What Is An Exempt Security?

What Is An Exempt Security

Exempt securities are not typically 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. 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. Securities that do not need to be registered with the SEC under the Security Act of 1933 or the Securities Exchange Act of 1934. Examples of exempt securities include small issues, agency securities, most other debt instruments issued by the federal or a local government, and issues made only in a single state. Private placements are also usually exempt from registration.

Securities Exempt from Registration

There are many securities which are exempt from the Securities Act of 1933—requiring neither registration nor a prospectus. There are several reasons why securities may be exempt from registration requirements:
• the securities are considered safe because they are issued by a government authority, such as US Treasuries or municipal bonds;
• the sale of the securities is restricted to a given geographic area, usually within a state; or
• the securities are sold to accredited investors, either wealthy individuals or institutions who are considered to have the wherewithal and expertise to manage their money and to avoid fraudulent schemes.

Tax-Exempt Security

A tax-exempt security is an investment in which the income produced is free from federal, state, and/or local taxes. Most tax-exempt securities come in the form of municipal bonds, which represent obligations of a state, territory or municipality. For some investors, U.S. Savings Bond interest may also be free from federal income taxes.

How a Tax-Exempt Security Works?

Income, such as dividends and interest, on tax-exempt securities does not have federal tax applied to it. Depending on where the investor lives, a tax-exempt security may be free from all taxes. An in-state resident will usually receive a state and federal tax exemption on general obligation bonds from his or her home state. While municipal bonds are the most common references of tax-exempt securities, mutual funds that invest in municipal bonds, U.S. Savings Bonds, or other tax-exempt securities can also receive tax-exempt status. Federal government bonds, namely the U.S. Savings Bond and Treasury Inflation Protected Securities (TIPS), are taxed at the federal level, but exempt from state and local taxes.

Exempt Transaction

An exempt transaction is a type of securities transaction where a business does not need to file registrations with any regulatory bodies, provided the number of securities involved is relatively minor compared to the scope of the issuer’s operations and that no new securities are being issued. Exempt securities are the instruments used that the government backs, which have tax-exempt status. An exempt transaction is a securities exchange that would otherwise have to register with the Securities and Exchange Commission (SEC) but does not because of the nature of the transaction in question.

How an Exempt Transaction Works?

Exempt transactions cut down the amount of paperwork needed for relatively minor transactions. For example, it would be a big hassle to perform a filing with the SEC every time a non-executive employee wanted to sell back some of the company’s common shares he or she purchased as part of an employee stock purchase plan.

Types of Exempt Transactions

A private placement or Reg D offering is a type of exempt transaction in which the securities are not offered to the public, but are instead sold privately to an accredited investor. According to the SEC, an accredited investor can be:

• An insurance company, bank, business development company, small business investment company, or registered investment company
• An employee benefit plan administered by a bank registered investment company, or insurance company
• A tax-exempt charitable organization
• Someone with at least $1 million in net worth, excluding his or her primary residence
• A person with more than $200,000 in income, or joint income of more than $300,000 with a spouse in both of the previous two years
• An enterprise owned by accredited investors
• A general partner, executive officer, or director of the company selling the securities
• A trust with assets of at least $5 million, as long as it has not been formed just to buy the securities in question.

Other types of exempt transactions include Reg A offerings, also known as small business company offerings, which permit the issuing company to raise no more than $5 million in 12 months. This allows smaller companies to access securities markets to raise capital. Rule 147 offerings, or intrastate offerings, are also exempt. Transactions with financial institutions, fiduciaries, and insurance underwriters may be considered exempt. Unsolicited orders, which are those executed through a broker at the request of his or her client, are also considered exempt. Usually, an exempt transaction involves a small amount of money or an accredited or sophisticated investor, or does not, for some other reason, warrant a full registration. However, even exempt transactions are subject to some regulations, such as anti-fraud provisions. Investors and companies can still be held liable to misleading or false statements made on behalf of the company, the offering, or the securities, even if the transaction is exempt. And while exempt transactions may not need to be registered with state securities regulators, those state authorities retain the authority to investigate fraud, collect associated state fees, and enforce state filing requirements. Therefore, companies should take care to remain in compliance with state securities regulations, even if their offerings and transactions are exempt under federal filing regulations.

Types of Exempt securities

Certain securities are exempt from the registration requirements under the Securities Act of 1933. Either these securities come from issuers that have a high level of creditworthiness, or another government regulatory agency has some sort of jurisdiction over the issuer of the securities. These types of securities include:

• Securities issued by the U.S. government or federal agencies
• Municipal bonds (local government bonds)
• Securities issued by banks, savings institutions, and credit unions
• Public utility stocks or bonds
• Securities issued by religious, educational, or nonprofit organizations
• Notes, bills of exchange, bankers’ acceptances, and commercial paper with an initial maturity of 270 days or less
• Insurance policies and fixed annuities

Fixed annuities are exempt from SEC registration because the issuing insurance company guarantees the payout. However, variable annuities require registration because the payout varies depending on the performance of the securities held in the separate account.

