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Exempt Securities and Exempt Transactions

20. What are “exempt securities” and “exempt transactions”?

Certain types of securities and certain transactions are deemed by the SEC to be exempt from registration requirements.

•    Exempt Security – Common types of exempt securities are government securities, bank securities, high-quality debt instruments, non-profit securities, and insurance contracts. Most important for private, for-profit companies is the broad exemption under Section 4 of the ’33 Act of “transactions by an issuer not involving any public offering.” This is known as a “private offering”. A private offering is generally for a lesser amount of money that is invested by a small number or closely-related investors.

⁃    Note: The exempt type of security never has to be registered, even if it is resold following the issuance.

•    Exempt Transaction – An exempt transaction is a transaction that does not warrant full-blown registration. Exempt transactions generally involve either a limited amount of capital or sophisticated or accredited investors.

⁃    Note: A security sold in an exempt transaction may have to be registered to avoid violating the ’33 Act if resold within a short period of time.

•    Discussion: Why do you think the securities laws exempt certain securities from regulations and certain types of transactions for regulation? How is your reasoning influenced by the underlying goals of the securities regulations?

•    Practice Question: What is an exempt transaction and an exempt security and why does this designation matter?

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