Exempt Securities and Transactions

If we recall on our previous articles, Securities are financial instruments that are sold by companies or the government to investors. Funds gathered from the sale of these securities are mainly used for raising capital for some businesses. These securities are mostly registered with the SEC in compliance to the provisions of the Securities Act of 1933.
However, not all issued securities have to be registered with the SEC. There are certain types of securities that can be granted full exemption from filing requirements. Under Section 4 of the Securities Act of 1933 these are what are known as Exempt Securities, they are financial instruments that are backed by the government and usually have government or tax-exempt status. Some examples of these kind of exempted securities are:
  • 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
If you look carefully at the list you will note that these exempted securities are mostly tied up or related to a certain government function. These are generally the type of investments that carry a lesser risk compared to securities offered by public companies. However, these type of securities are usually sold within a restricted geographical area within a certain state. These are usually sold to accredited investors, mostly wealthy individuals or institutions that are considered to have expertise in managing their money to avoid any fraudulent schemes.
Exempt transactions are securities transactions done when a business does not need to file their registration with any regulatory office, provided that the number of securities that are involved are only minor in comparison to the scope of the issuers operations as long as there are new securities that are being issued. To put it in simple terms, exempt transactions cut down on unnecessary paperwork needed for very minor transactions.
Some of the most common types of exempt transactions are what are known as Reg D and Reg A offerings.  A Reg D offering is what is also known as a private placement, these are the type of securities that are not offered to the public but are commonly sold privately to accredited investors. Some of these accredited investors are:
  • Insurance companies, banks, business development companies, small business investment companies, or registered investment companies
  • Employee benefit plans administered by banks, registered investment companies, or insurance companies
  • Tax-exempted charitable organizations
  • Any individual with a net worth of $1M not including his/her primary residence
  • Any person who has a monthly income of $200,000, or has a joint income with a spouse amounting to more than $300,000 monthly for the past two years
  • Any enterprise own by accredited investors
  • A general partner, an executive officer, or a director of a company selling securities
  • A trust with assets that amount to $5M, as long as the trust was not formed just for the purpose of buying securities
A Reg A offering is also known as a small business company offering. This allows smaller companies to raise capital for their companies to not more than $5M in a 12 month period.