EXEMPTION FROM REGISTRATION REQUIREMENTS Exempted Securities [§385] (Note: Such securities may be subject to the general antifraud and civil liability provisions of the Act; see infra.) Bank and government securities [§386] o Section 3(a)(2) of the 1933 Act exempts from the registration requirements: (i) securities issued or guaranteed by the United States, its territories, or the states themselves; (ii) securities issued or guaranteed by banks; (iii) certain kinds of tax-free industrial revenue bonds; (iv) equity interests in certain trust funds maintained by banks in a fiduciary capacity; and (v) interests in insurance company "separate accounts" that fund pension or profit-sharing plans qualified under the Internal Revenue Code. Short-term notes and other debt instruments o Notes or drafts arising out of current transactions are exempt if their maturity date does not exceed nine months. Charitable organizations o Securities issued by religious, educational, or charitable organizations are also exempt from registration. Savings and loan associations o Securities issued by savings and loan or related institutions are exempt if the issuer is supervised by state and/or federal authorities. Railroad equipment trusts o Securities issued by common carriers to finance the acquisition of rolling stock are exempt. Bankruptcy o Likewise, securities issued by a receiver or trustee in bankruptcy with the approval of the court are exempt. Insurance policies o Finally, insurance, endowment, or annuity policies issued by companies supervised by state agencies are exempt.
Private offering exemption Whether an offering is exempt under the general language of section 4(2) is a question of fact, considering: o Whether under the circumstances potential purchasers need the protection of the registration provisions (which depends on whether the potential investors are sophisticated and knowledgeable enough to ask the right questions, demand information, and make an intelligent investment decision); o Whether the investor has access to all material investment information; Whether the issuer actually distributed information to the offerees;
Whether the offerees are few in number; and Whether the offering looks like a public offering.
Small issue exemptions Regulation D Accredited investor o Regulation D defines several key terms. An "accredited investor" includes entities such as institutional investors, corporations, and partnerships having more than $5 million in assets; natural persons with at least $1 million in net worth or $200,000 annual income, etc. Purchasers o Under regulation D, the term "purchaser" does not include accredited investors. General conditions to be met o Integration Regulation D provides a safe harbor for all offers and sales that take place at least six months before the start of, or six months after the termination of, the regulation D offering, as long as there are no offers and sales of securities of the same or similar class within either of these six-month periods. o Information requirements Regulation D requires delivery of financial information when securities are sold under rules 505 or 506 (infra) to anyone not an accredited investor. When securities are sold under rule 504 (infra) or only to accredited investors, there is no mandatory disclosure under regulation D. o Manner of the offering General solicitation and general advertising are prohibited in connection with an offering under rule 505 or 506, and also in rule 504 transactions unless compliance with certain state law registration procedures has occurred. o Limitations on resale Resales of securities issued under most transaction exemptions are restricted. Issuers must exercise reasonable care in determining that purchasers are not underwriters. o Filing of notices of sales The seller must give the S.E.C. notice of the sale within 15 days after the first sale of securities under regulation D. Specific conditions of rules 504, 505, and 506 Rule 504 o Rule 504 provides an exemption for offers not exceeding $1 million over a 12month period for companies not registered under the 1934 Act. Rule 505
o Rule 505 provides an exemption for offers and sales to an unlimited number of accredited investors and to no more than 35 non-accredited purchasers where the aggregate purchase price does not exceed $5 million during any 12-month period. Rule 506 o Rule 506 provides an exemption for offers and sales to an unlimited number of accredited investors and to no more than 35 non-accredited investors in any dollar amount, but the non-accredited investors must be sohphisticated in financial or business matters or employ a representative who is sophisticated.
Intrastate offering exemption Securities offered and sold only to persons residing within a single state, by an issuer that is also a resident of and doing business in that state, are exempt from registration under section 5. Requirements for statutory intrastate offering exemption—section 3(a)(ll) o Under section 3(a)(ll), the entire issue must be intrastate, and resales to nonresidents can destroy the exemption unless the offering has "come to rest" (the point at which the securities are purchased with the intention of keeping them for investment). o Note that the issuer, offerees, and purchasers must all reside in the same state. Rule 147 criteria for intrastate offering exemption - Rule 147 provides the following, objective criteria for determining what is exempt under section 3(a)(ll). o Integration of offerings Rule 147 provides that transactions covered by section 3 exemptions or by the section 4(2) exemption, and which occur either six months or more before or at least six months after the rule 147 transaction will not be integrated with the intrastate offering as long as there are no offers or sales of the same or similar class of securities during either of these six-month periods. o Requirement of coming to rest Rule 147 provides an objective standard for the "coming to rest" test. No sales can be made to persons residing outside the state of issue during the time the securities are being offered and sold by the issuer and for an additional nine months following the last sale by the issuer. Moreover, the issuer must o (i) place a legend on each securities certificate that the securities are not registered and are subject to rule 147's "coming to rest" provisions, o (ii) issue instructions to its transfer agent prohibiting the transfer of the securities until they have "come to rest," and o (iii) obtain a written representation from each purchaser as to the purchaser's residence. o Requirement of residence Issuers
Issuers must both reside in and be doing business in a state. To be doing business in a state, the issuer must derive 80% of its gross revenues from business within the state, have at least 80% of its assets within the state, use at least 80% of the proceeds from the securities transaction in question in the state, and have its principal office within the state. o Offerees and purchasers Corporations and business organizations are deemed to be residents of the state in which their principal business office is located.
Restrictions on resale of securities issued in transaction exemptions A distribution is complete only when the securities finally come to rest in the hands of those investors who intend to hold them for a substantial period of time. A person who purchases securities from an issuer with a view toward reselling to the public is an underwriter, and if such a sale actually takes place without registration, there is a violation of the registration requirements. Thus, the intent of the original purchaser is key to whether a violation has occurred. Control persons are considered issuers. o Traditional factors showing investment intent Whether an original purchaser bought for investment or distribution is a question of fact. The following factors are usually considered: Whether the original purchasers gave the issuer a letter indicating that it is buying for investment purposes rather than resale; The length of time the original purchaser holds the securities; and Whether the securities certificate includes a legend that the certificates cannot be transferred without the issuer's permission. o Proof of investment intent—rule 144 Rule 144 specifies objective criteria that establish investment intent. If these factors are met, purchasers may resell "restricted securities." Scope of rule 144 “Restricted securities” o Rule 144 defines "restricted securities" to include (i) privately offered securities acquired from an issuer or control person; (ii) securities issued pursuant to rules 505 or 506, or to rule 701 (c) (employee benefit plans); (iii) securities sold under rule 144A (infra); and (iv) other securities not previously offered to the public. Sales by control persons o Rule 144 states when and how many securities a control person may sell without making those who purchase and resell "underwriters." The rule applies to both restricted and nonrestricted securities held by control persons.