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 carries its exemption into any trade while the security continues to qualify and the exemption remains available. 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 follows qualifying security or issuer status while available; specified categories can be denied or revoked.
- 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 must represent an interest in, debt of, or guarantee by that institution. Credit union issues or guarantees qualify when the issuer is a federal credit union or one organized and supervised under this state's laws.
- Insurance company securities (a state-organized company authorized to do business in this state), but NOT variable annuities or similar variable contracts.
- Railroad, common carrier, public utility, and holding company securities meeting one of the Act's regulation tests, such as rate or issuance regulation.
- Nonprofit securities (for example religious, educational, charitable, or fraternal issuers) 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 not federal covered under the Regulation D category.
- States cannot require registration but may still require a notice filing plus a fee for most categories, and retain antifraud authority. Exchange-listed securities are the exception: federal law bars a state notice filing or fee, and the notice-filing stop-order provision excludes them.
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: no state registration, notice filing, or fee.
- The unsolicited order 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 (such as an executor, receiver, trustee in bankruptcy, or 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 qualifying government bond carries its exemption into later trades; a private-placement exemption covers that sale only. A later public resale needs its own registration, applicable exemption, or federal-covered status.
- 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, carrier and utility, 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 needs registration, federal covered status, or an exemption. Qualifying government, bank, insurance-company, nonprofit, and commercial-paper exemptions travel with the security while the qualifying status and exemption remain available; isolated non-issuer, unsolicited, institutional, fiduciary, and private-placement exemptions protect only the specified trade. The private-placement limit is ten noninstitutional offerees in twelve months, with investment-purpose belief and no compensation for soliciting those offerees. Permitted notice filings and fees apply only if the state requires them; exchange-listed securities owe neither and are excluded from notice-filing stop orders. The Administrator cannot revoke protected government, financial-institution, or commercial-paper exemptions. No exemption shields fraud.
Need more than the recap? Read the full Exemptions from Registration unit.