Exempt Transactions
Certain transactions are exempt from state registration, even if the security itself is not exempt. Understanding the distinction between exempt securities and exempt transactions is essential.
Key Principle
Transaction exemptions apply only to the specific transaction, not to the security.
| Principle | Details |
|---|
| Transaction-Specific | Exemption covers only that transaction |
| Resale May Require Registration | Subsequent sales may need registration |
| Antifraud Applies | Still subject to antifraud provisions |
| No Exemption from Fraud | Cannot use exemption to commit fraud |
Isolated Non-Issuer Transactions
An isolated non-issuer transaction is exempt from registration.
Requirements
| Element | Requirement |
|---|
| Isolated | Not part of regular securities business |
| Non-Issuer | Seller is not the issuer of the security |
| Occasional | Not repeated or systematic |
Examples
| Exempt | Not Exempt |
|---|
| Individual selling own shares to neighbor | Broker selling client's shares (regular business) |
| Estate selling inherited securities | Market maker trading securities |
| Occasional private sale | Pattern of repeated sales |
On the Exam: The key question is whether the person is "in the business" of selling securities. Occasional sales by individuals are isolated; regular sales are not.
Institutional Investor Transactions
Transactions with institutional investors are exempt based on the sophistication of the buyer.
Qualified Institutional Investors
| Institution | Details |
|---|
| Banks | Commercial banks, savings institutions |
| Insurance Companies | Regulated insurance entities |
| Investment Companies | Registered investment companies |
| Pension Plans | Plans with assets > $1 million |
| Government Entities | Federal, state, local governments |
| Broker-Dealers | Registered broker-dealers |
| Other Institutions | Sophisticated institutional buyers |
Rationale
| Reason | Details |
|---|
| Sophistication | Can evaluate investments independently |
| Resources | Have professional advisers and analysts |
| Size | Large enough to negotiate protections |
| Regulatory Oversight | Subject to other regulations |
Private Placement Transactions
Private placements are offerings made to a limited number of purchasers without general advertising.
Federal Regulation D
| Rule | Description |
|---|
| Rule 504 | Up to $10 million in 12 months |
| Rule 506(b) | No general solicitation, up to 35 non-accredited |
| Rule 506(c) | General solicitation allowed, all accredited |
Rule 506 as Federal Covered
| Feature | Details |
|---|
| Preemption | Rule 506 offerings are federal covered |
| State Role | Notice filing and fee only |
| Form D | Must file within 15 days of first sale |
| Antifraud | State antifraud still applies |
State Private Placement Exemptions
| Requirement | Details |
|---|
| Limited Offerees | Usually 10-35 purchasers |
| No General Advertising | No public solicitation |
| Buyer Sophistication | Purchasers must meet requirements |
| Disclosure | Information must be provided |
Existing Security Holder Transactions
Transactions with existing security holders may be exempt when:
| Transaction | Requirement |
|---|
| Stock Dividends | No consideration paid by holder |
| Stock Splits | No consideration paid |
| Rights Offerings | To existing shareholders only |
| Conversion | Convertible securities converting |
Key Requirements
| Element | Details |
|---|
| No Commission | No remuneration paid for sale |
| No Consideration | Shareholder doesn't pay for new securities |
| Existing Holders | Must already own securities |
Underwriter Transactions
Transactions between issuers and underwriters are exempt:
| Transaction | Reason |
|---|
| Issuer to Underwriter | Part of distribution process |
| Underwriter to Dealer | Syndicate distribution |
| Dealer to Dealer | Trading among dealers |
The assumption is that the securities will be registered before sale to the public.
Fiduciary Transactions
Transactions by fiduciaries are often exempt:
| Fiduciary | Transaction |
|---|
| Executor/Administrator | Selling estate securities |
| Trustee in Bankruptcy | Liquidating assets |
| Receiver | Court-appointed receiver sales |
| Guardian/Conservator | Sales for ward's benefit |
Requirement
| Element | Details |
|---|
| Court Supervision | Often court-approved |
| Fiduciary Capacity | Acting as fiduciary, not personally |
| Proper Authority | Within scope of fiduciary powers |
Preorganization Certificates
Subscriptions for a new corporation being formed:
| Requirement | Details |
|---|
| Limited Subscribers | Maximum 10 subscribers |
| No Payment Until | Minimum capital is raised |
| No Commission | No remuneration paid |
| Organizational | For forming new entity only |
Unsolicited Brokerage Transactions
When a broker-dealer executes a customer-initiated order without solicitation:
| Requirement | Details |
|---|
| Customer-Initiated | Customer requests trade |
| No Recommendation | Broker did not solicit |
| Execution Only | Just filling an order |
Summary: Transaction Exemptions
| Transaction Type | Key Requirement |
|---|
| Isolated Non-Issuer | Not regular business, not issuer |
| Institutional | Sophisticated buyer |
| Private Placement | Limited offerees, no advertising |
| Existing Holders | No commission, no consideration |
| Underwriter | Part of distribution |
| Fiduciary | Court-supervised, proper authority |
| Preorganization | ≤10 subscribers, no payment |
| Unsolicited | Customer-initiated, no recommendation |
Key Takeaways
- Transaction exemptions apply to specific transactions, not the security
- Resale of securities acquired in exempt transaction may require registration
- Antifraud provisions apply to ALL transactions, exempt or not
- Rule 506 offerings are federal covered—only notice filing required
- Institutional investor exemption based on sophistication
- Isolated non-issuer means not in the securities business