16.4 Exempt Transactions

Certain transactions are exempt from state registration, even if the security itself is not exempt. Understanding the distinction between exempt securities and exempt transactions is essential.

Key Principle

Transaction exemptions apply only to the specific transaction, not to the security.

Transaction-Specific: Exemption covers only that transaction

Resale May Require Registration: Subsequent sales may need registration

Antifraud Applies: Still subject to antifraud provisions

No Exemption from Fraud: Cannot use exemption to commit fraud

Isolated Non-Issuer Transactions

An isolated non-issuer transaction is exempt from registration.

Requirements

Isolated: Not part of regular securities business

Non-Issuer: Seller is not the issuer of the security

Occasional: Not repeated or systematic

Examples

Exempt: Individual selling own shares to neighbor; Estate selling inherited securities; Occasional private sale

Not Exempt: Broker selling client's shares (regular business); Market maker trading securities; Pattern of repeated sales

On the Exam: The key question is whether the person is "in the business" of selling securities. Occasional sales by individuals are isolated; regular sales are not.

Institutional Investor Transactions

Transactions with institutional investors are exempt based on the sophistication of the buyer.

Qualified Institutional Investors

Banks: Commercial banks, savings institutions

Insurance Companies: Regulated insurance entities

Investment Companies: Registered investment companies

Pension Plans: Plans with assets over $1 million

Government Entities: Federal, state, local governments

Broker-Dealers: Registered broker-dealers

Other Institutions: Sophisticated institutional buyers

Rationale

Sophistication: Can evaluate investments independently

Resources: Have professional advisers and analysts

Size: Large enough to negotiate protections

Regulatory Oversight: Subject to other regulations

Private Placement Transactions

Private placements are offerings made to a limited number of purchasers without general advertising.

Federal Regulation D

Rule 504: Up to $10 million in 12 months

Rule 506(b): No general solicitation, up to 35 non-accredited

Rule 506(c): General solicitation allowed, all accredited

Rule 506 as Federal Covered

Preemption: Rule 506 offerings are federal covered

State Role: Notice filing and fee only

Form D: Must file within 15 days of first sale

Antifraud: State antifraud still applies

State Private Placement Exemptions

Limited Offerees: Usually 10-35 purchasers

No General Advertising: No public solicitation

Buyer Sophistication: Purchasers must meet requirements

Disclosure: Information must be provided

Existing Security Holder Transactions

Transactions with existing security holders may be exempt when:

Stock Dividends: No consideration paid by holder

Stock Splits: No consideration paid

Rights Offerings: To existing shareholders only

Conversion: Convertible securities converting

Key Requirements

No Commission: No remuneration paid for sale

No Consideration: Shareholder doesn't pay for new securities

Existing Holders: Must already own securities

Underwriter Transactions

Transactions between issuers and underwriters are exempt:

Issuer to Underwriter: Part of distribution process

Underwriter to Dealer: Syndicate distribution

Dealer to Dealer: Trading among dealers

The assumption is that the securities will be registered before sale to the public.

Fiduciary Transactions

Transactions by fiduciaries are often exempt:

Executor/Administrator: Selling estate securities

Trustee in Bankruptcy: Liquidating assets

Receiver: Court-appointed receiver sales

Guardian/Conservator: Sales for ward's benefit

Requirement

Court Supervision: Often court-approved

Fiduciary Capacity: Acting as fiduciary, not personally

Proper Authority: Within scope of fiduciary powers

Preorganization Certificates

Subscriptions for a new corporation being formed:

Limited Subscribers: Maximum 10 subscribers

No Payment Until: Minimum capital is raised

No Commission: No remuneration paid

Organizational: For forming new entity only

Unsolicited Brokerage Transactions

When a broker-dealer executes a customer-initiated order without solicitation:

Customer-Initiated: Customer requests trade

No Recommendation: Broker did not solicit

Execution Only: Just filling an order

Summary: Transaction Exemptions

Isolated Non-Issuer: Not regular business, not issuer

Institutional: Sophisticated buyer

Private Placement: Limited offerees, no advertising

Existing Holders: No commission, no consideration

Underwriter: Part of distribution

Fiduciary: Court-supervised, proper authority

Preorganization: 10 or fewer subscribers, no payment

Unsolicited: Customer-initiated, no recommendation

Key Takeaways

1. Transaction exemptions apply to specific transactions, not the security

2. Resale of securities acquired in exempt transaction may require registration

3. Antifraud provisions apply to ALL transactions, exempt or not

4. Rule 506 offerings are federal covered - only notice filing required

5. Institutional investor exemption based on sophistication

6. Isolated non-issuer means not in the securities business