3.1.4.2 Section 402(b) Exemptions
Unlike Section 402(a), which provides blanket registration exemptions to certain securities, Section 402(b) of the USA exempts securities from registration as long as their sale is limited to certain types of 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. Also, when an issuer repurchases its own securities, an issuer transaction takes place. 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 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.
Each of the following transaction types represents an exempt transaction. This means that securities sold in any of these types of transactions do not need to be registered:
• Isolated non-issuer transactions—