Saturday, September 25, 2010

Exempt Securities in the Real World

I taught a live Series 65 class this past week for the accounting firm who does tax work for my S-corp. It was amazing how quickly this group of five CPAs can absorb new, complex information, but we definitely hit the wall when we covered the Uniform Securities Act's provisions for securities. One of the CPAs said at the end of that section, "That seems to be the most vague of all the information we've covered."
Amen, brother. Regulators like things nice and vague when it comes to "securities." They like vague phrases like "investment contract" or "anything commonly known as a security" because it allows them to fit just about anything under that category if they want to regulate it. So, step one is this: does the investment meet the definition of a "security"? If so, it is subject to anti-fraud rules, whether it has to be registered or not (exempt). That means that a fixed annuity or a whole life insurance policy is not even subject to anti-fraud regulations. Why not? Neither one is a "security." Then, there are securities that are excused from registration requirements. They're still securities, so anti-fraud rules still apply. These securities just don't have to be registered. They are excused/exempted from the registration requirements. For example bank stock does not have to be registered with securities regulators. Neither do church bonds. A church bond is sold with an offering circular rather than a prospectus. But, that doesn't imply that the investment is somehow safer than other debt securities, and the offering circular will announce that at the very beginning. To see how this stuff works in the real world, please check out an offering circular for a "church bond" or series of "mission investments," really, at:
You'll notice that the investments are being sold by employees, who receive no special compensation for sales (not agents). You'll notice that the expenses incurred to sell the investments are about $1 million per year. You'll notice all the disclosure that is provided . . . because even though the securities aren't registered, they are subject to anti-fraud rules. Investors have to be informed of all the risks involved; otherwise, they could sue if they lose money. Spend some time with this document, and I'm confident you will begin to understand "exempt securities" and securities registration issues in general much, much better. Enjoy.

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