What Securities Are Exempt From Registration?

Companies offering securities to the public in the United States generally must register them with the U.S. Securities and Exchange Commission (SEC). This process involves filing a detailed statement providing financial and operational information about the company and the securities. Registration protects investors by ensuring they receive adequate and transparent information, allowing them to make informed decisions.

While registration is standard, certain securities or transactions are exempt. These exemptions facilitate capital formation, especially for smaller businesses, or when the security’s nature provides sufficient investor protection without full registration. Exemptions reduce costs and complexities, enabling more companies to access investment capital.

Common Exemptions for Capital Raising

Companies seeking to raise capital without full SEC registration often use exemptions under Regulation D and Regulation A. These regulations provide structured pathways for issuing securities, balancing capital formation with investor protection. Each rule sets forth distinct conditions an issuer must meet to qualify for the exemption.

Regulation D offers “safe harbors” for private offerings. Rule 504 allows companies to sell up to $10 million in securities within 12 months. Rule 506 offers two sub-exemptions for larger private placements. Rule 506(b) permits sales to unlimited accredited investors and up to 35 sophisticated non-accredited investors, prohibiting general solicitation. Rule 506(c) allows general solicitation but requires all purchasers to be accredited investors, with issuers verifying their status. All Regulation D offerings require filing a Form D notice with the SEC.

Regulation A, a “mini-IPO,” allows companies to raise capital from both accredited and non-accredited investors with some public solicitation, but with less extensive reporting requirements than a traditional initial public offering. It has two tiers with different offering limits and obligations.

Tier 1 of Regulation A permits offerings up to $20 million within 12 months. Companies must file an offering statement (Form 1-A) with the SEC and comply with state “blue sky” laws. Tier 1 offerings have no ongoing reporting requirements beyond a final status report.

Tier 2 of Regulation A allows raising up to $75 million in 12 months. Tier 2 issuers are generally exempt from state registration due to federal pre-emption. However, Tier 2 requires audited financial statements in offering documents and ongoing SEC reporting, including annual, semi-annual, and current reports.

Exemptions for Specific Security Types and Intrastate Offerings

Beyond capital-raising exemptions, certain securities are exempt from federal registration due to their nature or issuer. These exemptions acknowledge that other regulatory frameworks or the inherent characteristics of the securities provide sufficient oversight. Offerings confined to a single state may also qualify.

Securities issued or guaranteed by the U.S. government, state governments, or municipal entities, such as Treasury and municipal bonds, are generally exempt. This is based on the low risk associated with governmental issuers and the public interest.

Securities issued by banks (but not bank holding companies) are also exempt. Banks are already subject to extensive federal and state regulation by banking authorities, providing sufficient investor protection.

Commercial paper, short-term notes with a maturity of nine months (270 days) or less, is exempt if it arises from current transactions and is not advertised to the general public. This facilitates short-term corporate financing.

Intrastate offerings, under Rule 147 and Rule 147A, exempt securities offered and sold exclusively to residents of a single state. The issuer must also conduct a significant portion of its business within that state. For an issuer to be considered “doing business” in the state, it must meet at least one of four 80% tests: gross revenues, assets, net proceeds used, or a majority of employees located within the state.

Rule 147 requires all offers and sales be made only to residents of that state. Rule 147A allows offers to out-of-state residents, provided all sales are exclusively to in-state residents. Securities purchased under these rules are subject to resale restrictions, generally requiring them to remain within the state for six months before being resold out-of-state.

Important Characteristics of Exempt Securities

Securities issued under an exemption from registration have specific characteristics distinguishing them from fully registered securities. Understanding these features is important for investors, as they relate to information availability, liquidity, and investor eligibility.

Exempt securities have limited public disclosure. Unlike registered offerings with extensive public prospectuses and ongoing reports, exempt offerings have fewer mandated public disclosure requirements. This means investors may have less readily available information on the company’s financial condition, operations, and management.

Many exempt securities, especially from Regulation D, are “restricted securities.” They cannot be freely resold to the public immediately after purchase. Resales are generally permitted only through another exemption, like Rule 144, or if the securities are subsequently registered.

Rule 144 allows resale of restricted and control securities under specific conditions, including holding periods. For SEC-reporting companies, a minimum six-month holding period is required. For non-reporting companies, the holding period is one year. Affiliates also face volume limitations, generally restricted to 1% of outstanding shares sold within any three-month period.

Some exemptions, particularly in Regulation D and Regulation A Tier 2, require investor sophistication. For example, Rule 506 offerings often involve “accredited investors,” defined by the SEC based on income, net worth, or professional credentials. This assumes such investors have the financial knowledge and ability to bear investment risk without full registration protections.

Finally, while federal exemptions reduce SEC registration burdens, state “blue sky” laws may still apply. Some federal exemptions, like Rule 506 of Regulation D, pre-empt state registration. However, others, such as Regulation A Tier 1 and Rule 147, do not. This means additional state-level compliance may be necessary, varying by jurisdiction.