A non-issuer transaction is a type of deal involving a security that is neither directly nor indirectly executed for the benefit of the issuing company. These transactions are predominant in the secondary market, including stock exchanges, secondary offerings, or share buybacks involving the issuer.
Key Highlights
- Non-issuer transactions encompass the buying or selling of securities without involving the issuer of the securities.
- An isolated non-issuer transaction refers to an ad-hoc exchange of securities between private parties, often conducted over-the-counter (OTC) and exempt from registration.
- Transactions involving outstanding securities largely pertain to trades executed among counterparties on secondary markets without the issuer’s involvement.
The Essence of Non-Issuer Transactions
Isolated non-issuer transactions are exempt from registration requirements by the Securities and Exchange Commission (SEC). For example, if Joe sells 100 shares of XYZ stock to his brother, the transaction is exempt from these requirements.
Consequently, after selling those shares to his brother, Joe is deemed a non-issuer broker-dealer. A non-issuer is a person or entity that doesn’t issue securities nor intends to issue them, while a broker-dealer is someone who buys and sells securities either for their personal account or on behalf of others.
Regulations are comparatively lenient for non-issuer broker-dealers, although their activities are notably restricted while maintaining this status.
Role of Auditors and Non-Issuer Broker-Dealers
Auditors of non-issuer broker-dealers must be registered with the Public Company Accounting Oversight Board (PCAOB) as of the issuance date of their report. Registration with the PCAOB should commence as early as feasible. Non-public broker-dealers are encouraged to engage with the SEC’s Division of Trading and Markets to address specific circumstances, if needed.
Non-issuer broker-dealers’ auditors must adhere to Exchange Act Rule 17a-5(f)(3), indicating the auditor’s necessity to remain independent in compliance with specified provisions. However, auditors of non-issuer broker-dealers are exempt from the partner rotation and compensation prerequisites found in §210.201(c).
Types of Exemptions for Non-Issuer Transactions
Isolated Non-Issuer Transactions
States independently define “isolated” in context, but generally, these are non-recurring events. For example, someone relocates to Idaho from Tennessee with PDQ stock certificates. The stock is not registered in Idaho, but a sale to a neighbor would be exempt since the individual is not the issuer and the transaction is “isolated”.
Non-Issuer Transactions in Outstanding Securities
Referred to as the “manual exemption”, these transactions are exempt if the security from a compliant issuer is devoid of financial distress and is not a “blind pool” or “shell corporation”. The involved securities must have been public for at least 90 days.
This comprehensive understanding of non-issuer transactions, from their operational mechanisms to regulatory nuances, underscores the essential nature of secondary market trades and their pivotal role within the broader financial system.
Related Terms: Issuer, Secondary Market, Securities, Broker-Dealer, Stock Exchange, SEC, Auditors, Exemption
References
- U.S. Securities and Exchange Commission. “17 CFR Parts 240 and 249”, Page 95.
