Section 7.3: Exempt Securities & Exempt Transactions

  • 🧾 Securities That Do Not Require SEC Registration

    • When a company (issuer) sells securities in the U.S., those securities normally must be registered with the SEC — unless they qualify for an exemption under the Securities Act of 1933.

🏛️ Exempt Securities (because of the type of issuer):

  • These securities are exempt because they are issued by certain trusted or regulated entities:

    • U.S. Government securities

    • U.S. Government Agencies (e.g., Ginnie Mae, Fannie Mae)

    • Municipal securities (issued by states, cities, or local governments)

    • National and state-chartered banks

    • Savings & Loan (S&L) associations and Building & Loan associations

    • Charitable, religious, educational, or non-profit organizations

    • Common carriers (e.g., railroads, trucking, airlines regulated by ICC/DOT)

    • ⚠️ Bank exemption note:
      The exemption applies only to the securities issued by the bank itself, not to securities issued by a bank holding company.

💵 Exempt Securities (because of the type of issue):

  • Short-term debt — maturities of 270 days (9 months) or less, such as:

    • Commercial Paper

    • Bankers’ Acceptances

  • Insurance products —

    • Fixed insurance (life, annuities) → not securities → exempt.

    • Variable insurance (variable life, variable annuity) → are securities → must register (because they are funded by separate accounts).

💼 Regulation A — Simplified Registration for Smaller Companies

  • Purpose:

    • Helps small and medium-sized companies raise capital with fewer regulatory burdens.

    • Two Tiers:

Tier / Max Offering (12 month) / Sold on Behalf of Existing shareholder / Review / Investment Limit

  • Tier 1 / Up to $20 million / Up to $6 million / SEC + State coordinated review / None

  • Tier 2 / Up to $75 million / Up to $22.5 million / SEC only / Investors must be qualified

Tier 2 Qualified Investor Rules:

  • Must be an accredited investor or

  • Limit investment to 10% of net worth or income (self-certified).

  1. Other Notes:

    • General solicitation is permitted for both tiers.

    • Investment companies cannot use Regulation A.

💵

〰️

💵 〰️

🏠 Rule 147 — Intrastate Offerings:

  • An offering made entirely within one state is exempt from SEC registration if it meets these requirements:

    1. Issuer’s principal office is in the state.

    2. All purchasers are residents of the state.

    3. Must meet at least one of these 80% tests:

      • 80% of revenues from within the state

      • 80% of assets located within the state

      • 80% of proceeds used within the state

      • Majority of employees work within the state

    Additional Notes:

    • If there’s an underwriter, the BD must be based in the same state.

    • Securities cannot be resold to out-of-state residents for 6 months.

🔒 Regulation D — Private Placements:

  • Reg D allows issuers to raise unlimited capital privately without registering with the SEC, by filing a Form D (a brief disclosure similar to a prospectus).

  • Investor Agreement:

    • Investors must agree they are buying for investment purposes only (not resale).

    • Securities are restricted for 6 months — called Letter Stock or Legend Stock.

Types of Private Placements:

Rule / Ads Allowed? / Accredited Investors / Non-Credited Investors / Verification Required?

  • 506(b) / ❌ No advertising / Unlimited / Up to 35 / No formal verification

  • 506(c) / ✅ Advertising allowed / All must be accredited / None / Issuer must verify accreditation

🧾 Disclosure for Exempt Transactions

  • Instead of a prospectus, issuers provide an Offering Circular or Notice of Sale.

  • Contains much of the same information as a prospectus but is used for exempt offerings.

Chapter 8

✺ Review questions ✺

  • a) Common stock of a private company
    b) Municipal bonds
    c) Variable annuity contracts
    ✅ Answer: b) Municipal bonds

  • Securities issued by the bank itself, not its holding company.

  • $75 million in a 12-month period.

  • At least 80%.

  • Private placements — exempt from SEC registration.

  • Letter Stock or Legend Stock.

  • Rule 506(c).

  • Offering Circular or Notice of Sale.