self regulatory 31 organizations, may be enhanced by greater use of information 32 technology systems such as the Web-CRD, the Investment Adviser 33 Registration Depository (IARD), or the Securities and Exchange 34 Commission Electronic Data Gathering, Analysis and Retrieval 35 System (EDGAR). These types of techniques are consistent with a 36 potential system of “one stop filing” of all federal and state forms 37 that is encouraged by this chapter. 38 3. This chapter is intended, to the extent practicable, to be 39 revenue neutral in its impact on existing state laws. 40 4. Section 608(c) lists some joint or coordinated efforts which 41 might be undertaken. Other appropriate cooperative activities are 42 also encouraged.

1 [588] 199 1 5. Court decisions interpreting the securities laws have 2 construed these acts to achieve “broad protection to investors,” a 3 remedial approach that “embodies a flexible rather than a static 4 principle, one that is capable of adaption to meet the countless and 5 variable schemes devised by those who seek to use the money of 6 others on the promise of profits.” SEC v. W.J. Howey Co, 328 7 U.S. 293, 299, 301 (1946). 8 9 South Carolina Reporter’s Comments 10 11 1. Section 35-1-608(a): This provision is new and states as the 12 public policy of this State the goals of uniformity among the states 13 and coordination with federal regulation of securities. 14 2. Section 35-1-608(b): This provision is new and states the 15 policies to be considered by the Securities Commissioner in taking 16 action under this chapter. 17 3. Section 35-1-608(c): This provision is new. 18 19 Section 35-1-609. A person aggrieved by a final order of the 20 Securities Commissioner may obtain a review of the order in the 21 Richland County Court of Common Pleas by filing in the court, 22 within thirty days after entry of the order, a written petition 23 praying that the order may be modified or set aside in whole or in 24 part. The aggrieved person, upon filing a petition, may move 25 before the court in which the petition is filed to stay the 26 effectiveness of the Securities Commissioner’s final order until 27 such time as the court has reviewed the order. If the court orders a 28 stay, the aggrieved person must post any bond set by the court in 29 which a petition is filed. A copy of the petition must be served 30 upon the Securities Commissioner, and the Securities 31 Commissioner shall certify and file in court a copy of the filing 32 and evidence upon which the order was entered. When these have 33 been filed, the court has exclusive jurisdiction to affirm, modify, 34 enforce or set aside the order, in whole or in part. The findings of 35 the Securities Commissioner as to the facts, if supported by 36 competent, material, and substantial evidence, are conclusive. 37 38 Official Comments 39 40 Prior Provisions: 1956 Act Section 411; RUSA Section 711(b). 41 1. The 1956 Act Section 411 specified procedures for judicial 42 review of orders, in part modeled on Section 12 of the Model 43 Administrative Procedure Act, 54 Handbook of National

1 [588] 200 1 Conference of Commissioners on Uniform State Laws 334 (1944) 2 and partly on Section 25 of the Securities Exchange Act. 3 2. A rule adopted under this chapter may be subject to judicial 4 review in accordance with the state administrative procedure act. 5 3. In those states in which judicial review of rules is permitted, a 6 state may choose to add Section 609(b). In those states in which 7 judicial review of rules is not permitted, Section 609(b) should be 8 deleted. 9 10 South Carolina Reporter’s Comments 11 12 Section 35-1-609: This provision sets forth the procedure for 13 judicial review of final orders of the Securities Commissioner. It 14 continues existing law by excluding such review from the 15 application of the Administrative Procedures Act and therefore 16 varies from the uniform text. 17 18 Section 35-1-610. (a) Sections 35-1-301, 35-1-302, 19 35-1-401(a), 35-1-402(a), 35-1-403(a), 35-1-404(a), 35-1-501, 20 35-1-506, 35-1-509, and 35-1-510 do not apply to a person that 21 sells or offers to sell a security unless the offer to sell or the sale is 22 made in this State or the offer to purchase or the purchase is made 23 and accepted in this State. 24 (b) Sections 35-1-401(a), 35-1-402(a), 35-1-403(a), 25 35-1-404(a), 35-1-501, 35-1-506, 35-1-509, and 35-1-510 do not 26 apply to a person that purchases or offers to purchase a security 27 unless the offer to purchase or the purchase is made in this State or 28 the offer to sell or the sale is made and accepted in this State. 29 (c) For the purpose of this section, an offer to sell or to 30 purchase a security is made in this State, whether or not either 31 party is then present in this State, if the offer: 32 (1) originates from within this State; or 33 (2) is directed by the offeror to a place in this State and 34 received at the place to which it is directed. 35 (d) For the purpose of this section, an offer to purchase or to 36 sell is accepted in this State, whether or not either party is then 37 present in this State, if the acceptance: 38 (1) is communicated to the offeror in this State and the 39 offeree reasonably believes the offeror to be present in this State 40 and the acceptance is received at the place in this State to which it 41 is directed; and 42 (2) has not previously been communicated to the offeror, 43 orally or in a record, outside this State.

