A startup wants $8 million, a city needs to borrow, a founder wants to sell stock, and a European manufacturer wants U.S. pension money. None files a registration statement, and all can be legal.
Section 5 of the Securities Act of 1933 requires registration with the Securities and Exchange Commission (SEC) before a security is offered or sold, unless an exemption applies. The exemption decides who may buy and whether the buyer can resell.
Some securities are exempt because of who issues them. U.S. government and agency securities, municipal securities and bank-issued securities need no registration under Securities Act Section 3(a). Neither do commercial paper maturing in nine months or less, nonprofit issues, and insurance policies and fixed annuities. Variable annuities and variable life policies are not exempt, because their buyers bear the investment risk.
KEY: Exempt means exempt from registration, never from fraud rules. Securities Act Section 17(c) keeps antifraud liability on every Section 3 security.
Other sales are exempt because of how they happen. Trades by anyone other than an issuer, underwriter or dealer are exempt under Section 4(a)(1).
Common mistakes
- Counting accredited investors toward the 506(b) limit of 35. Only non-accredited purchasers count, so a deal with 50 accredited and 35 non-accredited buyers qualifies.
- Taking the lesser of the two Rule 144 volume tests, or ignoring the affiliate's other sales in the past three months. Use the greater test, then subtract.
- Applying the 10% Tier 2 cap to accredited buyers, Tier 1 deals or exchange-listed Tier 2 deals. It reaches only non-accredited buyers in unlisted Tier 2 offerings.
Bottom line
- Exempt securities (governments, agencies, municipals, bank issues, commercial paper of nine months or less, nonprofits, insurance and fixed annuities) skip registration but never the antifraud rules.
- Accredited investors earn over $200,000 ($300,000 jointly) in each of two years and expect it again, have net worth over $1 million excluding the home, hold a Series 7, 65 or 82, are insiders, or are entities with over $5...
- Rule 506(b) bans advertising and allows unlimited accredited buyers plus 35 sophisticated non-accredited buyers who receive disclosure; Rule 506(c) allows advertising to verified accredited buyers only.
- Rule 504 caps raises at $10 million in 12 months, and Form D is due 15 calendar days after the first sale.
Exam shortcut
Sort the stem first. A named issuer type (government, municipality, bank, nonprofit), or an insurance policy or fixed annuity, signals an exempt security. An insurer's own stock is not exempt. A described sale signals an exempt transaction. "Advertising" points to 506(c), Regulation A or 147A. A few sophisticated non-accredited buyers with no advertising point to 506(b).
The full lesson (about 3,325 words, 22 min read) adds 2 worked examples, all 4 common mistakes, a self-check, free in the app.
Learning objectives
- A5
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