Section 402(b) Exemptions
Unlike Section 402(a), which provides blanket exemptions from registration to certain securities, Section 402(b) of the USA exempts certain securities from registration as long as they are limited to certain transactions. In other words, as long as securities that would otherwise require registration only change hands in one of the following circumstances, registration is not required.
In order to understand 402(b) exemptions it is important to understand the difference between issuer transactions and non-issuer transactions. When an issuer raises money by selling securities to investors, the sale is an issuer transaction. The proceeds of the sale go to the issuer. Securities bought in an initial public offering (IPO) and sales of mutual fund shares are both considered issuer transactions. An issuer repurchasing their own securities would also be an issuer transaction. An issuer transaction takes place in the primary market.
Test Note: If an exam question mentions “an underwriter” or “the primary market,” it is usually referring to an issuer transaction.
In contrast, a non-issuer transaction is when one party sells a security to another party, and neither party is the issuer. The proceeds of this kind of transaction do not go to the issuer, and these kinds of transactions take place in the secondary market.
Test Note: Generally sales of mutual fund shares are considered issuer transactions because when an investor buys shares of a mutual fund, the shares are issued new, and when the investor wants to sell these shares, they are then redeemed by the fund. If a mutual fund decides to sell some of the securities that are owned by the fund, however, this transaction is considered a non-issuer transaction.
Exempt transactions that do not result in a security needing to be registered are:
1. Isolated non-issuer transactions. Transactions between two private parties, even if effected through a broker-dealer, that do n