A non-affiliate holds restricted stock in an SEC-reporting company for exactly six months. Can she sell all of it on the open market without restriction? If you answered "Yes," you've just fallen for one of the most common traps on the Series 7 exam. The correct answer is "It depends." The holding period is only half the story. The real test is whether she was an affiliate at any point in the prior three months. This single detail changes everything, and it's exactly the kind of judgment-first thinking you need to pass.
The Series 7 exam tests four key exemptions from the Securities Act of 1933: Regulation D (private placements), Rule 144 (resale of restricted/control stock), Rule 144A (institutional resales), and Rule 147/147A (intrastate offerings). Mastering them requires knowing the specific conditions for investor types, offering limits, holding periods, and resale restrictions.
Key facts
- Governing Act
- Securities Act of 1933, which requires registration of new issues unless an exemption applies.
- Key Exemptions
- Regulation D (private placements), Rule 144 (resales), Rule 144A (QIBs), and Rule 147/147A (intrastate).
- "Restricted" Security
- A security acquired in an unregistered, private transaction (e.g., a Reg D offering).
- "Control" Security
- Any security held by an affiliate (officer, director, or 10%+ shareholder) of the issuer.
- Accredited Investor
- An individual with a net worth over $1 million (excluding primary residence) or income over $200,000 ($300,000 with spouse).
- QIB (Qualified Institutional Buyer)
- An institution managing at least $100 million in securities.
Your 7-Day Sprint to Mastering New Issue Exemptions
Forget memorizing a wall of rules. To pass the Series 7, you need to think like an examiner and apply the right exemption to the right scenario. We'll structure this as a 7-day sprint to build that judgment. Try VoraPrep's adaptive Series 7 questions to drill these concepts each day.
Day 1: Deconstruct Regulation D (Private Placements)
Regulation D allows companies to raise capital without a full SEC registration. The exam will test your ability to choose the correct rule within Reg D based on the company's needs.
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What is Rule 504 for small offerings?
Rule 504 provides an exemption for offerings up to $10 million in a 12-month period. As of 2021, general solicitation and advertising are permitted. Securities issued under Rule 504 are restricted unless the offering meets specific state-level registration and disclosure requirements. This rule is for smaller capital raises.When is Rule 506(b) the right choice?
Rule 506(b) is the workhorse for traditional private placements with an unlimited offering amount. It allows sales to an unlimited number of accredited investors and up to 35 sophisticated non-accredited investors. General solicitation is strictly prohibited. This is the choice for companies that want to raise significant capital quietly from a known group of investors.Why would an issuer use Rule 506(c)?
Rule 506(c) also allows an unlimited offering amount but, crucially, permits general solicitation and advertising. The trade-off is severe: all purchasers must be accredited investors, and the issuer must take reasonable steps to verify their status. This is for issuers who need to reach a broad audience of wealthy investors they don't already know.| Feature | Rule 504 | Rule 506(b) | Rule 506(c) |
|---|---|---|---|
| Offering Cap | $10 million (12-month period) | Unlimited | Unlimited |
| Investor Types | Unlimited accredited/non-accredited | Unlimited accredited, up to 35 sophisticated non-accredited | Accredited investors ONLY |
| General Solicitation | Permitted | Prohibited | Permitted |
| Verification | Not required | Sophistication check for non-accredited | Required for all purchasers |
| Securities Status | Restricted | Restricted | Restricted |
Day 2 & 3: Master Rule 144 Resales
Rule 144 is not an exemption for issuing securities; it is a safe harbor for reselling restricted or control securities in the public market. The distinction between the security's nature and the seller's status is the most tested concept here.
- Restricted Securities: Unregistered shares from a private offering (like Reg D). Their "restricted" label relates to the security itself.
- Control Securities: Any shares held by an affiliate (officer, director, 10%+ owner). Their "control" label relates to the person holding them.
An affiliate can hold restricted stock (bought in a private placement) or registered stock (bought on the open market). The rules apply based on both factors.
What are the Rule 144 conditions?
To resell under Rule 144, several conditions must be met:- Holding Period (for Restricted Stock ONLY):
- Six months if the issuer is an SEC-reporting company.
- One year if the issuer is a non-reporting company.
- There is no holding period for control stock that was acquired on the open market. However, if an affiliate acquires restricted stock, they must satisfy the holding period just like anyone else.
- Adequate Current Public Information: The issuer must be current with its SEC filings.
- Volume Limits (for Affiliates ONLY): In any three-month period, an affiliate can sell the greater of:
- 1% of the outstanding shares.
- The average weekly trading volume of the last four calendar weeks.
- Manner of Sale (for Affiliates ONLY): Sales must be handled as routine brokerage transactions.
- Notice of Sale (Form 144): An affiliate must file Form 144 with the SEC at or before placing the order to sell if the sale exceeds 5,000 shares or $50,000.
- Is the seller an affiliate now? No.
- Has the seller been an affiliate in the past three months?
If the answer to #2 is "Yes," they are still subject to all the affiliate requirements (volume limits, manner of sale, Form 144 filing). If the answer is "No," then they can sell freely. The exam loves to test this three-month lookback period.
Day 4: Rule 144A and the QIB Market
Rule 144A is an exemption for the resale of restricted securities to Qualified Institutional Buyers (QIBs). A QIB is an institution that owns and invests at least $100 million in securities.
Think of Rule 144A as creating a private, liquid marketplace for the big players. It allows a hedge fund that bought restricted stock in a Reg D offering to immediately resell it to an insurance company without waiting for the six-month Rule 144 holding period.
The securities remain restricted, but they can be traded freely among QIBs. This is a critical source of liquidity for the institutional market.
Day 5: Rule 147 & 147A Intrastate Offerings
These rules provide a federal registration exemption for local businesses raising local capital. The offering must be genuinely "intrastate."
To qualify, the issuer must have its principal place of business in the state and meet at least one of the "80% tests": 80% of revenues, assets, or proceeds used in-state. All purchasers must be residents of that state.
What is the difference between Rule 147 and 147A?
Rule 147A modernizes the old rule for the internet age.- Offers: Rule 147A allows public advertising and general offers (like on a website) that can be seen by out-of-state persons, as long as sales are limited to in-state residents. Rule 147 required offers and sales to be in-state.
- Incorporation: Rule 147A allows a company to be incorporated elsewhere (e.g., Delaware) as long as its principal place of business is in the state of the offering.
Securities sold under these rules cannot be resold to non-residents for six months from the date of the last sale by the issuer.
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Day 6 & 7: Synthesis and Scenario Practice
Your final two days should be spent on application. Use a high-quality question bank to drill scenarios that force you to choose between these exemptions. The VoraPrep platform includes over 1,800 practice questions with detailed rationales that train this exact skill. Our adaptive engine will identify if you're confusing Rule 506(b) with 506(c) and give you more questions on that specific pain point until you master it.
Ask yourself on every question:
- Is this about a new issuance or a resale? (Reg D/147 vs. Rule 144/144A)
- Who are the investors? (Accredited, non-accredited, QIBs, in-state residents)
- How much money is being raised? (Triggers Rule 504 cap)
- Is there public advertising? (The key fork between 506b and 506c)
- Who is the seller? (Affiliate vs. Non-affiliate is the key to Rule 144)
This systematic approach, built on an accurate understanding of the rules, is how you demonstrate competence and pass the exam.