Registration Exemptions
Not every security or transaction requires registration. The Uniform Securities Act and federal securities laws provide two categories of exemptions: exempt securities (the product itself is exempt) and exempt transactions (the way the security is sold is exempt). Understanding the difference is critical for the exam.
Exempt Securities
Certain types of securities are always exempt from state registration, regardless of how they are sold:
| Exempt Security | Rationale |
|---|---|
| U.S. government and agency securities | Backed by full faith and credit of the federal government |
| Municipal securities | Issued by state/local governments; regulated separately |
| Securities issued by banks and savings institutions | Already heavily regulated by banking authorities |
| Securities issued by insurance companies | Regulated by state insurance departments |
| Securities listed on national exchanges | Federal covered securities under the National Securities Markets Improvement Act (NSMIA) |
Important limitations:
- Insurance company exemption applies to the company's own securities (stock), NOT to variable products sold by the company
- Variable annuities and variable life insurance ARE securities and are NOT exempt
- The exemption covers registration only; antifraud provisions ALWAYS apply
Exam Tip: Gotchas
- "Exempt from registration" does NOT mean "exempt from everything." Even U.S. government bonds are subject to state antifraud authority. This is one of the most frequently tested concepts on the Series 66.
- Insurance company stock is exempt, but variable annuities are NOT. The exemption covers securities the insurance company itself issues (its own stock). Variable annuities and variable life insurance are separate securities that must be registered.
Exempt Transactions
Even if a security itself is not exempt, certain types of transactions may be exempt from registration:
State-Level Exempt Transactions
| Exempt Transaction | Description |
|---|---|
| Private placements | Limited offerings to a small number of purchasers |
| Issuer-underwriter transactions | Transactions between issuers and underwriters during the distribution process |
| Isolated non-issuer transactions | Ordinary secondary market trades (most everyday stock purchases) |
| Unsolicited brokerage transactions | Client initiates the trade without any solicitation from the broker |
| Institutional investor transactions | Sales to banks, insurance companies, pension funds, and other institutional buyers |
Federal Exempt Transactions - Regulation D
Regulation D provides the most important federal exemptions for private placements. These are transaction exemptions, meaning the security itself may not be exempt, but the specific offering does not need to be registered.
Rule 504
- Allows offerings up to $10 million in a 12-month period
- Can sell to any number and type of investor
- No specific disclosure requirements mandated by the SEC
- Issuer must file Form D with the SEC within 15 days of the first sale
- Not available to Exchange Act reporting companies or blank-check companies
Rule 506(b) - Private Placements Without General Solicitation
- Unlimited amount of capital can be raised
- Unlimited number of accredited investors
- Up to 35 non-accredited investors (but they must be "sophisticated," meaning capable of evaluating the investment)
- No general solicitation or advertising permitted
- Must provide specified disclosure documents to non-accredited investors
Rule 506(c) - Private Placements With General Solicitation
- Unlimited amount of capital can be raised
- Only accredited investors may participate (no non-accredited investors allowed)
- General solicitation and advertising IS permitted (ads, social media, public events)
- Issuer must take reasonable steps to verify each investor's accredited status (self-certification alone is NOT sufficient)
Rule 506(b) vs. Rule 506(c) Comparison
| Feature | Rule 506(b) | Rule 506(c) |
|---|---|---|
| General solicitation allowed? | No | Yes |
| Accredited investors | Unlimited | Unlimited |
| Non-accredited investors | Up to 35 (must be sophisticated) | None allowed |
| Verification of accredited status | Self-certification acceptable | Must take reasonable steps to verify |
| Amount that can be raised | Unlimited | Unlimited |
| Federal covered security? | Yes | Yes |
Exam Tip: Gotchas
- Rule 506 offerings (both b and c) are federal covered securities. States cannot require registration but CAN require notice filings, collect fees, and enforce antifraud provisions. Rule 504 offerings are NOT federal covered securities; states retain full registration authority over these.
Exempt Securities vs. Exempt Transactions
| Feature | Exempt Securities | Exempt Transactions |
|---|---|---|
| What is exempt? | The security itself | The way the security is sold |
| Always exempt? | Yes, for registration | Only for that specific transaction |
| Resale exempt? | Yes | Not necessarily; resale may require registration |
| Antifraud applies? | Yes, always | Yes, always |
Memory Aid:
- Exempt security = the stuff is exempt (permanent)
- Exempt transaction = the trade is exempt (one-time)
Think of it this way: An exempt security is like having a permanent hall pass. No matter where you go (how you sell it), you never need to check in. An exempt transaction is like a one-time pass for a specific trip. The pass covers that sale only; if the buyer wants to resell, they need their own pass.
Key distinction: If a security is sold under a transaction exemption (like a Regulation D offering), the resale of that security by the purchaser may NOT be exempt. The purchaser may need to hold the security for a restricted period or find their own exemption to resell.
Exam Tip: Gotchas
- Transaction exemptions do NOT carry over to resales. If you buy restricted securities through a Regulation D offering, you cannot freely resell them. You must find your own exemption or hold for the restricted period.