Exempt Securities and Transaction Information for the Series 7 Exam - dummies

Exempt Securities and Transaction Information for the Series 7 Exam

By Steven M. Rice

As the Series 7 exam will expect you to know, certain securities are exempt from registration because of either the type of security or the type of transaction involved. You may find that securities that are exempt because of who’s issuing them are a bit easier to recognize. You’ll probably have to spend more time on the securities that are exempt from registration because of the type of transaction.

Exempt securities

Certain securities are exempt from the registration requirements under the Securities Act of 1933. Either these securities come from issuers that have a high level of creditworthiness, or another government regulatory agency has some sort of jurisdiction over the issuer of the securities. These types of securities include

  • Securities issued by the U.S. government or federal agencies

  • Municipal bonds (local government bonds)

  • Securities issued by banks, savings institutions, and credit unions

  • Public utility stocks or bonds

  • Securities issued by religious, educational, or nonprofit organizations

  • Notes, bills of exchange, bankers’ acceptances, and commercial paper with an initial maturity of 270 days or less

  • Insurance policies and fixed annuities

Fixed annuities are exempt from SEC registration because the issuing insurance company guarantees the payout. However, variable annuities require registration because the payout varies depending on the performance of the securities held in the separate account.

Exempt transactions

Some securities that corporations offer may be exempt from the full registration requirements of the Securities Act of 1933 due to the nature of the sale. The following list shows you these exemptions:

  • Intrastate offerings (Section 3[a][11] and Rule 147): An intrastate offering is an offering of securities within one state. For such an offering to be exempt from SEC registration, the company must be incorporated in the state in which it’s selling securities, 80 percent of its business has to be within the state, and it may sell securities only to residents. The securities still require registration at the state level.

    Don’t confuse intrastate offerings (securities sold in one state) with interstate offerings (securities sold in many states). Interstate offerings do need SEC registration. To help you remember, think of an interstate roadway, which continues from one state to the next.

  • Regulation A (Reg A) offerings: An offering of securities worth $5 million or less within a 12-month period is Regulation A. Although this company may seem large to you, it’s relatively small in market terms. Regulation A offerings are exempt from the full registration requirements but the issuer still has to file a simplified registration or abbreviated registration statement.

  • Regulation D (Reg D) offerings: Also known as a private placement, a Regulation D offering is an offering to less than 35 unaccredited investors per year. Companies who issue securities through private placement are allowed to raise an unlimited amount of money but are limited in terms of the number of unaccredited investors. Sales of Reg D securities are subject to the sales limitations set forth under Rule 144.

    An accredited investor is one with a net worth of $1 million or more or an investor who has had a yearly income of at least $200,000 (for an individual investor) or $300,000 (for joint income with spouse) for the previous two years and is expected to earn at least that much in the current year.

  • Rule 144: This rule covers the sale of restricted, unregistered, and control securities. According to Rule 144, sellers of these securities must wait anywhere from 6 months to a year, depending on whether the corporation that issued the securities is subject to the reporting requirements of the Securities Exchange Act of 1934 prior to selling the securities to the public.

    Additionally, the most an investor can sell at one time is 1 percent of the outstanding shares or the average weekly trading volume for the previous four weeks, whichever is greater.

The following example tests your ability to answer restricted-stock questions.

John Bullini is a control person who purchased shares of restricted stock and wants to sell under Rule 144. John has fully paid for the shares and has held them for over one year. There are 1,500,000 shares outstanding. Form 144 is filed on Monday, May 28, and the weekly trading volume for the restricted stock is as follows:

Week Ending Trading Volume
May 25 16,000 shares
May 18 15,000 shares
May 11 17,000 shares
May 4 15,000 shares
April 27 18,000 shares

What is the maximum number of shares John can sell with this filing?

(A)    15,000

(B)    15,750

(C)    16,200

(D)    16,250

The right answer is Choice (B). The test writers often try to trick you on the Series 7 exam by giving you at least one week more than you need to answer the question. Because John has held his restricted stock for over a year, he can sell 1 percent of the outstanding shares or the average weekly trading volume for the previous four weeks, whichever is greater:


In this case, the previous four weeks are the top four in the list, but be careful; the examiners are just as likely to use the bottom four to give the table a different look.

Figure out 1 percent of the outstanding shares by multiplying the outstanding shares by 1 percent. You come up with 15,000 shares. The other possible answer is the average weekly trading volume for the previous four weeks. Add the trading volume for the previous four weeks and divide by 4 to get an answer of 15,750 shares. Because you’re looking for the greater number, the answer is Choice (B).

Even securities exempt from registration are subject to antifraud rules. All securities are subject to antifraud provisions of the Securities Act of 1933, which requires issuers to provide accurate information regarding any securities offered to the public.