Quick Answer
A security may be offered in a state only three ways: it is registered, it is a federal covered security, or the security or transaction is exempt. An exempt security stays exempt in any trade. An exempt transaction exempts only the specific sale. No exemption ever shields fraud.
The whole unit on one sheet: the framework, exempt securities, federal covered securities, exempt transactions, and revocation, plus the gotchas the exam loves.
The Exemption Framework
- Three lawful paths to offer or sell a security in a state: registered, exempt (security or transaction), or a federal covered security. There is no fourth option.
- Exempt security: the exemption comes from what the security IS; it travels with the security no matter who sells it or how.
- Exempt transaction: the exemption comes from HOW it is sold; only the specific trade is exempt, and the same security may need registration in a different transaction.
- The burden of proving an exemption falls on the person claiming it, not on the Administrator.
Exempt Securities (What It IS)
- Government: United States Treasury securities, municipal bonds (both general obligation and revenue), and agency issues.
- Canadian and other foreign government securities, but a foreign issuer is exempt only while the United States maintains diplomatic relations.
- Bank, savings and loan, and credit union securities, only when the security represents an interest in, debt of, or a guarantee by that institution.
- Insurance company stock and bonds, but NOT variable annuities or variable life (those are securities that must be registered).
- Railroad, common carrier, public utility, and holding company securities that are otherwise regulated as to rates or issuance.
- Nonprofit securities (religious, educational, charitable, fraternal) and commercial paper meeting maturity, denomination, and rating tests.
- Employee benefit plan securities, conditioned on prior written notice to the Administrator.
Federal Covered Securities
- Created by the National Securities Markets Improvement Act, which preempts state registration for these categories.
- Exchange-listed securities and investment company shares (mutual funds and unit investment trusts) registered under the Investment Company Act of 1940.
- Securities sold to qualified purchasers and certain Regulation D private placements.
- States cannot require registration but may still require a notice filing plus a fee, and always keep full antifraud authority.
The One-Liners That Win Points
- Fixed annuities are not securities at all; variable products are securities and are NOT covered by the insurance exemption.
- Exchange-listed securities are now federal covered, which preempts state registration even more strongly than the old listing exemption did.
- The unsolicited order is the single most-tested transaction exemption: the customer must initiate, and the sale must be non-issuer through a registered broker-dealer.
- Underwriter transactions (issuer to underwriter or among underwriters) are exempt, but sales from underwriter to the public are NOT.
- Institutional-buyer, fiduciary (executor, receiver, trustee in bankruptcy, guardian), and bona fide pledge sales are exempt transactions.
Numbers to Lock In
| Item | Value |
|---|---|
| Private-placement (limited offering) offerees | not more than 10 non-institutional persons per 12 months |
| Preorganization certificate | 10 or fewer subscribers, no commissions, no payments |
| Institutional buyers in the private-placement count | excluded (do not count toward the 10) |
| Employee benefit plan notice | written notice to the Administrator before inception |
| Federal covered notice filing (private placement) | filed within 15 days of the first sale in the state |
| Offer to existing security holders | Administrator has 5 full business days to disallow |
| Summary revocation hearing | set within 15 days of a written request |
Top Gotchas
- Exempt SECURITY versus exempt TRANSACTION: a government bond is always exempt; a private placement exempts only that trade, and reselling the same stock to the public is not exempt.
- Antifraud never gets exempted. No exemption (security, transaction, or federal covered) shields anyone from fraud; the Administrator can always pursue it.
- The private-placement limit counts offerees, not purchasers: offer to 11 people and the exemption is lost even if only a few buy.
- The unsolicited exemption applies only to non-issuer sales through a registered broker-dealer; an issuer selling its own securities cannot use it.
- Government, financial-institution, and commercial-paper exemptions are immune from revocation; only exchange-listed, nonprofit, employee benefit plan securities, and all exempt transactions can be revoked.
One-Breath Recap
A security is lawful in a state only if it is registered, a federal covered security, or exempt. An exempt security (government, bank, insurance stock and bonds, nonprofit, commercial paper) stays exempt in any trade; an exempt transaction (isolated non-issuer, unsolicited order, institutional buyer, fiduciary, private placement to 10 or fewer offerees in 12 months) exempts only that specific sale. Federal covered securities (exchange-listed, fund shares) are preempted from state registration but still owe notice filings. The Administrator cannot revoke government, financial-institution, or commercial-paper exemptions, and no exemption ever shields fraud.
Need more than the recap? This is a condensed summary. If it is not enough, read the full Exempt Securities and Exempt Transactions unit for the complete lesson.