Government Securities

U.S. government securities—Treasuries—and municipal bonds are all exempt from registration.

Intrastate Offerings

An intrastate offering is an offering made only to the residents of a state by a corporation in that state. The offering must be registered in the state, and it must comply with SEC Rule 147:
• the issuer is incorporated in the state;
• at least 80% of the issuer’s revenues must come from business within the state,
• at least 80% of the issuer’s assets must be located in the state,
• at least 80% of the proceeds of the offering must be used in the state;
• buyers of the offering must be state residents or an entity owned by state residents.
Resale is permitted only:
• to other state residents;
• or to other buyers only after 9 months after the termination of the Rule 147 offering;
• and the certificates and offering document must specify these resale restrictions.

Life Insurance

Most life insurance contracts are exempt, except for those contracts that have investment risk, such as variable life policies and variable annuities.

Commercial Paper and Bankers Acceptances

Commercial paper is exempt from registration if its term is 270 days or less; and banker’s acceptances, if the term 180 days or less.

Regulation A

Regulation A of the Securities Act of 1933 (aka Reg A) exempts small offerings of securities from the regular SEC registration if these conditions are met:
• The public offering is not for more than $5,000,000 within a 12-month period.
• The offering statement, which is a simplified disclosure document, must be filed with a Regional Office of the SEC at least 10 days before the issue is offered for sale.
• The offering circular, which, like the prospectus, provides full disclosure, must be sent to each buyer of the issue at least 48 hours before the confirmation of the sale.
• The offering circular must be revised if the issue is still being offered 9 months after the initial issue, and the issuer must file a sales report of the issue with the Securities and Exchange Commission (SEC) every 6 months until the offer is terminated.

Private Placements

A private placement is the sale of securities to wealthy or sophisticated investors but not to the general public. Private placements are exempted from SEC registration under Regulation D of the Securities Act. Some broker-dealers — sometimes referred to as private placement agents — specialize in private placements. Nonetheless, private placement agents are required to be registered by the SEC even though the securities that they sell are usually exempt from registration requirements.

Regulation D

The details of Reg D are explained in Rules 501 to 506. No public advertisements or solicitations for a Reg D issue are allowed. A tombstone ad may provide notice of the completion of an offering, but not the offering itself.

Rule 501: Definition of an Accredited Investor

Securities are exempt if sold to accredited investors, who are basically individuals or institutions that have a lot of money and the financial wherewithal to invest in risky unregistered securities. Accredited investors include:
• corporations, partnerships, or other organizations:
o financial institutions;
o with more than $5,000,000 of assets:
o corporations and partnerships, not formed expressly for this investment;
o non-profit organizations;
o any entity owned entirely by accredited investors;
• individuals or married couples
o corporate or partnership insiders;
o with assets worth more than $1,000,000;
o or individuals who earned at least $200,000, or $300,000 for a married couple, in the last 2 years, and expect to make at least the same amount in the current year.

Although the SEC does not require that a disclosure document be offered to accredited investors, the issuer will usually provide a Private Offering Memorandum instead. After all, even accredited investors want to know some details about what they are investing in. A non-accredited investor, who the law presumes does not have sufficient knowledge of financial matters to evaluate the risks and merits of a private placement, must have a purchaser representative who does have the necessary expertise to evaluate any private placement that a non-accredited investor is considering. A purchaser representative may not be affiliated with the issuer unless he is related to the investor.

Rule 503 — Form D

The issuer must file a Form D within 15 days after the commencement of a Reg D offering.

Rule 504

A non-reporting company can raise up to $1,000,000 from any number of individuals, accredited or not, without a SEC registration.

Rule 505 — Purchaser Limitation Rule

A corporation can raise up to $5,000,000 within a 12-month period from any number of accredited investors, but no more than 35 non-accredited investors. A non-accredited investor is anyone or organization who is not an accredited investor. However, a married couple counts as 1 non-accredited investor, as well as any purchase of issues under the Uniform Gifts to Minors Act (UGMA) for their dependent children. A partnership that was not formed for a Reg D investment is considered 1 non-accredited investor; if the partnership was formed expressly for this investment, then the number of non-accredited investors depends on the status of each partner.

Rule 506 — Investment Sophistication

The dollar limitation of Rule 505 can be waived if the non-accredited investors are sophisticated investors who have had prior experience with a Reg D offering, or they are represented by a purchaser representative who has, such as an investment adviser, accountant, or attorney.