1 [588] 201 1 (e) An offer to sell or to purchase is not made in this State 2 when a publisher circulates or there is circulated on the publisher’s 3 behalf in this State a bona fide newspaper or other publication of 4 general, regular, and paid circulation that is not published in this 5 State, or that is published in this State but has had more than two 6 thirds of its circulation outside this State during the previous 7 twelve months or when a radio or television program or other 8 electronic communication originating outside this State is received 9 in this State. A radio or television program, or other electronic 10 communication is considered as having originated in this State if 11 either the broadcast studio or the originating source of 12 transmission is located in this State, unless: 13 (1) the program or communication is syndicated and 14 distributed from outside this State for redistribution to the general 15 public in this State; 16 (2) the program or communication is supplied by a radio, 17 television, or other electronic network with the electronic signal 18 originating from outside this State for redistribution to the general 19 public in this State; 20 (3) the program or communication is an electronic 21 communication that originates outside this State and is captured 22 for redistribution to the general public in this State by a 23 community antenna or cable, radio, cable television, or other 24 electronic system; or 25 (4) the program or communication consists of an electronic 26 communication that originates in this State, but which is not 27 intended for distribution to the general public in this State. 28 (f) Sections 35-1-403(a), 35-1-404(a), 35-1-405(a), 35-1-502, 29 35-1-505, and 35-1-506 apply to a person if the person engages in 30 an act, practice, or course of business instrumental in effecting 31 prohibited or actionable conduct in this State, whether or not either 32 party is then present in this State. 33 34 Official Comments 35 36 Source of Law: 1956 Act Section 414; RUSA Section 801. 37 1. Section 610 defines the application of the chapter to interstate 38 or international transactions when only some of the elements of a 39 violation occur in this State. This section applies to all types of 40 proceedings specified by the chapter – administrative, civil, and 41 criminal. The law is now settled that a person may violate the law 42 of a particular state without ever being within the state or 43 performing each act necessary to violate the law within that state.

1 [588] 202 1 2. Section 610 generally follows Section 414 of the 1956 Act, 2 but has been modernized to reflect the development of the Internet 3 and other electronic communications after 1956. 4 3. Section 610 can be illustrated in the context of a civil action 5 under Section 509(b) by a purchaser in State A against a seller in 6 State B: 7 Section 610(a) would apply when an “offer to sell is made in 8 this State.” 9 Section 610(c) provides that an offer which originates in State B 10 and is directed to State A is made in both states. The securities act 11 of State A would apply under Section 610(c)(2). The act of State 12 B would apply also, under Section 610(c)(1). The intent is to 13 prevent a seller in State B from using that state as a base of 14 operations for defrauding person in other states. 15 Section 610(e) addresses offers made through publications, 16 radio, television, or electronic communications. The subsection 17 provides a series of safe harbors for advertisements in newspapers, 18 magazines, radio, television, or electronic media that either 19 originate outside State A or that originate in State A but are 20 directed outside the state to the general public. With respect to 21 bona fide newspapers or other publications of general, regular, and 22 paid circulation, the safe harbor requires that more than two thirds 23 of its circulation be outside State A. With respect to radio, 24 television, or other electronic communications, safe harbors are 25 specified in Sections 610(e)(1) through (4). 26 Section 610(d), however, provides that a person in State A who 27 makes an offer to purchase as a result of communication described 28 in Section 610(e) may cause the chapter to be applicable if the 29 offeror accepts the offer “in this State.” Section 610(d) defines 30 when an offer is accepted “in this State.” 31 If a selling broker-dealer in State B solely sends a confirmation 32 into State A, or the purchaser in State A sends a check from within 33 State A, the chapter will not apply unless, under Section 610(d), 34 the confirmation or delivery constitutes the seller’s acceptance of 35 the purchaser’s offer to buy in State A. 36 The applicability of the chapter to purchaser is addressed by 37 Section 610(b) which is the converse of Section 610(a). Under 38 Section 509(c) there can be liability of purchasers to sellers. 39 Section 610(f) is a new provision that specifies jurisdictions in 40 cases involving investment advice and misrepresentations. 41 4. Under subsection 202(20) certain out-of-state offers or sales 42 are exempt from securities registration.

