Covered Securities Under NSMIA: Rule 506, Exchanges, and State Filings

Covered securities under NSMIA are four categories of securities that the National Securities Markets Improvement Act of 1996 shields from state registration and merit review: securities listed on national stock exchanges, shares issued by registered investment companies, securities sold to qualified purchasers, and securities issued under certain federal exemptions such as Rule 506 of Regulation D.¹ States keep the power to demand notice filings, collect fees on most of these offerings, and prosecute fraud, but they cannot layer their own registration on top of the federal framework.

Securities Listed on National Exchanges

The broadest category covers anything listed, or approved for listing, on a national stock exchange. Stock trading on the New York Stock Exchange, Nasdaq, or NYSE American (formerly the American Stock Exchange) is a covered security, and state regulators cannot require separate registration for it.¹ The exchanges already impose listing standards, and the SEC oversees the exchanges themselves.

Preemption also reaches securities of the same issuer that are equal or senior in seniority to the listed stock. If a corporation has common shares listed on the NYSE, its preferred shares and corporate bonds are covered too, even if those instruments never trade on the exchange floor.¹

Exchange-listed securities receive the strongest form of preemption in the statute. Unlike the other categories, states cannot even require notice filings or collect fees for them. The statute explicitly prohibits any filing or fee requirement for securities covered under this exchange-listing provision.¹

Investment Company Securities

Shares issued by investment companies registered, or that have filed for registration, under the Investment Company Act of 1940 are covered securities.¹ That means mutual funds, exchange-traded funds, unit investment trusts, and closed-end funds. Before NSMIA, a mutual fund marketed nationally had to register in every state where it sold shares. That duplication was expensive and produced no real benefit for investors already protected by federal oversight.

Investment companies register with the SEC,² and the Act imposes detailed rules on disclosure, governance, and custody of assets. Congress treated that framework as sufficient.

Investment company securities are not fully exempt from state fees. States can still require notice filings and charge annual renewal fees, which vary widely. Some states charge a flat amount per fund; others calculate fees as a percentage of the aggregate offering, subject to minimum and maximum caps.

Securities Sold to Qualified Purchasers

The third category covers securities sold to “qualified purchasers,” a term the statute delegates to the SEC to define. For an individual, the threshold is at least $5 million in investments.³ Family-owned companies that hold $5 million in investments and trusts managed by qualified purchasers also qualify. That bar sits well above the accredited investor standard used for most private placements.

The category is most relevant to private funds relying on Section 3(c)(7) of the Investment Company Act, which limits participation to qualified purchasers.

Private Placements Under Rule 506

For startups and private companies raising capital, the covered-security category that matters most is Rule 506 of Regulation D. Securities sold under Rule 506 are covered securities, so the offering bypasses state registration even though it is not registered at the federal level either.¹ There are two versions, and the differences matter.

Rule 506(b): No Advertising, Broader Investor Pool

Rule 506(b) is the traditional private placement route. The issuer can raise an unlimited dollar amount and sell to an unlimited number of accredited investors. It also permits sales to up to 35 non-accredited investors, provided those buyers are financially sophisticated enough to evaluate the risks.⁴ The tradeoff is that the issuer cannot use general solicitation or advertising to market the offering. Investors have to come through existing relationships.

Rule 506(c): Advertising Allowed, Accredited Only

Rule 506(c), created by the JOBS Act in 2013, reverses that tradeoff. Issuers can advertise broadly and solicit investors publicly, but every actual purchaser must be an accredited investor, and the issuer must take reasonable steps to verify their status rather than rely on self-certification. Verification typically means reviewing tax returns, bank statements, or obtaining written confirmation from a broker-dealer or attorney.⁵ States can still require notice filings and collect fees for both 506(b) and 506(c) offerings.

Who Qualifies as Accredited

An individual qualifies with a net worth over $1 million (excluding a primary residence), individually or with a spouse or partner. Income over $200,000 individually, or $300,000 jointly, in each of the two most recent years with a reasonable expectation of the same in the current year also qualifies.⁶ Certain professional certifications and entity-level criteria also count.

Other Federal Exemptions That Produce Covered Securities

Rule 506 gets most of the attention, but NSMIA grants covered-security status to several other offering types.