Rule 502

Rule 502 restricts general solicitation or advertising for a private offering, stating specifically that “neither the issuer nor any person acting on its behalf shall offer or sell the securities by any form of general solicitation or general advertising….” This rule may apply if the media finds out about the offering and publishes it widely, creating a demand for the private offering.

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What Is A Private Placement Of Stocks?

Private Placement Attorney

There are many different ways to raise money for your small business.

What are Private Stock Offerings and How Can They Help You Finance Your Small Business?

You can get loans from your friends and family, liquidate your savings, ask for donations online, or even throw a local fundraiser. But one the most powerful way to finance your small business is a private stock offering. A private stock offering—sometimes called a private placement—is when you sell securities in your business without an initial public offering—usually called an IPO. In other words, a private placement is when you sell your company’s stocks or bonds to private investors. For example, if you run a start-up shopping site, you might offer private stocks to a private investor. This investor gives you money to fund your burgeoning start-up in hopes that he or she will see a large financial return on their investment. There are numerous ways to find investors that might want to purchase securities in a private stock offering. Bankers, small business attorneys, and your personal business contacts are a good place to start. But it’s important to remember that not everyone qualifies as a private investor. While private offerings are governed by less strict rules than IPOs, the Securities and Exchange Commission (SEC) still has guidelines your business will need to follow. (Do note that you will not need to file anything with the SEC, however. In other words, a private placement allows you to get funding for your business without dealing directly with the SEC.)

Who can invest in a private stock offering?

Private placements must come from what the SEC terms an “accredited investor.” Our article, “What are Accredited Investors and How Can They Help Finance Your Small Business?” lays out a fuller picture, but know for starters that accredited investors are generally wealthy individuals or organizations. For example, for a single person to be classified as an accredited investor, they must have a net worth of $1 million or a yearly income of $200,000. Trusts, banks, investment and insurance companies also qualify.

What documents you should have to hold a private stock offering?

• Operating Agreement: First and foremost, you need to make sure your company is incorporated and that you have an Operating Agreement. Legal status and a plan that shows how your business runs will be crucial in securing the sort of savvy investors your small business will want.

• Private Placement Memorandum: A Private Placement Memorandum outlines the terms and conditions upon which you are offering interests in your business. You can think of it as a brochure for your business, where you alert potential investors to the facts they’ll need to know about your company. You can set the amount of stocks you’re offering overall, the price for each, how many an investor can purchase, when that investor will receive stocks, and pertinent information about your company (such as its founders, age, projected profit, etc.).

• Subscription Agreement: A Subscription Agreement is just that: an agreement. When a private investor decides to purchase securities in your small business, a subscription agreement is the contract you use to put the investment in writing. It should note the price and amount of stocks being purchased, in addition to information about the company itself.

• Accredited Investor Questionnaire Form: An accredited investor questionnaire is used by companies and individuals to validate that they are in fact an accredited investor, as defined by the SEC. Making sure your investors are accredited investors can save you a lot of hassle down the road, when your business is growing even faster. Rocket Lawyer provides this form as part of our Subscription Agreement.

While it might sound like a lot of paperwork, it’s not as bad as it seems. You’re simply showing potential investors how great your company is (via a Private Placement Memorandum) while they prove that they’re legally allowed to invest (via an accredited investor questionnaire form). When you agree, you both sign a contract (the Subscription Agreement) and you receive the funding you need to push your small business to the next level. Private Placement.

What Is a Private Placement?

A private placement is a sale of stock shares or bonds to pre-selected investors and institutions rather than on the open market. It is an alternative to an initial public offering (IPO) for a company seeking to raise capital for expansion. Investors invited to participate in private placement programs include wealthy individual investors, banks and other financial institutions, mutual funds, insurance companies, and pension funds. One advantage of a private placement is its relatively few regulatory requirements.

Understanding Private Placement

There are minimal regulatory requirements and standards for a private placement even though, like an IPO, it involves the sale of securities. The sale does not even have to be registered with the U.S. Securities and Exchange Commission (SEC). The company is not required to provide a prospectus to potential investors and detailed financial information may not be disclosed. The sale of stock on the public exchanges is regulated by the Securities Act of 1933, which was enacted after the market crash of 1929 to ensure that investors receive sufficient disclosure when they purchase securities. Regulation D of that act provides a registration exemption for private placement offerings. The same regulation allows an issuer to sell securities to a pre-selected group of investors that meet specified requirements. Instead of a prospectus, private placements are sold using a private placement memorandum (PPM) and cannot be broadly marketed to the general public. It specifies that only accredited investors may participate. These may include individuals or entities such as venture capital firms that qualify under the SEC’s terms.

Advantages and Disadvantages of Private Placement

Private placements have become a common way for startups to raise financing, particularly those in the internet and financial technology sectors. They allow these companies to grow and develop while avoiding the full glare of public scrutiny that accompanies an IPO. Buyers of private placements demand higher returns than they can get on the open markets.

