Securities - Exempt Transactions
The Uniform Securities Act specifies a number of transactions by which non-exempt securities may be legally traded without registration. The following is not a comprehensive list but touches on those most likely to be on the Series 63 exam.
Isolated Non-Issuer Transactions
The states define what "isolated" means on a local basis but it is specifically non-recurring. For example: An individual brought stock certificates for PDQ stock to Idaho when he moved from Tennessee. The stock is not registered in Idaho, but he may sell it to his neighbor and the transaction is exempt because the individual is not the issuer and the transaction is "isolated".
Non-Issuer Transactions in Outstanding Securities
This is often called the "manual exemption". If the security being traded is from an issuer that is currently up-to-date on all financial reporting with the SEC, is not experiencing financial difficulties, and is not a "blind pool", or "shell corporation", the transaction is exempt from registration. The securities involved in the transaction must have been in the hands of the public for at least 90 days.
"Shell Corporations" are businesses without active operations or significant assets. These companies are often formed before commencing operations to obtain financing. Sometimes, they may be used as a front in tax evasion.
"Blind Pools" occur when securities are sold to investors with no specific indication as to what the monies raised will be used for.
If you would like to learn more about blind pools, click here for an investor alert from the NASAA:
These transactions may be effected by, or through, a broker-dealer but are only exempt if they are truly unsolicited. The broker-dealer may be required by the Administrator to provide proof - a statement by the customer, for example - demonstrating the nature of the transaction.
These include sales by executors, Administrators, trustees, receivers, etc. For example, if an executor of an estate liquidates securities of a deceased person in accordance with the person's will, it is an exempt transaction.
Transactions with Financial Institutions
This includes sales to banks, savings institutions, and insurance companies. This exemption goes back to the ideas discussed earlier. The Uniform Securities Act does not place as much emphasis on the protection of institutions as it does for individual investors.
Private Placement Transactions
Private placements, as the name implies, are not "public" offerings and are not examined as closely by the SEC as a public offering.A private placement may be made to an unlimited number of accredited investors. However, If a private placement offering is to be exempt from registration under the Uniform Securities Act, there are additional requirements.relating to offers to non accredited investors. Any offer to non accredited investors must follow these guidlines:
- No more than 10 offers may be made in a twelve-month period.
- No commissions may be paid, directly or indirectly.
- The purchase is for the purpose of investment and not resale.
Institutional and acrredited investors are exempt purchasers for the purpose of these rules.
In all cases where an exemption for a security or a transaction is claimed, the burden of proof is on the person requesting the exemption.
The Administrator may, as the USA states, "...by order deny or revoke an exemption ..." and specifies the transaction exemptions for institutions and private placements. In other words, the Administrator has the power to require that the party claiming an exemption demonstrate proof.