Section 3 Exempt Securities and Intrastate Offerings
Quick Answer
Securities Act Section 3 lists classes exempt from registration based on issuer type, including US government, bank, commercial paper, nonprofit, and municipal securities. Section 3(a)(11) plus Rules 147 and 147A provide safe harbors for intrastate offerings that meet an 80% in-state doing-business test. Exempt from registration never means exempt from antifraud liability under Section 17 or 12(a)(2).
Some securities are exempt from SA registration not because they qualify for a private-placement exemption (Reg D) but because of the type of issuer or the scope of the offering. Securities Act (SA) Section 3 lists the most important of these categories. This section also covers the intrastate offering exemption and its two modern safe harbors, Rule 147 and Rule 147A.
Which securities are exempt from registration under Securities Act Section 3?
Section 3 lists classes of securities that are exempt from SA registration regardless of how they are offered. The key categories tested on Series 6:
| Subsection | Exempt Securities |
|---|---|
| 3(a)(2) | US government securities, agency securities, bank-issued securities, securities of certain public instrumentalities |
| 3(a)(3) | Commercial paper with maturities of 270 days or less used for current transactions |
| 3(a)(4) | Securities issued by non-profit, religious, educational, benevolent, or charitable organizations |
| 3(a)(5) | Securities issued by savings and loans and building and loan associations |
| 3(a)(11) | Intrastate offerings (detailed below) |
| 3(a)(12) | Municipal (state and local government) securities |
Exempt from Registration Is NOT Exempt from Antifraud
Section 3 securities remain fully subject to the antifraud provisions:
- Section 17 (covered in Topic 7)
- Section 12(a)(2) (civil liability for material misstatements)
Exam Tip: Gotchas
- Exempt from registration is NEVER exempt from antifraud. A false statement in a commercial paper offering (3(a)(3)), a municipal bond sale (3(a)(12)), or a charity bond (3(a)(4)) is still actionable under SA Section 17 and Section 12(a)(2).
What does the Section 3(a)(11) intrastate offering exemption require?
Section 3(a)(11) exempts offerings conducted entirely within a single state from federal registration. The theory is that local financing can be overseen by the state rather than the SEC.
Requirements for Section 3(a)(11):
- The issuer must be organized in the state where the offering occurs
- A significant amount of business must be conducted in that state
- All offers and sales must be made only to residents of that state
The All-or-Nothing Trap
Section 3(a)(11) is an all-or-nothing test. A single out-of-state offer or sale can destroy the entire exemption for every purchaser, converting the whole offering into an unregistered public offering.
Exam Tip: Gotchas
- Section 3(a)(11) and Rule 147 are all-or-nothing. Even ONE out-of-state sale (or one out-of-state offer under Rule 147) destroys the entire exemption. Contrast with Reg D Rule 508, where insignificant deviations may be forgiven for the individual purchaser. Intrastate offers do NOT get the same grace.
What are the Rule 147 safe harbor requirements for intrastate offerings?
Rule 147 is an objective safe harbor that gives bright-line tests for compliance with Section 3(a)(11).
The "Doing Business" Test (80% Rule)
The issuer must meet all three of these in-state benchmarks:
- 80% of revenues from in-state operations
- 80% of assets located in-state
- 80% of net proceeds used for in-state operations or real property
Investor Residency
- All offerees AND purchasers must be in-state residents
- Any offer made to a single out-of-state resident destroys the safe harbor
Resale Restriction
- Purchasers may not resell to out-of-state persons for 6 months from the last sale by the issuer
- Certificates must carry appropriate legends disclosing the resale limitation
How does Rule 147A differ from Rule 147?
Rule 147A was adopted in 2016 to accommodate modern communication channels (the internet).
| Feature | Rule 147 | Rule 147A |
|---|---|---|
| Offers to out-of-state residents | Prohibited | Permitted (including via internet) |
| Sales to out-of-state residents | Prohibited | Prohibited |
| Issuer incorporation | Must be in-state | May be out-of-state if principal place of business is in-state |
| 6-month resale limit | Applies | Applies |
| 80% doing-business test | Applies | Applies |
Exam Tip: Gotchas
- Rule 147A allows OFFERS to out-of-state residents, but SALES must still be only to in-state residents. The internet-age distinction: an issuer can market broadly, but only state residents can buy. Rule 147 (the older safe harbor) is stricter and blocks even out-of-state offers.
Think of it this way: Before 2016, an issuer that published anything online about its intrastate offering risked losing the exemption because strangers out of state could see it. Rule 147A fixed that by separating who can see the ad (anyone) from who can buy (in-state residents only).