What Is an Exempt Transaction?
Let me explain what an exempt transaction is: it's a securities transaction where you, as a business, don't have to file registrations with regulatory bodies, as long as the securities involved are minor in scale relative to your overall operations and no new securities are being issued.
Key Takeaways
You should know that exempt transactions skip the registration filing process. In most cases, exempt securities come with tax-exempt benefits. Remember, there are still regulations like anti-fraud provisions that apply to these transactions.
Understanding Exempt Transactions
When I talk about an exempt transaction, I'm referring to a securities exchange that would normally need to register with the Securities and Exchange Commission (SEC), but it doesn't because of the transaction's specific nature. Exempt securities, which often have tax-exempt status, include instruments backed by the government.
These exempt transactions reduce paperwork for small-scale deals. For instance, imagine if every time a non-executive employee wanted to sell back some company shares from an employee stock purchase plan, you had to file with the SEC—that would be a major hassle, and exemptions avoid that.
Who Qualifies as an Accredited Investor According to the SEC
- 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 hasn't been formed just to buy the securities in question.
Fast Fact
Even in exempt transactions, you and your company remain responsible for any misleading or false statements. These transactions aren't exempt from general regulatory codes, including reporting requirements.
Special Considerations
Consider other types of exempt transactions, like Reg A offerings—also called small business company offerings—which allow a company to raise up to $5 million in 12 months, helping smaller firms access capital markets. Rule 147 offerings, or intrastate offerings, are exempt too. Transactions with financial institutions, fiduciaries, and insurance underwriters can also qualify as exempt. Unsolicited orders executed through a broker at a client's request fall into this category as well.
Typically, an exempt transaction involves a small amount of money, an accredited or sophisticated investor, or some other factor that doesn't require full registration. But don't forget, even these are subject to regulations like anti-fraud provisions. You can still be held liable for misleading or false statements about the company, offering, or securities.
While exempt transactions might not need federal registration, state securities regulators can still investigate fraud, collect fees, and enforce their own filing requirements. So, make sure you comply with state regulations, even if your offerings are exempt federally.
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