DEFINITION of 'Exempt Transaction'

An exempt transaction is a type of securities transaction where a business does not need to file registrations with any regulatory bodies, provided the number of securities involved is relatively minor compared to the scope of the issuer's operations and that no new securities are being issued. In other words, an exempt transaction is a securities exchange that would otherwise have to register with the Securities and Exchange Commission (SEC), but does not because of the nature of the transaction in question.

BREAKING DOWN 'Exempt Transaction'

Exempt transactions cut down the amount of paperwork needed for relatively minor transactions. For example, it would be a big hassle to perform a filing with the SEC every time a non-executive employee wanted to sell back some of the company's common shares he or she purchased as part of an employee stock purchase plan.

Types of Exempt Transactions

A private placement or Reg D offering is a type of exempt transaction in which the securities are not offered to the public, but are instead sold privately to an accredited investor. According to the SEC, an accredited investor can be:

  • An insurance company, bank, business development company, small business investment company, or registered investment company
  • An employee benefit plan administered by a bank, registered investment company, or insurance company
  • A tax-exempt charitable organization
  • Someone with at least $1 million in net worth, excluding his or her primary residence
  • A person with more than $200,000 in income, or joint income of more than $300,000 with a spouse in both of the previous two years
  • An enterprise owned by accredited investors
  • A general partner, executive officer, or director of the company selling the securities
  • A trust with assets of at least $5 million, as long as it has not been formed just to buy the securities in question

Other types of exempt transactions include Reg A offerings, also known as small business company offerings, which permit the issuing company to raise no more than $5 million in a 12-month period. This allows smaller companies to access securities markets to raise capital. Rule 147 offerings, or intrastate offerings, are also exempt. Transactions with financial institutions, fiduciaries, and insurance underwriters may be considered exempt. Unsolicited orders, which are those executed through a broker at the request of his or her client, are also considered exempt.

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