1 [588] 203 1 5. The phrase “other electronic means” is coextensive with 2 computer or other information technology permitted by 3 subsections 102(8), 102(25). 4 6. Under Section 610 the administrator may adopt interpretative 5 rules or orders to specify when particular uses of new electronic 6 communications, including the Internet, involve an offer to sell or 7 to purchase a security, acceptance of an order to purchase or sell a 8 security, or an act or practice involving prohibited conduct, within 9 a State, whether or not a purchaser, seller, or other party is then 10 present in the State. The NASAA Interpretive Order Concerning 11 Broker-Dealers, Agents, and Investment Adviser Representatives 12 Using the Internet for General Dissemination of Information for 13 Products and Services (Apr. 23, 1997) is an illustration of an 14 interpretative order that would be in compliance with the 15 administrator’s authority under Section 610. Under this Order, 16 broker-dealers, agents, investment advisers, and investment 17 adviser representatives who distribute information on available 18 products and services through communications on the Internet 19 generally to anyone having access to the Internet such as postings 20 on a bulletin board or home page shall not be deemed to be 21 transacting business in a State if specified conditions are satisfied 22 including a legend clearly stating that the broker-dealer, agent, 23 investment adviser, or investment adviser representative may 24 transact business in that State only if first registered, excluded or 25 exempted from applicable registration requirements. 26 27 South Carolina Reporter’s Comments 28 29 1. Section 35-1-610(a): This provision continues existing law. 30 2. Section 35-1-610(b): This provision continues existing law. 31 3. Section 35-1-610(c): This provision continues existing law. 32 4. Section 35-1-610(d): This provision continues existing law. 33 5. Section 35-1-610(e): This provision is intended to extend to 34 computer and other technology, in addition to traditional media. It 35 clarifies the safe harbors available for media communications. 36 6. Section 35-1-610(f): This provision continues existing law. 37 38 Section 35-1-611. (a) A consent to service of process 39 complying with this section required by this chapter must be 40 signed and filed in the form required by a rule or order under this 41 chapter. A consent appointing the Securities Commissioner the 42 person’s agent for service of process in a noncriminal action or 43 proceeding against the person, or the person’s successor or

