Exempt Transactions (1933 Act)

The whole unit on one sheet: the exempt-transaction framework, Regulation D, the accredited investor, the resale safe harbors, Regulation S, and the private-placement process the exam loves.

The One-Liners That Win Points

• The exemption is for the TRANSACTION, not the security. The same share is freely tradable in a registered Initial Public Offering (IPO) but "restricted" when sold in a private placement.
• "Exempt transaction" is NOT the same as "exempt security." Government and bank securities are exempt securities; Regulation D, 144A, and Regulation S securities still need an exempt transaction to move.
• The no-public-offering exemption is the STATUTORY private-placement exemption; Regulation D is the SAFE HARBOR under it (bright-line conditions vs the Ralston Purina facts-and-circumstances burden).
• The accredited-only $5M exemption is a separate statutory exemption (accredited-only, $5 million cap in 12 months, no general solicitation), rarely used because the workhorse safe harbor has no cap.
• Form D is a NOTICE filing, not an approval, filed no later than 15 calendar days after the first sale.
• The verified-AI Reg D safe harbor permits general solicitation but is accredited-only with VERIFICATION; the private Reg D safe harbor bans solicitation but allows up to 35 non-accredited sophisticated purchasers.
• Insiders of the issuer are AUTOMATICALLY accredited regardless of personal wealth.
• A QIB is a $100M discretionary SECURITIES threshold, not $100M total assets under management (AUM); broker-dealers qualify at $10 million.
• The distribution compliance period is NOT a holding period; it restricts resales BACK INTO the U.S. during the window.
• The PPM is NOT a prospectus; it carries general anti-fraud liability, not registration-statement strict liability.

Numbers to Lock In

The Exempt-Transaction Framework

• The registration mandate of the Securities Act of 1933 prohibits any offer or sale unless a registration statement is in effect or an exemption applies; the burden of proof is on the party claiming the exemption.
• The no-public-offering exemption exempts "transactions by an issuer not involving any public offering"; the statute does not define "public offering."
• SEC v. Ralston Purina Co. (1953) supplies the factors: offeree sophistication (can they fend for themselves), access to information, number of offerees and manner of offer, and relationship of offerees to the issuer.
• The accredited-only $5M exemption: accredited investors only, $5 million cap in a 12-month period, general solicitation prohibited, Form D required, available regardless of reporting status.

Regulation D Framework

• Framework rules bind every Reg D offering: definitions (supplies the accredited-investor definition), general conditions, and Form D.
• Four general conditions: integration, information delivery (triggered by even ONE non-accredited purchaser, then furnished to EVERY investor), manner of offering (general-solicitation ban, overridden only by the verified-AI safe harbor), and resale limitations (Reg D securities are restricted securities).
• Integration bright-line safe harbor: an offering completed more than 30 calendar days before another begins, or more than 30 days after another ends, is not integrated.
• Form D: filed no later than 15 calendar days after the first sale (the date the first investor is irrevocably contractually committed), electronically on EDGAR. A late Form D does not automatically blow the federal exemption but risks state blue-sky problems.
• Small-offering Reg D tier: up to $10 million in any 12-month period, no investor cap, restricted securities, NO federal preemption (blue-sky required in every state), barred to reporting, investment, blank-check, and bad-actor companies.
• Workhorse safe harbor securities are "covered securities" preempted from state registration (states get notice filings and fees only).

Accredited Investor Definition

• Individual paths: net worth over $1 million (excluding the primary residence, since the Dodd-Frank Act of 2010), income of $200,000 (or $300,000 joint) in each of the two most recent years with a reasonable expectation of the same, a Series 7, Series 65, or Series 82 license in good standing, or knowledgeable-employee status.
• Income is a two-year look-back, not an average ($400K one year plus $150K the next fails).
• The professional-license path does not require active industry employment.
• Entity paths: institutional status, an entity with assets over $5 million, family offices with at least $5 million AUM and family clients, all-accredited entities, and insiders of the issuer.
• Anti-abuse: entities formed for the specific purpose of acquiring the securities are NOT accredited; trusts face a triple test ($5M assets AND not formed for the purpose AND sophisticated direction).

