The Exemption Framework Under the USA
Before diving into the specific exemptions, you need to understand the framework that governs how securities can lawfully be offered and sold in a state.
Three Lawful Paths to Offering Securities
Under Section 301 of the Uniform Securities Act (USA), it is unlawful for any person to offer or sell any security in a state unless one of these three conditions is met:
- The security is registered under the Act (via filing, coordination, or qualification)
- The security or transaction is exempted under Section 402
- The security is a federal covered security
These are the only three lawful paths. There is no other legal basis for offering or selling a security in a state.
Exam Tip: Gotchas
If an exam question describes a security that is not registered, not exempt, and not federal covered, the sale is unlawful. There is no fourth option.
Exempt Securities vs. Exempt Transactions
This is one of the most important distinctions on the entire Series 63 exam.
| Feature | Exempt Securities | Exempt Transactions |
|---|---|---|
| Basis for exemption | The nature of the security itself (what it IS) | The manner or circumstances of the sale (HOW it is sold) |
| Who benefits | Anyone who offers or sells the security | Only the parties to the specific transaction |
| Permanence | Always exempt, regardless of how it is traded | Only the specific transaction is exempt; the same security may need registration in a different transaction |
| Example | A U.S. Treasury bond is always exempt | A private placement is exempt, but resale of the same stock to the public is not |
- Exempt securities carry their exemption with them; the exemption "travels" with the security no matter who is selling it or how
- Exempt transactions exempt only the specific transaction, not the security itself; the same security may require registration when sold in a different type of transaction
Antifraud Provisions Always Apply
This is the single most commonly tested principle in this area of the exam.
- Exemptions under Section 402 are NOT exemptions from the antifraud provisions of Sections 101 and 410(a)(2)
- Even if a security or transaction is exempt from registration, it is still subject to the full force of the antifraud rules
- A person who commits fraud in connection with an exempt security or exempt transaction can still be prosecuted and held civilly liable
The antifraud provisions apply to all securities transactions:
- Registered securities
- Exempt securities
- Exempt transactions
- Federal covered securities
There are no exemptions from Section 101.
Exam Tip: Gotchas
Any question asking whether an exemption shields someone from fraud liability is always answered "no." No exemption (whether for the security, the transaction, or federal covered status) provides protection from antifraud enforcement. This is tested repeatedly.
Burden of Proof
Under Section 402(d) of the Uniform Securities Act (USA):
- The burden of proving an exemption falls on the person claiming it
- The Administrator does not have to prove that an exemption does NOT apply
- The person asserting the exemption must affirmatively demonstrate that it does
In practice, claiming an exemption requires affirmative proof. The Administrator can challenge the claim and the burden falls on the party asserting the exemption.