Section 4(a)(2)

Which of the following is exempt from Securities Act registration because of what the instrument is, rather than because of how it happens to be sold?

1. A.A general obligation bond issued by a municipality.Correct. Municipal issues are exempt securities under Section 3(a), so the exemption follows the instrument.
2. B.Common stock sold by an operating company under Rule 506(b).Wrong. That sale is exempt as a transaction, and the stock comes out restricted rather than exempt.
3. C.Investment-grade debt resold to qualified institutional buyers under Rule 144A.Wrong. Rule 144A exempts the resale transaction, and only where the buyer qualifies as an institution.
4. D.Equity sold to non-U.S. persons in an offshore transaction under Regulation S.Wrong. Regulation S exempts the offshore transaction, and domestic equity so acquired is restricted.

Why: Section 3(a) exempts securities by category, and municipal issues sit inside that list; the exemption belongs to the instrument and survives into every later transaction. The other three depend entirely on the transaction. Rule 506(b) stock rests on the Section 4(a)(2) issuer exemption, Rule 144A debt rests on a resale safe harbor available only where the buyer is a qualified institutional buyer, and Regulation S equity rests on the offer and sale occurring offshore. Move any of those three into a different transaction and registration or another exemption is needed again.

A representative tells a client that the common stock in a Rule 506(b) placement is an exempt security. Why is that description wrong?

1. A.The exemption attaches to the purchaser rather than to the security or to the transaction.Wrong. Accredited status is a condition of the exemption, not the thing being exempted.
2. B.A Rule 506(b) offering relies on Section 3(a), and Section 3(a) reaches only debt instruments.Wrong. Rule 506(b) rests on Section 4(a)(2), and Section 3(a) is not confined to debt.
3. C.No exemption exists until the SEC declares the issuer Form D effective.Wrong. Form D is a notice filing that the SEC never declares effective.
4. D.The instrument is never the exempt thing; the exemption attaches to the transaction, which is why the shares are restricted.Correct. A transaction exemption cannot follow the paper into the next sale.

Why: The Securities Act draws two different kinds of exemption. Section 3(a) exempts certain securities by category, such as United States government and municipal issues, and that exemption travels with the instrument into every later transaction. Section 4 exempts certain transactions, and the exemption attaches to the particular sale rather than to the paper. A Rule 506(b) placement rests on the Section 4(a)(2) transaction exemption, which is precisely why the shares come out restricted and need registration or a resale exemption to move again.

An investor buys stock in a Rule 506(b) offering and, four months later, wants to sell it to a friend. What is her position?

1. A.She may sell freely, since Regulation D restricts the issuer's offering, not the investor's resale.Wrong. Rule 502(d) attaches the restriction to the securities, so it follows them into the holder's hands.
2. B.The stock is restricted and cannot be resold without registration or an available exemption.Correct. Rule 502(d) gives it Section 4(a)(2) status, and the legend on the certificate says so.
3. C.She may sell freely to one individual, because a sale to a single person is not a distribution.Wrong. The restriction does not depend on how many buyers there are; a single resale still needs a route.
4. D.She may sell only back to the issuer, which must repurchase at the original subscription price.Wrong. No repurchase obligation exists, and inventing one would make the security far more liquid than it is.

Why: Rule 502(d) gives securities acquired in a Regulation D transaction the status of securities acquired under Section 4(a)(2) of the Securities Act: they cannot be resold without registration or an available exemption. The issuer is expected to exercise reasonable care against creating underwriters, which the rule illustrates with reasonable inquiry into the purchaser's intent, written disclosure of the resale limitation before the sale, and a legend on the certificate. The usual route out later is Rule 144, which for securities of a non-reporting issuer requires a minimum of one year to elapse from acquisition. Nothing in Regulation D obliges an issuer to buy the securities back.

An issuer offers its existing bondholders the opportunity to exchange their bonds for a new series of the issuer's preferred stock, dealing exclusively with its own existing security holders and paying no commission or other remuneration to anyone for soliciting the exchange. Which Securities Act exemption is specifically designed for this kind of transaction?

1. A.Section 4(a)(2), since any transaction not involving the general public automatically falls under the private placement exemption regardless of its specific structure.Wrong. This defaults to the most familiar private placement exemption instead of the narrowly tailored exchange exemption.
2. B.Rule 506(b) of Regulation D, since any exchange of securities for other securities is treated as a sale for cash and analyzed the same way.Wrong. Section 3(a)(9) is a distinct exemption specifically for this kind of exchange.
3. C.Section 3(a)(9), the exemption for securities exchanged by an issuer exclusively with its existing security holders with no commission paid.Correct. This is the narrowly tailored exemption for exactly this transaction type.
4. D.Section 3(a)(11), the intrastate exemption, since exchanges with existing security holders are presumed to occur only within a single state.Wrong. Section 3(a)(11) has nothing to do with exchanges with existing security holders.

Why: Section 3(a)(9), which exempts any security exchanged by an issuer with its existing security holders exclusively, where no commission or other remuneration is paid for soliciting the exchange -- a narrow, specific exemption distinct from Section 4(a)(2)'s broader private placement exemption for new money raised from new or existing investors.