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.
What Is 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 whoever claims it.
Which Securities Are Exempt?
- Government: United States Treasury securities, municipal bonds (both general obligation and revenue), and agency issues.
- Canadian and other foreign government securities. Canada and its provinces and instrumentalities carry no diplomatic-relations test; that condition attaches only to other foreign governments. One condition reaches both: the security must be recognized as a valid obligation by the issuer or guarantor.
- Bank and savings and loan securities, only when the security represents an interest in, debt of, or a guarantee by that institution. Credit union securities carry no such limit: it is enough that the security is issued or guaranteed by the credit union.
- 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 written notice to the Administrator 30 days before the plan's inception, not merely "prior" notice.
What Are Federal Covered Securities?
- Created by the National Securities Markets Improvement Act, which preempts state registration for these categories.
- Exchange-listed (or authorized-for-listing) securities and investment company shares (mutual funds and unit investment trusts) registered, or with a registration statement filed, under the Investment Company Act of 1940.
- Securities sold to qualified purchasers, other SEC-defined exempt-offering categories (a municipal security is the exception in its own issuer's state), and only the uncapped tier of Regulation D private placements. The smaller-dollar capped tier is never federal covered.
- States cannot require registration but may still require a notice filing plus a fee for most categories, and always keep full antifraud authority. Exchange-listed securities are the exception: federal law bars a state from requiring any filing or any fee on them, and they can never be stop-ordered either.
Which One-Liners 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 federal covered, preempting state registration 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.
Which Numbers Matter Most?
| 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 | 30 days before inception (60 days after for an existing plan; 30 days before reopening a closed one) |
| Federal covered notice filing (uncapped Reg D 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 |
Which Gotchas Trip Students Up?
- 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; exchange-listed, nonprofit, and employee benefit plan securities, plus every exempt transaction, 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 are preempted from state registration, and most (fund shares, qualified-purchaser sales, the uncapped Regulation D tier) still owe a notice filing and fee, while exchange-listed ones owe nothing at all: no filing, no fee, no stop order. The Administrator cannot revoke government, financial-institution, or commercial-paper exemptions, and no exemption ever shields fraud.
Need more than the recap? Read the full Exemptions from Registration unit.