Exempt Transaction
An exempt transaction is a securities sale or exchange that is not required to be registered with the Securities and Exchange Commission (SEC) because of the nature, size, or parties involved. These exemptions reduce regulatory paperwork for transactions that are considered limited in scope or otherwise do not pose the same public-investor protections concerns as full public offerings.
How it works
- Exemptions apply when the transaction is small, private, or involves sophisticated/accredited investors, or when specific statutory rules cover the transaction (e.g., intrastate offerings).
- Even when a transaction is exempt from SEC registration, it remains subject to anti-fraud rules: issuers and participants can be held liable for misleading or false statements.
- State securities regulators can still investigate fraud, collect fees, and enforce state filing requirements even if federal registration is not required. Companies should verify and comply with applicable state rules.
Common types of exempt transactions
- Private placements (Regulation D): Securities sold privately to a limited number of investors, often accredited investors, without a public offering.
- Regulation A offerings: Also called small public offerings; allow an issuer to raise up to $5 million in a 12-month period under a simplified registration/capital-raising process.
- Rule 147 (intrastate offerings): Transactions confined to a single state that meet the rule’s requirements may be exempt from federal registration.
- Transactions involving certain institutions or roles: Sales to banks, insurance companies, fiduciaries, underwriters, or unsolicited broker orders may qualify for exemptions in some circumstances.
Accredited investor examples
Under common definitions used in private placements, accredited investors include:
– Banks, insurance companies, registered investment companies, business development companies.
– Employee benefit plans administered by banks, registered investment companies, or insurance companies.
– Tax-exempt charitable organizations (meeting applicable asset thresholds).
– Individuals with net worth of at least $1 million (excluding primary residence).
– Individuals with income exceeding $200,000 in each of the two most recent years (or $300,000 joint income with a spouse) and a reasonable expectation of the same income level in the current year.
– Company insiders such as general partners, executive officers, or directors of the issuer.
– Trusts with assets exceeding $5 million that were not formed solely to purchase the offered securities.
– Entities in which all equity owners are accredited investors.
Special considerations
- Exempt transactions streamline capital-raising for smaller or private deals, but they are not a free pass: anti-fraud provisions and other general securities laws still apply.
- Some exempt securities (e.g., certain municipal issues) may carry tax-exempt status, but tax treatment varies by instrument and should be confirmed separately.
- Even when federal registration is not required, state-level filings, fees, and investigations remain possible. Issuers should consult legal counsel to ensure compliance with both federal and state requirements.
Key takeaways
- Exempt transactions avoid SEC registration but remain subject to anti-fraud rules and other general securities laws.
- Common exemptions include private placements (Reg D), Regulation A small offerings, and intrastate Rule 147 offerings.
- Accredited investors and institutional buyers are frequent participants in exempt offerings.
- Always review state requirements and seek legal guidance to ensure full compliance.