Exempt Transactions

Now let's shift from what the security IS to HOW it is sold. Under Section 402(b) of the Uniform Securities Act (USA), certain transactions are exempt from the registration requirement of Section 301. Unlike exempt securities, these exemptions apply only to the specific transaction. The same security may need registration if sold in a different manner.

Non-Issuer Transaction Exemptions

The first group of exempt transactions involves non-issuer transactions (sales where the issuer does not receive the proceeds).

Isolated Non-Issuer Transactions (402(b)(1))

Any isolated non-issuer transaction, whether effected through a broker-dealer or not.

• "Non-issuer" means the transaction is not directly or indirectly for the benefit of the issuer (the issuer does not receive the proceeds)
• "Isolated" means the transaction is not part of a pattern of repeated sales; it is an occasional, one-time secondary market transaction
• Example: an individual selling shares they personally own to another individual in a one-time transaction

This is the most basic secondary market exemption. It allows ordinary investors to sell their securities without registration.

Exam Tip: Gotchas

• "Isolated" means not a pattern. If a person engages in repeated sales, the transactions are no longer "isolated" and this exemption does not apply. A control person who conducts regular sales of their holdings may not qualify.

Non-Issuer Transactions in Outstanding Securities (402(b)(2))

This is sometimes called the "manual exemption" because of the securities manual requirement. A non-issuer transaction by a registered agent of a registered broker-dealer is exempt if the security has been outstanding in the hands of the public for at least 90 days and ALL of these conditions are met:

Non-Issuer Transactions in Senior Securities (402(b)(2.1))

A non-issuer transaction by a registered agent of a registered broker-dealer is exempt if:

• The issuer is actually engaged in business (same as above)
• The security is senior in rank to the common stock (both as to dividends/interest and upon dissolution/liquidation)
• The security has been outstanding at least 3 years
• The issuer has NOT defaulted on payments during the current fiscal year or the three preceding fiscal years

Non-Issuer Transactions in Reporting Company Securities (402(b)(2.2))

A non-issuer transaction in an outstanding security is exempt if the issuer:

• Has a class of securities subject to registration under Section 12 of the Securities Exchange Act of 1934 and has been subject to reporting under Section 13 or 15(d) for at least 180 days before the transaction, OR
• Has a class of securities registered under the Investment Company Act of 1940, OR
• Has filed and maintained substantially comparable information with the Administrator for at least 180 days

Customer-Initiated and Wholesale Exemptions

Unsolicited Transactions (402(b)(3))

Any non-issuer transaction effected by or through a registered broker-dealer pursuant to an unsolicited order or offer to buy.

• The customer must initiate the transaction; the broker-dealer cannot solicit the order
• The Administrator may require the customer to acknowledge on a specified form that the sale was unsolicited
• The broker-dealer may be required to preserve a signed copy for a specified period

Exam Tip: Gotchas

• Unsolicited exemption applies ONLY to non-issuer transactions. If the issuer is selling its own securities, this exemption does not apply.
• The broker-dealer must be registered. An unregistered broker-dealer cannot claim this exemption.

Underwriter Transactions (402(b)(4))

Any transaction between the issuer and an underwriter, or among underwriters.

• This exempts the wholesale distribution process (the sales between the issuer and underwriting syndicate members, and among syndicate members)
• The exemption does NOT cover sales from the underwriter to the public; those require registration or another exemption

Collateral and Fiduciary Exemptions

Secured Debt Transactions (402(b)(5))

Any transaction in a bond or other evidence of indebtedness secured by a real or chattel mortgage or deed of trust, or by an agreement for the sale of real estate or chattels.

Key condition: the entire mortgage, deed of trust, or agreement, together with all the bonds or other evidences of indebtedness secured thereby, must be offered and sold as a unit.

If the debt and collateral are split up and sold separately, this exemption does not apply.

Fiduciary Transactions (402(b)(6))

Any transaction by a court-appointed or legally authorized fiduciary:

• Executor
• Administrator
• Sheriff or marshal
• Receiver
• Trustee in bankruptcy
• Guardian or conservator

These fiduciaries may need to sell securities as part of their duties (e.g., liquidating an estate, selling assets in bankruptcy). The exemption recognizes that these sales are made under legal authority, not as part of a securities distribution.

Bona Fide Pledge Transactions (402(b)(7))

Any transaction executed by a bona fide pledgee without any purpose of evading the Act.

• When a lender who holds securities as collateral sells them to satisfy the borrower's debt, that sale is exempt
• The pledge must be bona fide (genuine)
• The sale must not be a disguised distribution

Institutional and Private Exemptions

Institutional Buyer Transactions (402(b)(8))

Any offer or sale to the following institutional buyers (whether acting for themselves or in a fiduciary capacity):

• Banks, savings institutions, trust companies
• Insurance companies
• Investment companies (as defined in the Investment Company Act of 1940)
• Pension or profit-sharing trusts
• Other financial institutions or institutional buyers
• Broker-dealers

The rationale: institutional buyers are sophisticated enough to evaluate investments on their own and do not need the protection of state registration.

Exam Tip: Gotchas

• The exemption covers the sale TO the institution only. If the institution later resells to retail investors, that resale is a separate transaction that needs its own exemption or registration.

Limited Offering / Private Placement (402(b)(9))

Any transaction pursuant to an offer directed to not more than 10 persons (other than institutional buyers) in the state during any period of 12 consecutive months, whether or not any party is present in the state.

Two additional conditions:

• (A) The seller reasonably believes that all buyers in the state (other than institutional buyers) are purchasing for investment
• (B) No commission or other remuneration is paid for soliciting any prospective buyer in the state (other than institutional buyers)

Key rules:

• The limit of 10 applies to offerees (persons to whom the offer is directed), NOT buyers
• Institutional buyers listed in 402(b)(8) are NOT counted toward the 10-person limit
• The Administrator may by rule or order change the number of permitted offerees (increase or decrease), withdraw or further condition the exemption, or waive the conditions

Exam Tip: Gotchas

• The 10-person limit counts OFFEREES, not purchasers. If you make offers to 11 people (even if only 3 buy), the exemption is lost.
• Institutional buyers are excluded from the count.
• The Administrator has authority to change the number by rule or order.

Existing Holder and Pre-Effective Exemptions

Preorganization Certificate Exemption (402(b)(10))

Any offer or sale of a preorganization certificate or subscription is exempt if ALL three conditions are met:

Unlike the private placement exemption (402(b)(9)), the limit here is on the number of subscribers (not offerees); the offer can be publicly advertised. No subscriber may make any payment until the securities are registered or another exemption is available.

Offers to Existing Security Holders (402(b)(11))

Any transaction pursuant to an offer to existing security holders of the issuer (including holders of convertible securities, nontransferable warrants, or transferable warrants exercisable within 90 days) is exempt if EITHER:

• (A) No commission or other remuneration (other than a standby commission) is paid for soliciting any security holder in the state, OR
• (B) The issuer first files a notice specifying the terms and the Administrator does not disallow the exemption within 5 full business days

A standby commission (paid to an underwriter for their risk in committing to take down any unsubscribed portion) is permitted under option (A). This exemption is commonly used for rights offerings and stock dividends.

Pre-Effective Offers During Dual Registration (402(b)(12))

Any offer (but NOT a sale) of a security for which registration statements have been filed under BOTH the USA and the Securities Act of 1933.

Conditions:

• No stop order or refusal order is in effect
• No public proceeding or examination looking toward such an order is pending

This allows offers (but not sales) during the waiting period while dual registration is pending, similar to the federal "cooling off" period concept.

Exempt Transactions Summary Table