Quick Answer
Exempt securities (like government bonds and bank securities) don't need registration, no matter how they're sold; the core categories (government, bank) can't be revoked, though the administrator can deny or revoke certain other categories (e.g., nonprofit, employee-benefit-plan) prospectively. Exempt transactions (like private placements) exempt the specific sale, not the security itself, so resales may still need registration. Both types of exemption cover registration only; antifraud provisions always apply.
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 exempt from state registration, regardless of how they are sold. Core categories (government, bank) can't be revoked, though the administrator can prospectively deny or revoke the exemption for certain other categories (e.g., nonprofit, employee-benefit-plan securities). The most commonly tested categories include:
| Exempt Security | Rationale |
|---|---|
| U.S. government and agency securities | Exempt by statutory category; Treasuries and Ginnie Mae carry full faith and credit backing, though some other agency securities (e.g., Fannie Mae, Freddie Mac) do not |
| 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) |
The Uniform Securities Act also exempts several other categories, including qualifying Canadian and foreign-government securities, credit-union securities, regulated public-utility and common-carrier securities, nonprofit-organization securities, qualifying short-term commercial paper, and certain employee-benefit-plan interests.
Important limitations:
- Insurance company exemption applies to securities issued by, representing an interest in or debt of, or guaranteed by, a qualifying insurance company, 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, debt, and guaranteed securities are exempt, but variable annuities are NOT. The exemption covers securities issued by or guaranteed by the insurance company, not just 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 | An offer directed to no more than 10 non-institutional offerees in the state within a 12-month period, where the seller reasonably believes the purchasers are buying for investment (not resale) and no commission or remuneration is paid for soliciting them |
| Issuer-underwriter transactions | Transactions between issuers and underwriters during the distribution process |
| Isolated non-issuer transactions | An occasional, one-off resale (not part of regular, repeated trading) |
| Unsolicited transactions | A non-issuer transaction effected by or through a registered broker-dealer, where the 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.
Small-Issue Exemption
- 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
Traditional Private-Placement Exemption (No 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
Verified-Accredited-Investor Private-Placement Exemption (General Solicitation Allowed)
- 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 under a flexible facts-and-circumstances standard, using one or more nonexclusive methods (self-certification alone is NOT sufficient)
Traditional vs. Verified-Accredited Private-Placement Comparison
| Feature | Traditional (No General Solicitation) | Verified-Accredited (General Solicitation OK) |
|---|---|---|
| General solicitation allowed? | No | Yes |
| Accredited investors | Unlimited | Unlimited |
| Non-accredited investors | Up to 35 (must be sophisticated) | None allowed |
| Verification of accredited status | Reasonable belief standard (self-certification alone, without more, is not by itself sufficient) | Must take reasonable steps to verify, via nonexclusive facts-and-circumstances methods |
| Amount that can be raised | Unlimited | Unlimited |
| Federal covered security? | Yes | Yes |
Exam Tip: Gotchas
- Both private-placement exemptions (with or without general solicitation) produce federal covered securities. States cannot require registration but CAN require notice filings, collect fees, and enforce antifraud provisions. The small-issue exemption (up to $10M / 12 months) does NOT produce federal covered securities; states retain full registration authority over those offerings.
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 in core categories; the administrator can prospectively deny/revoke some other categories | 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 (durable, though not always irrevocable)
- Exempt transaction = the trade is exempt (one-time)
Think of it this way: An exempt security is like a standing hall pass valid no matter where you go (how you sell it), durable for core categories, though the administrator can revoke it prospectively for some others. 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.
What Should You Check on Exam Day?
- Can you name the most commonly tested categories of exempt securities (government/agency, municipal, bank, insurance company, exchange-listed) and explain that exempt securities are exempt regardless of how they're sold; plus recall that several other categories exist beyond this core list?
- Do you know the insurance company exemption covers securities issued by, or guaranteed by, a qualifying insurer (not just stock), not variable annuities or variable life insurance?
- Can you list the state-level exempt transactions: private placements, issuer-underwriter transactions, isolated non-issuer transactions, unsolicited transactions (through a registered broker-dealer), and institutional investor transactions?
- Do you know the dollar cap and investor rules for the Regulation D small-issue exemption ($10 million, any number/type of investor, Form D within 15 days)?
- Can you distinguish the traditional private-placement exemption (no general solicitation, up to 35 non-accredited) from the verified-accredited exemption (general solicitation allowed, all accredited and verified)?
- Do you know that only the two private-placement exemptions produce federal covered securities, not the small-issue exemption?
- Can you explain why a security bought under a transaction exemption may not be freely resellable?