1 [588] 204 1 personal representative under this chapter or a rule adopted or 2 order issued under this chapter after the consent is filed, has the 3 same force and validity as if the service were made personally on 4 the person filing the consent. A person that has filed a consent 5 complying with this subsection in connection with a previous 6 application for registration or notice filing need not file an 7 additional consent. 8 (b) If a person, including a nonresident of this State, engages in 9 an act, practice, or course of business prohibited or made 10 actionable by this chapter or a rule adopted or order issued under 11 this chapter and the person has not filed a consent to service of 12 process under subsection (a), the act, practice, or course of 13 business constitutes the appointment of the Securities 14 Commissioner as the person’s agent for service of process in a 15 noncriminal action or proceeding against the person or the 16 person’s successor or personal representative. 17 (c) Service under subsection (a) or (b) may be made by 18 providing a copy of the process to the office of the Securities 19 Commissioner, but it is not effective unless: 20 (1) the plaintiff, which may be the Securities Commissioner, 21 promptly sends notice of the service and a copy of the process, 22 return receipt requested, to the defendant or respondent at the 23 address set forth in the consent to service of process or, if a 24 consent to service of process has not been filed, at the last known 25 address, or takes other reasonable steps to give notice; and 26 (2) the plaintiff files an affidavit of compliance with this 27 subsection in the action or proceeding on or before the return day 28 of the process, if any, or within the time that the court, or the 29 Securities Commissioner in a proceeding before the Securities 30 Commissioner, allows. 31 (d) Service pursuant to subsection (c) may be used in a 32 proceeding before the Securities Commissioner or by the 33 Securities Commissioner in a civil action in which the Securities 34 Commissioner is the moving party. 35 (e) If process is served under subsection (c), the court, or the 36 Securities Commissioner in a proceeding before the Securities 37 Commissioner, shall order continuances as are necessary or 38 appropriate to afford the defendant or respondent reasonable 39 opportunity to defend. 40 41 Official Comments 42

1 [588] 205 1 Prior Provisions: 1956 Act Sections 414(g) and (h); RUSA 2 Section 708. 3 1. Section 611 follows the 1956 Act and RUSA in providing for 4 a signed consent to service of process in Section 611(a); a 5 substituted service of process in Section 611(b); and process and 6 opportunity to defend in Sections 611(c) through (e). 7 2. An issuer is not required to file a consent to service of process 8 unless it proposes to offer a security in this State through someone 9 acting on an agency basis. Since the civil liability provisions of 10 Section 509(b) apply only in a suit by a purchaser against a seller, 11 the issuer in a firm commitment underwriting is civilly liable only 12 to the underwriter, who, in turn, may be liable to the dealer, who, 13 in turn, may be liable to the purchaser. In contrast, in a best efforts 14 underwriting, when the security is sold on an agency basis and title 15 passes directly to the purchaser, the issuer can be liable to the 16 purchaser. 17 3. Section 611(b) generally follows Section 414(h) of the 1956 18 Act and Section 708(c) of RUSA. The intent is to provide for 19 substituted service of process when a seller in one state directs an 20 offer into a second state either in violation of the laws of the 21 second state or fraudulently. Under Section 611(b) the purchaser 22 may sue the seller in the purchaser’s state and then bring an action 23 on the judgment in the seller’s state. The constitutionality of this 24 type of statute has long been sustained. 25 4. This section was originally based on the type of nonresident 26 motorist statute whose constitutionality was sustained in Hess v. 27 Pawlowski, 274 U.S. 352 (1927) and subsequently in other 28 contexts. See, e.g., International Shoe Co. v. State of Wash., 326 29 U.S. 310 (1945); Travelers Health Ass’n v. Commonwealth of Va., 30 339 U.S. 643 (1950). 31 32 South Carolina Reporter’s Comments 33 34 Section 35-1-611: This section substantially continues existing 35 law. 36 37 Section 35-1-612. If any provision of this chapter or its 38 application to any person or circumstances is held invalid, the 39 invalidity does not affect other provisions or applications of this 40 chapter that can be given effect without the invalid provision or 41 application, and to this end the provisions of this chapter are 42 severable. 43