A Speedier Process

Above all, a young company can remain a private entity, avoiding the many regulations and annual disclosure requirements that follow an IPO. The light regulation of private placements allows the company to avoid the time and expense of registering with the SEC. That means the process of underwriting is faster, and the company gets its funding sooner. If the issuer is selling a bond, it also avoids the time and expense of obtaining a credit rating from a bond agency. A private placement allows the issuer to sell a more complex security to accredited investors who understand the potential risks and rewards.

A More Demanding Buyer

The buyer of a private placement bond issue expects a higher rate of interest than can be earned on a publicly-traded security. Because of the additional risk of not obtaining a credit rating, a private placement buyer may not buy a bond unless it is secured by specific collateral. A private placement stock investor may also demand a higher percentage of ownership in the business or a fixed dividend payment per share of stock.

What is a Stock?

Stock (also capital stock) of a corporation, is all of the shares into which ownership of the corporation is divided. In American English, the shares are collectively known as “stock”. A single share of the stock represents fractional ownership of the corporation in proportion to the total number of shares. This typically entitles the stockholder to that fraction of the company’s earnings, proceeds from liquidation of assets (after discharge of all senior claims such as secured and unsecured debt), or voting power, often dividing these up in proportion to the amount of money each stockholder has invested. Not all stock is necessarily equal, as certain classes of stock may be issued for example without voting rights, with enhanced voting rights, or with a certain priority to receive profits or liquidation proceeds before or after other classes of shareholders. Stock can be bought and sold privately or on stock exchanges, and such transactions are typically heavily regulated by governments to prevent fraud, protect investors, and benefit the larger economy. The stocks are deposited with the depositories in the electronic format also known as Demat account. As new shares are issued by a company, the ownership and rights of existing shareholders are diluted in return for cash to sustain or grow the business. Companies can also buy back stock, which often lets investors recoup the initial investment plus capital gains from subsequent rises in stock price. Stock options, issued by many companies as part of employee compensation, do not represent ownership, but represent the right to buy ownership at a future time at a specified price. This would represent a windfall to the employees if the option is exercised when the market price is higher than the promised price, since if they immediately sold the stock they would keep the difference (minus taxes).

Shares vs. Stocks: What’s the Difference?

The distinction between stocks and shares is pretty blurred in the financial markets. Generally, in American English, both words are used interchangeably to refer to financial equities, specifically, securities that denote ownership in a public company (in the good old days of paper transactions, these were called stock certificates). Nowadays, the difference between the two words has more to do with syntax and is derived from the context in which they are used. Of the two, “stocks” is the more general, generic term. It is often used to describe a slice of ownership of one or more companies. In contrast, in common parlance, “shares” has a more specific meaning: It often refers to the ownership of a particular company.
What’s The Difference Between Shares and Stocks?


Let’s confine ourselves to equities and the equity markets. Investment professionals often use the word stocks as synonymous with companies—publicly-traded companies, of course. They might refer to energy stocks, value stocks, large- or small-cap stocks, food-sector stocks, blue-chip stocks, and so on. In each case, these categories don’t refer so much to the stocks themselves as to the corporations that issued them. Financial pros also refer to common stock and preferred stock, but, actually, these aren’t types of stock but types of shares.


A share is the single smallest denomination of a company’s stock. So if you’re divvying up stock and referring to specific characteristics, the proper word to use is shares. Technically speaking, shares represent units of stock. Common and preferred refer to different classes of stock. They carry different rights and privileges, and trade at different prices. Common shareholders are allowed to vote on company referenda and personnel, for example. Preferred shareholders do not possess voting rights, but on the other hand, they have priority in getting repaid if the company goes bankrupt. Both types of shares pay dividends, but those in the preferred class are guaranteed. Common and preferred are the two main forms of stock shares; however, it’s also possible for companies to customize different classes of stock to fit the needs of their investors. The different classes of shares, often designated simply as “A,” “B,” and so on, are given different voting rights. For example, one class of shares would be held by a select group who are given perhaps five votes per share, while a second class would be issued to the majority of investors who are given just one vote per share.

Special Considerations

The interchangeability of the terms stocks and shares applies mainly to American English. The two words still carry considerable distinctions in other languages. In India, for example, as per that country’s Companies Act of 2013, a share is the smallest unit into which the company’s capital is divided, representing the ownership of the shareholders in the company, and can be only partially paid up. A stock, on the other hand, is a collection of shares of a member, converted into a single fund, that is fully paid up.

Free Initial Consultation with Lawyer

It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States

Telephone: (801) 676-5506

Ascent Law LLC

4.9 stars – based on 67 reviews

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