Why is commercial paper not required to be registered with the SEC?

Why is commercial paper not required to be registered with the SEC?

• A. It is unsubordinated debt.
• B. It is guaranteed by the issuer.
• C. It is sold only to sophisticated investors.
• D. It is issued with a term of less than one year.

Answer: (D)

Commercial paper is not required to be registered with the SEC largely due to its short-term nature, specifically because it is typically issued with a maturity of less than one year. This characteristic qualifies commercial paper for an exemption under the Securities Act of 1933, which states that securities offered for maturity of less than nine months (270 days for certain calculations) are exempt from registration. The rationale behind this exemption is that commercial paper is considered a less risky form of financing due to its short-term commitment, implying that investors have a lower exposure to the risks typically associated with longer-term securities. As such, the regulatory framework allows firms to issue these instruments more freely, facilitating liquidity and operational flexibility while still protecting investors based on the sophisticated nature of transactions involved. The other options present attributes of commercial paper but do not align correctly with the regulatory reasons behind the exemption from SEC registration. Factors such as the type of debt or guarantees do not determine the need for registration, nor does the investor's sophistication level play a critical role in the exemption criteria. The key factor remains the short-term nature of the financial instrument.

Commercial paper is not required to be registered with the SEC largely due to its short-term nature, specifically because it is typically issued with a maturity of less than one year. This characteristic qualifies commercial paper for an exemption under the Securities Act of 1933, which states that securities offered for maturity of less than nine months (270 days for certain calculations) are exempt from registration.

The rationale behind this exemption is that commercial paper is considered a less risky form of financing due to its short-term commitment, implying that investors have a lower exposure to the risks typically associated with longer-term securities. As such, the regulatory framework allows firms to issue these instruments more freely, facilitating liquidity and operational flexibility while still protecting investors based on the sophisticated nature of transactions involved.

The other options present attributes of commercial paper but do not align correctly with the regulatory reasons behind the exemption from SEC registration. Factors such as the type of debt or guarantees do not determine the need for registration, nor does the investor's sophistication level play a critical role in the exemption criteria. The key factor remains the short-term nature of the financial instrument.