Exempt Securities vs. Exempt Transactions

The distinction determines who has to worry about registration after the deal closes: the issuer alone, or every investor who later wants to resell.

What Makes a Security Exempt From Registration Entirely?

The Securities Act removes specified classes of securities from the registration requirement entirely, regardless of how they are later sold. Because the exemption attaches to the security itself, a security exempt this way generally stays exempt through later resales. The Act names thirteen such classes. Three of them matter most here:

• Government and bank securities: issued or guaranteed by the U.S. government, a state, or a bank
• Short-term commercial paper: a note, draft, bill of exchange, or banker's acceptance that arises out of a current transaction, or funds one, with a maturity of nine months or less at issuance, not counting days of grace. A renewal of that note is exempt too, as long as the renewal is limited the same way. The short maturity alone is not enough
• Insurance and annuity contracts: issued by a regulated insurance company

Separately, the SEC has its own rulemaking authority to add further exemptions for small issues, by rule and subject to a dollar cap. Regulation A is adopted under this authority (covered in full in the Regulation A unit).

Exam Tip: Gotchas

• Not every private-offering exemption traces to the private-placement exemption. Regulation A traces to the SEC's separate small-issue rulemaking authority, a different statutory basis with different resale consequences than a private placement. So does Regulation D's own small-offering exemption, so do not treat Regulation D as resting on a single statutory basis.

What Makes a Transaction Exempt Instead of the Security?

Rather than exempting a class of securities, the Securities Act also removes specified transactions from the registration requirement. The exemption attaches only to that transaction, not permanently to the security.

• Transactions by an issuer not involving any public offering: this is the statutory basis for the private placement, the exemption a Private Securities Offerings Representative sells against every day. Regulation D's no-dollar-limit private placement exemption is the safe harbor under it (covered in full in the Regulation D unit).
• Ordinary trading transactions: transactions by a person other than an issuer, underwriter, or dealer
• Most dealer transactions: transactions by a dealer once the security's distribution is complete

Why Does the Security-vs-Transaction Distinction Matter for Resale?

A security sold in a private placement is not itself exempt from registration; only that one sale is. The investor who buys it holds a restricted security and needs its own exemption, or a registration statement, to resell it (resale to a large institutional buyer is covered in the investor-qualification unit).

A security exempt because of what it is, rather than how it was sold, carries no such restriction. The exemption belongs to the security, not to a single sale of it, so an ordinary resale needs nothing further.

Exam Tip: Gotchas

• "Exempt security" and "exempt transaction" are not interchangeable. A private placement never makes the security itself exempt; it exempts only the issuer's original sale, and the resulting restricted security still needs its own exemption or registration to be resold.

What Should You Check on Exam Day?

• Identify whether a fact pattern describes a permanently exempt security or a one-time exempt transaction before answering a resale question.
• Match Regulation A and Regulation D's small-offering exemption to the SEC's small-issue rulemaking authority, and Regulation D's no-dollar-limit private placement exemption to the private-placement exemption; do not answer as though Regulation D rested on a single statutory basis.
• Confirm that a restricted security's later resale still needs its own exemption or registration, even though the original sale was exempt.