What Are Exempt Securities and Transactions? - Definition & Types

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  • 0:01 Section 4: Exempt Securities
  • 2:24 Regulation D
  • 5:48 Lesson Summary
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Lesson Transcript
Instructor: James Walsh

M.B.A. Veteran Business and Economics teacher at a number of community colleges and in the for profit sector.

Exempt securities are financial instruments that do not need to be registered with the Securities Exchange Commission (SEC). They are generally backed by the government and may carry a lesser risk than securities offered by public companies.

Section 4: Exempt Securities

Diane and Dan are so excited! They are planning to bring equity investors into their interior design business for the first time. That means they will be issuing shares of stock. However, they soon find out that this could mean having to file a mountain of paperwork with the Securities and Exchange Commission (SEC). Dan calls a securities broker friend and receives some promising news. It seems that not all securities need to be registered with the SEC. If Diane and Dan's business qualifies for an exemption, they may only need to fill out a short form instead of that big pile of paper. So they both start going through the SEC website to see if they qualify. Here's the information they find:

Securities are financial instruments sold by publicly-traded companies or the government to investors. The revenue from the sale of securities is used as a means of raising capital. Many of these instruments must be registered with the SEC and abide by the provisions of the Securities Act of 1933. In short, the Securities Act of 1933 does a couple of things. It requires that a publicly held company disclose full financial information and that the information is truthful. Not to confuse things, but each state may have different rules for registration.

However, not every security issuance must register with the SEC. Certain types of securities can be granted an exemption from full filing requirements. Exempt securities, under Section 4 of the Securities Act of 1933, are financial instruments that carry government backing and typically have a government or tax-exempt status. Let's take a look at a few examples to better explain this type of security:

  • Government securities
  • Foreign government securities
  • Bank or financial institution securities
  • Securities issued by insurance companies
  • Public utility and railroad securities
  • Non-profit securities
  • Employee benefit plans

A careful look at the list will show that each of the exempted securities is related to a government function. These investments are generally not too risky. Dan and Diane realize that their interior design business doesn't fall under that list. They're downcast since there may be no luck with getting that exemption. But then, Diane finds there is something else called Regulation D.

Regulation D

Regulation D allows some companies to be exempt from full filing requirements. Instead, they must file a much shorter form D. Companies must follow these rules in order to get the exemption: Rule 504 and Rule 506. As a side note, you may be wondering why there's no Rule 505. This is because the rules under Regulation D were revised effective May 2017. The old Rule 504 was amended and the old Rule 505 was repealed.

Rule 504 states that certain securities can be exempt if they meet the following requirements:

  1. No more than $5 million worth of securities are issued in a 12-month period.
  2. No principal party of the issuer is considered a bad actor as defined by the SEC. Not being a bad actor generally means no criminal history or securities fraud issues.

Additionally, some of these following provisions may apply:

  1. The company must register the offering exclusively in a state where registration is required and financial disclosure must be provided to investors.
  2. The company sells in both a state that requires registration and in one that does not require registration and provides full financial disclosure.
  3. The company sells to accredited investors in a state that permits general solicitation and advertising.

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