1 [588] 206 1 Official Comments 2 3 Prior Provisions: 1956 Act Section 417; RUSA Section 805. 4 5 South Carolina Reporter’s Comments 6 7 Section 35-1-612: This provision protects the effectiveness of 8 this chapter in the event any provision is held invalid. 9 10 Article 7 11 12 Transition 13 14 Section 35-1-701. (a) The predecessor chapter exclusively 15 governs all actions or proceedings that are pending on the effective 16 date of this chapter or may be instituted on the basis of conduct 17 occurring before the effective date of this chapter, but a civil action 18 may not be maintained to enforce any liability under the 19 predecessor chapter unless instituted within any period of 20 limitation that applied when the cause of action accrued or within 21 five years after the effective date of this chapter, whichever is 22 earlier. 23 (b) All effective registrations under the predecessor chapter, all 24 administrative orders relating to the registrations, rules, statements 25 of policy, interpretative opinions, declaratory rulings, no action 26 determinations, and conditions imposed on the registrations under 27 the predecessor chapter remain in effect while they would have 28 remained in effect if this chapter had not been enacted. They are 29 considered to have been filed, issued, or imposed under this 30 chapter, but are exclusively governed by the predecessor chapter. 31 (c) The predecessor chapter exclusively applies to an offer or 32 sale made within one year after the effective date of this chapter 33 pursuant to an offering made in good faith before the effective date 34 of this chapter on the basis of an exemption available under the 35 predecessor chapter. 36 37 Official Comments 38 39 Prior Provisions: 1956 Act Section 418; RUSA Section 807. 40 Prior law governs all suits, actions, prosecutions, or proceedings 41 which are pending or may be initiated on the basis of facts or 42 circumstances occurring before the effective date of a State blue

1 [588] 207 1 sky statute. See Hilton v. Mumaw, 522 F.2d 588, 600 (9th Cir. 2 1975). 3 4 South Carolina Reporter’s Comments 5 6 1. Section 35-1-701(a): This provision provides for the 7 continued application of existing law to matters pending as of the 8 effective date of this chapter and to actions which occurred prior to 9 the effective date. 10 2. Section 35-1-701(b): This provision provides for the 11 continued application of registrations, orders, rulings, etc. as 12 though they were issued under this chapter, but provides that they 13 be governed exclusively by law existing on the date of their issue, 14 i.e., the predecessor Chapter 1 of Title 35. 15 3. Section 35-1-701(c): This provision allows offers or sales of 16 offerings made in good faith prior to the effective date of this 17 chapter to be governed exclusively by existing law, i.e., the 18 Uniform Securities Act, Chapter 1 of Title 35 as it existed prior to 19 the enactment of this Act, the South Carolina Uniform Securities 20 Act of 2005, for a one year period after the effective date. The 21 expanded private and administrative remedies of this chapter 22 would not, therefore, apply to any such offers or sales. 23 24 Section 35-1-702. (a) Every applicant applying for 25 registration as a broker-dealer, broker-dealer agent, investment 26 adviser, or investment adviser representative and every person 27 filing a securities registration statement or a notice filing for a 28 federal covered security or a federal covered investment adviser 29 shall pay the below specified fees and meet other requirements 30 established by statute or otherwise set pursuant to this chapter. 31 When an application is denied or withdrawn, the filing fee must 32 not be refunded. The following fees are in effect for the filings 33 designated until the Securities Commissioner promulgates a rule or 34 order establishing different fees: 35 (1) For all initial and renewal notice filings of federal 36 covered securities as defined in Section 18(b)(2) of the Securities 37 Act of 1933: Five hundred forty-six dollars 38 (2) For all documents filed with respect to a federal covered 39 security under Section 18(b)(3) or (4): Twenty-five dollars 40 (3) For all initial and subsequent notice filings of federal 41 covered securities under Section 18(b)(4)(D) of the Securities Act 42 of 1933 and all filings pursuant to Regulation D of the Securities 43 Act of 1933: Three hundred dollars

