Table of Contents
Table of Contents

Exempt Transaction: What it is, How it Works

What Is an 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.

Key Takeaways

  • Exempt transactions do not require registrations to be filed.
  • Exempt securities are tax-exempt in most cases.
  • There are some regulations for exempt transactions such as anti-fraud provisions.

Understanding Exempt Transactions

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. Exempt securities which have tax-exempt status are the instruments that the government backs,

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.

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 their 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

Even with exempt transactions, investors and companies are responsible for any misleading or false statements. Exempt transactions are also not exempt from the general provisions of regulating codes, including reporting requirements.

Special Considerations

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 12 months. 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.

Usually, an exempt transaction involves a small amount of money or an accredited or sophisticated investor, or does not, for some other reason, warrant a full registration. However, even exempt transactions are subject to some regulations, such as anti-fraud provisions. Investors and companies can still be held liable to misleading or false statements made on behalf of the company, the offering, or the securities, even if the transaction is exempt.

And while exempt transactions may not need to be registered with state securities regulators, those state authorities retain the authority to investigate fraud, collect associated state fees, and enforce state filing requirements. Therefore, companies should take care to remain in compliance with state securities regulations, even if their offerings and transactions are exempt under federal filing regulations.

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