The Private Placement Exemption (Workhorse Safe Harbor)

• No dollar cap and federal preemption (covered securities) drive its dominance.
• Private Reg D safe harbor: general solicitation PROHIBITED; unlimited accredited plus up to 35 non-accredited sophisticated purchasers; accredited status on a "reasonable belief" standard (signed questionnaire generally sufficient).
• The 35 cap is on PURCHASERS, not offerees; one non-accredited purchaser triggers full information delivery to everyone.
• Verified-AI Reg D safe harbor: general solicitation PERMITTED; accredited investors ONLY; issuer must take "reasonable steps to verify" (a signed questionnaire alone is NOT sufficient).
• Both safe harbors yield RESTRICTED securities; once an issuer takes the verified-AI path it cannot later add non-accredited investors.

Restricted and Control Share Resale Safe Harbor

• Lets a holder resell without being deemed an underwriter under the 1933 Act's underwriter definition. Covers restricted securities (from exempt transactions) and control securities (held by an affiliate: officer, director, 10%+ holder, or otherwise controlling).
• A person who WAS an affiliate within the last 90 days is still treated as an affiliate.
• Five affiliate conditions: (1) holding period 6 months (reporting) / 12 months (non-reporting); (2) current public information; (3) volume limit = GREATER of 1% of outstanding OR 4-week average weekly volume per 3-month period; (4) manner of sale via brokers' transactions or to a market maker; (5) Form 144 filing if over 5,000 shares OR $50,000 in any 3-month period.
• Non-affiliates carry a much lighter burden: satisfy only the holding period (plus current public information for the reporting-issuer window between the 6-month mark and 12 months held); no volume limit, manner of sale, or Form 144.
• A reporting-issuer non-affiliate who has held for at least 12 months can sell FREELY with no conditions.

QIB Private Resale Safe Harbor (144A)

• Lets restricted securities trade among Qualified Institutional Buyers (QIBs) with NO holding-period or volume conditions; the protective theory is buyer sophistication, not passage of time.
• QIB definition: an institution owning and investing on a discretionary basis at least $100 million in securities of non-affiliated issuers; banks need $100M PLUS $25M audited net worth; broker-dealers qualify at $10 million.
• $100M discretionary SECURITIES, not $100M AUM: a foundation with $500M cash but only $80M in securities is NOT a QIB.
• General solicitation is permitted in OFFERS, but SALES must go only to persons reasonably believed to be QIBs (reasonable belief, not the verified-AI verification standard).
• Standard high-yield structure: issuer sells to an initial purchaser (investment bank) in a no-public-offering sale, who immediately resells to QIBs; buyers get an offering memorandum; often paired with an offshore tranche.

Regulation S Offshore Offerings

• Lets issuers sell securities outside the U.S. without registering; the protective theory is GEOGRAPHIC, not sophistication-based.
• Two general conditions: an offshore transaction and no directed selling efforts in the United States.
• Category number measures RESTRICTION INTENSITY: Category 1 is lightest (basic conditions only), Category 3 is heaviest.
• Distribution compliance periods: Category 2 = 40 days; Category 3 = 40 days (debt), 6 months (reporting-issuer equity), 1 year (non-reporting equity).
• The distribution compliance period is NOT a holding period; it restricts resales BACK INTO the U.S. After it ends, a non-U.S. holder may resell into the U.S. subject to the restricted-share resale safe harbor or the QIB safe harbor.
• "Directed selling efforts" is broader than direct advertising (press releases, U.S. road shows, certain U.S.-distributed research can all count).