1 [588] 208 1 (4) For all registration statements pursuant to this chapter: 2 Five hundred dollars 3 (5) For all post-effective amendments to increase the number 4 of securities to be offered or sold pursuant to a current registration 5 statement: Five hundred dollars 6 (6) Broker-Dealer (initial filing fee): Three hundred ten 7 dollars 8 (7) Broker-Dealer (renewal filing fee): Three hundred ten 9 dollars 10 (8) Broker-Dealer Agent (initial filing fee): One hundred 11 ten dollars 12 (9) Broker-Dealer Agent (renewal or change of registration 13 filing fee): One hundred dollars 14 (10) Investment Advisers (initial filing fee): Two hundred ten 15 dollars 16 (11) Investment Advisers (renewal filing fee): Two hundred 17 ten dollars 18 (12) Investment Adviser Representatives (initial filing fee): 19 Fifty five dollars 20 (13) Investment Adviser Representatives (renewal or change 21 of registration filing fee): Fifty five dollars 22 (14) Federal Covered Investment Advisers (initial fee): Two 23 hundred ten dollars 24 (15) Federal Covered Investment Advisers (renewal filing 25 fee): Two hundred ten dollars. 26 (b) The Attorney General may retain the first one million five 27 hundred thousand dollars from fee revenues collected pursuant to 28 this chapter to be used for the operations of the Securities Division. 29 The Attorney General may transfer to the South Carolina Law 30 Enforcement Division two hundred thousand dollars after retaining 31 the first one million five hundred thousand dollars collected 32 pursuant to this chapter to be retained, expended, and carried 33 forward for the provision of investigators for the State Grand Jury. 34 The funds transferred to the State Law Enforcement Division must 35 be used only for purposes of the State Grand Jury, and may not be 36 transferred to another program or used for another purpose. 37 (c) The Attorney General may retain the first seven hundred 38 fifty thousand dollars received by the Division of Securities in a 39 fiscal year in settlement of litigation enforcement action and 40 reimbursements of expenses arising from violations under this 41 chapter to offset investigative, prosecutorial, and administrative 42 costs of enforcing this chapter. 43

1 [588] 209 1 South Carolina Reporter’s Comments 2 3 Section 35-1-702 is a nonuniform provision setting fees and 4 allowing the Attorney General to retain a portion of fees and of 5 recoveries in civil or administrative enforcement actions. It 6 consolidates several statutes under prior law. It increases the 7 amount which may be retained by the Attorney General from civil 8 or administrative enforcement actions, but generally continues 9 prior law. 10 11 Section 35-1-703. This act takes effect on January 1, 2006. 12 13 SECTION 2. Section 31-13-200(b)(ii)(b) of the 1976 Code is 14 amended to read: 15 16 “(b) If the notes or bonds are sold or placed either as ‘mortgage 17 bonds sold as a unit’, in ‘transactions with banks, institutional 18 buyers, etc. or other nonregistered persons’ as provided in Section 19 35-1-320(5) and (8) 35 - 1 - 202(11)(A), the documents pursuant to 20 which the notes or bonds are issued must permit the authority to 21 avoid any a default by it by completing an assignment of, or 22 foregoing its rights with respect to, any collateral or security 23 pledged to secure the notes or bonds.” 24 25 SECTION 3. Section 35-6-10(B)(8) of the 1976 Code, as added 26 by Act 102 of 1997, is amended to read: 27 28 “(8) ‘Security’ means and is defined as provided in Section 29 35-1-20(12) 35 - 1 - 102(28) and as a security account.” 30 31 SECTION 4. Section 37-1-202(11) of the 1976 Code is amended 32 to read: 33 34 “(11) Transactions in securities or commodities accounts with 35 broker-dealers registered under Article 5 4 of Chapter 1, Title 35 36 [Sections 35-1-410 et seq.], or with the Securities and Exchange 37 Commission.” 38 39 SECTION 5. Section 38-90-440(E)(5)(f) of the 1976 Code, as 40 added by Act 291 of 2004, is amended to read: 41 42 “(f) an affidavit from the applicant that the securities proposed 43 to be issued are valid legal obligations that are either properly

1 [588] 210 1 registered with the Securities Commissioner or constitute an 2 exempt security or form part of an exempt transaction pursuant to 3 Section 35-1-310 or 35-1-320 35 - 1 - 201 or Section 35 - 1 - 202.” 4 5 SECTION 6. Section 41-44-60(G) of the 1976 Code is amended 6 to read: 7 8 “(G) All securities issued by either the Corporation or the Fund 9 before dissolution pursuant to Section 6 of Act 187 of 2004 are 10 considered exempt securities with regard to Section 35-1-310 11 35 - 1 - 201 of the South Carolina Uniform Securities Act.” 12 13 SECTION 7. Unless otherwise provided herein, this act takes 14 effect January 1, 2006. 15 ----XX---- 16

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