Mastering Exempt Transactions

Mastering Exempt Transactions On The Series 63 Exam
Uniform Securities Exam

One of the keys to passing the Series 63 exam is to make sure that you have a complete understanding of how exempt transactions will be tested on the Series 63 Exam. This article which was produced from material contained in our Series 63 textbook and will help you master the material so that you pass the Series 63 exam.

Exempt Transactions

Sometimes a security that would otherwise have to register is exempt from state registration because of the type of transaction that is involved. The following are all exempt transactions:

Private Placements/Regulation D Offerings

A private placement is a sale of securities that is made to a group of accredited investors and the securities are not offered to the general public. Accredited investors include institutional investors and individuals who:

• Earn at least $200,000 per year if single; or,
• Earn at least $300,000 jointly with a spouse; or,
• Have a net worth of at least $1,000,000 without the primary residence

Sales to non-accredited investors are limited to 10 in any 12-month period. No commission may be paid to Representatives who sell a private placement to a non-accredited investor. All investors in private placements must hold the securities fully paid for at least 1 year.

Rule 147 Intrastate Offering

Rule 147 pertains to offerings of securities that are limited to one state. Because the offering is being made only in one state, it is exempt from registration with the SEC and is subject to the jurisdiction of the state securities administrator. In order to qualify for an exemption from SEC registration the issue must meet the following criteria:

• The issuer must have its headquarters in that state
• 80% of the issuer’s income must be received in that state
• 80% of the offering’s proceeds must be used in that state
• 80% of the issuer’s assets must be located in that state
• 100% of purchasers must be located in that state
• Purchasers must agree not to resell the securities to an out-of-state resident for 9 months
• If the issuer is using an underwriter, the broker dealer must have an office in that state.

Regulation A Offerings

A regulation A offering is also known as a small business company offering and allows the issuer to raise up to $5,000,000 in any 12-month period. This exemption from full registration allows smaller companies access to the capital markets without having to go through the expense of filing a full registration statement with the SEC. The issuer will instead file an abbreviated notice of sale or offering circular with the SEC and purchasers of the issue will be given a copy of the offering circular rather than a final prospectus. The same 20-day cooling off period applies to Regulation A offerings.

Transactions with Financial Institutions

All transactions with financial institutions are exempt. The Uniform Securities Act was designed to protect the individual investor not the sophisticated financial institution. Financial institutions include:

• Banks
• Insurance companies
• Investment companies
• Broker dealers
• Pension plans with at least $1,000,000 in assets

Transactions with Fiduciaries

All transactions with fiduciaries are exempt from registration with the administrator. Transactions with any of the following are considered transactions with fiduciaries and are exempt:

• Trustees
• Executors
• Guardians
• Sheriffs/marshals
• Administrators
• Receivers

Transactions with Underwriters

All transactions with underwriters of securities are exempt from state registration. For example, if XYZ Corporation is selling 10,000,000 shares of its common stock to its investment bank under a firm commitment underwriting agreement, the transaction is exempt from state registration.

Unsolicited Orders

All orders that are executed through a broker dealer at the sole request of the customer are considered unsolicited orders and are exempt from registration. The administrator may require proof that the order was unsolicited and may require that the customer sign an acknowledgement to that fact.