The Private Placement Process

• Document stack: teaser/executive summary, confidentiality/NDA, private placement memorandum (PPM), security term sheet, subscription agreement, and the engagement letter / placement agent agreement.
• The placement agent agreement is the BANKER's contract with the issuer (fees, exclusivity, indemnification, lock-up); the subscription agreement is the INVESTOR's contract.
• The PPM is NOT a prospectus: not filed as a registration statement, not subject to SEC comment, carries general anti-fraud liability rather than registration-statement strict liability.
• Process sequence: engagement letter, teaser plus NDA, PPM plus term sheet, management meetings, non-binding commitments (soft circles), locked terms plus subscription agreements, closing, then Form D within 15 days of first sale.
• Non-binding commitments come BEFORE the subscription agreement, and Form D is filed AFTER the first closing.

Resales by Control Persons

• Affiliates cannot resell freely because the 1933 Act's underwriter definition sweeps in anyone selling for a person controlling or controlled by the issuer in a distribution.
• Affiliate status hinges on CONTROL, not just ownership percentage: a 5% holder with two board seats may be an affiliate; an 8% passive holder may not. Officers and directors are presumed affiliates regardless of share count.
• Four paths to resale: the restricted-share resale safe harbor (most common), the QIB safe harbor (if buyers are QIBs), a registered resale on Form S-1 or Form S-3 (selling-stockholder registration, expensive, names the affiliate), or the offshore resale safe harbor.

Top Gotchas

• The exemption attaches to the TRANSACTION, not the security; the character of the security itself does not change.
• Failing a Reg D condition does not automatically blow the underlying statutory private-placement exemption; it strips the bright-line safe harbor and forces a facts-and-circumstances defense.
• The 35 non-accredited limit is on PURCHASERS, not offerees, and one non-accredited purchaser triggers full information delivery to EVERYONE.
• The verified-AI safe harbor requires VERIFICATION, not self-certification; a signed questionnaire that suffices for the private safe harbor's "reasonable belief" is not enough here.
• Holding period is 6 months (reporting) / 12 months (non-reporting), and the volume limit is the GREATER of 1% or 4-week average volume, not the lesser.
• Form 144 trigger is 5,000 shares OR $50,000 in any 3-month period, not "and."
• Banks need BOTH $100M discretionary securities AND $25M net worth to be a QIB; individuals never qualify.
• Category 3 (not Category 1) is the strictest Regulation S category.
• The 85% use-of-proceeds floor is calculated against GROSS proceeds and excludes offering costs, discounts, and commissions; it is an MPO concept, not a third-party-participation one.
• The FINRA Corporate Financing Department filing is a NOTICE filing, not a clearance.

One-Breath Recap

The Securities Act of 1933 requires registration unless an exempt transaction applies, and the exemption attaches to the transaction, not the security, so a share freely tradable in an IPO is restricted when sold privately. Issuers raise unregistered capital through the no-public-offering exemption (operationalized by Regulation D, where the accredited investor definition, the 35 non-accredited cap under the private safe harbor, verification under the verified-AI safe harbor, and Form D within 15 days of first sale are the tested mechanics) or through Regulation S offshore, where category number measures restriction intensity and the distribution compliance period gates resales back into the U.S. rather than acting as a holding period. Holders get liquid through the restricted-share resale safe harbor (6-month reporting / 12-month non-reporting holding period, greater-of volume limit, Form 144 over 5,000 shares or $50,000), the QIB safe harbor (144A) for institutions at $100 million discretionary securities, or Regulation S. Control persons face the underwriter definition and reach the market via those same safe harbors or an expensive registered resale, while the PPM anchors the private-placement document stack as an anti-fraud, not strict-liability, near-prospectus. Master which exemption lets an issuer sell and which safe harbor lets a holder resell, and this twelve-section unit answers itself.

Need more than the recap? This is a condensed summary. If it is not enough, read the full Exempt Transactions (1933 Act) unit for the complete lesson.