Regulation A, Tier 2. Companies raising up to $75 million under Regulation A Tier 2 are not required to register or qualify their offerings with state securities regulators.⁷ Preemption applies because these offerings fall under rules adopted under Section 3(b)(2) of the Securities Act. Tier 1 offerings do not enjoy this protection.

Regulation Crowdfunding. The SEC used its authority under NSMIA to define all purchasers in a Regulation Crowdfunding offering as “qualified purchasers” for preemption purposes.⁸ Crowdfunding securities are therefore covered securities, though the state where the issuer’s principal place of business is located, and states where a majority of purchasers reside, can still require filings and fees.

Section 4(a)(7) resales. Secondary market sales by existing shareholders under Section 4(a)(7) also produce covered securities, giving liquidity to holders of restricted stock without triggering state registration.¹

Exemptions That Are Not Covered Securities

Not every federal exemption triggers NSMIA preemption. Confusing an ordinary federal exemption with covered-security status can create serious compliance problems.

Rule 504 of Regulation D. Offerings up to $10 million under Rule 504 are exempt from federal registration, but they are not covered securities. Issuers must comply with securities laws in every state where they offer or sell.⁹ Choosing Rule 504 over Rule 506 may look simpler, but it trades away federal preemption entirely.

Intrastate offerings under Rules 147 and 147A. Offerings sold only within a single state are exempt from federal registration but must comply with that state’s securities laws.¹⁰ There is no federal filing at all; the state is the sole regulator.

Regulation A, Tier 1. Tier 1 offerings up to $20 million lack the preemption that Tier 2 enjoys. Issuers must register or qualify in each state where they plan to sell.

What States Can Still Require

Federal preemption does not remove states from the process. For every category of covered securities except exchange-listed stock and its senior equivalents, states retain meaningful procedural authority.

Notice Filings and Fees

The statute preserves the right of state regulators to require copies of documents already filed with the SEC, along with a consent to service of process and payment of fees.¹ In practice, an issuer files a copy of its Form D with state regulators in each state where it sells securities. Most states require this filing within 15 days of the first sale to an investor in that state.¹¹ Fees range from around $100 to $750 or more depending on the jurisdiction. Most states participate in the NASAA Electronic Filing Depository, which lets issuers submit filings, fees, and supporting documents to multiple states through a single portal.¹²

Consequences of Missing a Filing

Skipping a notice filing or failing to pay fees is not a minor oversight. The statute gives state regulators the power to suspend an offering of covered securities within their borders if the required filing or fee has not been submitted.¹ A suspended offering means the issuer cannot legally sell to investors in that state until the problem is fixed. Promptly remedied delays or underpayments are not treated as a refusal to pay, so catching the mistake early matters.

Anti-Fraud Authority

The most important power states keep is the ability to investigate and prosecute fraud. NSMIA strips states of the right to second-guess the merits of a covered offering, but it does not shield issuers who lie. If a company makes material misrepresentations in offering documents, omits critical risks, or otherwise deceives investors, state securities regulators can bring enforcement actions. That anti-fraud backstop applies across every category of covered securities.

1
Office of the Law Revision Counsel. 15 USC 77r – Exemption From State Regulation of Securities Offerings
2
Office of the Law Revision Counsel. 15 USC 80a-8 – Registration of Investment Companies
3
Legal Information Institute. 15 USC 80a-2(a)(51) – Qualified Purchaser
4
U.S. Securities and Exchange Commission. Private Placements – Rule 506(b)
5
U.S. Securities and Exchange Commission. General Solicitation – Rule 506(c)
6
U.S. Securities and Exchange Commission. Accredited Investors
7
U.S. Securities and Exchange Commission. Regulation A
8
eCFR. 17 CFR Part 227 – Regulation Crowdfunding
9
U.S. Securities and Exchange Commission. Exemption for Limited Offerings Not Exceeding $10 Million – Rule 504 of Regulation D
10
U.S. Securities and Exchange Commission. Intrastate Offering Exemptions – Guidance for Issuers
11
North American Securities Administrators Association. Staff Statement on Opportunity Zones – Federal and State Securities Laws Considerations
12
NASAA Electronic Filing Depository. Electronic Filing Depository