Federal Exempt Securities & Transactions

Overview

• Registration is time-consuming and expensive, so many persons try to use an exemption when one is available.
• The Securities Act of 1933 provides exemptions for certain issuers, issues, and transactions.
• 📌 When an exemption exists, it’s typically because the investing public is considered to face limited risk.

Two general types of exemptions:

🔑 Numbers & deadlines

Exempt securities

Exempt securities are always exempt from registration, regardless of the situation or type of transaction. That’s a major advantage for issuers raising capital because it avoids the time and cost of registration.

Complete table of exempt securities

Government securities

Most commonly cited government securities:

Insurance company products

• Insurance companies are regulated under their own laws.
• Most insurance products are generally exempt, but there’s one key exception: ⚠️ insurance products with a variable component are not exempt.
• Variable annuities are the primary non-exempt insurance product to remember.
• Technically, most insurance products do not meet the definition of a security, which means they’re excluded from registration.

Bank securities

• Banks are subject to their own laws, so their investment products generally avoid registration.
• ⚠️ Most bank securities are exempt, but bank holding company securities are not.
• Bank holding companies are organizations that own banks and may also own other types of companies.
  • Example: Bank of America — in addition to banking services, it owns other companies like Merrill Lynch. Because of that structure, Bank of America securities (including its common stock) are not exempt from registration.
• By contrast, a security issued by a bank that is focused only on banking activities is exempt.

Non-profit securities

• Securities issued by non-profits — including charities, religious organizations, and social advocacy groups — are exempt.
• Example: if the Red Cross wanted to issue a bond, it could do so without registering it with the SEC.

Commercial paper and banker’s acceptances

• Commercial paper is a short-term, zero coupon debt instrument. It’s sold at a discount and matures at par.
• 🔑 The Securities Act of 1933 specifies that any security with a maturity of 270 days or less is exempt from registration. Because of this rule, commercial paper is virtually always issued with a maximum maturity of 270 days.
• The same concept applies to banker’s acceptances, which are short-term financing vehicles used by importers and exporters.

Railroad ETCs

• Equipment trust certificates (ETCs) issued specifically by railroad companies are exempt.
• Common carriers like railroads are already regulated under other laws for their financial activities, so the Securities Act of 1933 doesn’t cover them.

Exempt transactions

Even if the issuer and the security itself are not exempt, an exemption may apply based on how the security is sold.

Complete table of exempt transactions

Regulation D

• Regulation D offerings are also called private placements. They involve selling securities to a private audience rather than the general public.
• Since the Securities Act of 1933 is designed to protect the general investing public, the rules are relaxed when the offering is limited to a smaller, non-public group. If an issuer sells a security under Regulation D, it can avoid registration.
• Many growing companies use private placements early on and later move to an IPO — private placements let an issuer raise capital without the time and cost of registration.
• In practice, these offerings are limited to accredited (wealthy and/or sophisticated) investors and a small number of non-accredited investors.

Example (from the text): Airbnb participated in multiple private placements starting in 2008, then completed an IPO in late 2020 when it sought a large amount of capital ($3.5 billion) that likely couldn’t be raised solely from accredited investors.

Many companies follow this cycle:

1. Raise capital from private placements
2. Grow the business
3. Repeat as much as possible
4. Eventually take part in an IPO when necessary

• Regulation D allows unregistered, non-exempt securities to be sold to an unlimited number of accredited investors. As a result, millionaires, billionaires, and institutions make up most private placement investors.

🔑 Accredited investors

An investor is accredited if they meet any of the following characteristics:

*For an institution to qualify as an accredited investor, it cannot be formed solely for the purpose of purchasing securities in a private placement.

Non-accredited investors

• ⚠️ Even if an investor isn’t accredited, they may still be able to participate. Regulation D allows up to 35 non-accredited investors in a private placement.
• Non-accredited investors must sign documents acknowledging the risks, especially because the issuer avoids registration and won’t provide a prospectus.
• Instead, investors receive disclosures in an offering memorandum, which is similar to a prospectus but typically provides less detail.

Sidenote: Rule 144

• Rule 144 regulates restricted stock.
• Regulation D stock offerings are considered restricted because they are not registered with the SEC.
• ⚠️ Therefore, the holding period required by Rule 144 applies, preventing any participating investor from selling their shares for 6 months.

Rule 147

• Rule 147 allows issuers offering securities intrastate (within one state only) to avoid federal registration.
• Federal agencies like the SEC generally regulate offerings made interstate (across state lines). If an issuer sells all of its securities only in Colorado (or any other single state), it can avoid SEC registration.

Requirements

• The issuer must be operating “primarily” in one state, and its headquarters must be located in the state where the offering occurs.
• 🔑 Under the “80% rule,” a company is considered primarily operating in one state if:

Investor requirements and resale

• ⚠️ Although there’s no SEC oversight for Rule 147 offerings, state registration typically applies. In particular, intrastate securities are usually subject to state registration by qualification.

Key points

Federal exempt securities

• Not required to register in any circumstance
• List:
  • Government securities
  • Insurance company securities (unless a variable contract)
  • Bank securities (not bank holding company securities)
  • Non-profit securities
  • Commercial paper and banker’s acceptances
  • Railroad ETCs

Bank holding companies

• Companies that own banks
• Not exempt from SEC registration

Federal exempt transactions

• Security is exempt only if sold in a specific way
• List:
  • Regulation D
  • Rule 147

Regulation D

• Private placement rule
• Unlimited sales to accredited investors
• No more than 35 non-accredited investors
• Disclosures made in offering memorandum

Accredited investors

• Income-based (annual)
  • Single: $200k income for 2+ years
  • Joint: $300k income for 2+ years
• $1 million of net worth, excluding residence
• Holding the Series 7, 65, or 82 licenses
• Officer or director of the issuer
• Institution with $5 million+ in assets
• Any entity where all owners are accredited investors

Rule 147 offerings

• Avoid SEC registration if sold intrastate
• Typically still subject to state registration
• No holding period for resale within the state
• 6-month holding period for resale out of state

Sources

Primary/official references for the material in this chapter. Every link was fetched and returned HTTP 200 on 2026-08-15.