What is Non-Issuer Transaction

A non-issuer transaction is not directly or indirectly executed for the benefit of the issuer. Non-issuer transactions refer to any disposition of a security that does not confer a benefit to the issuer (company).

BREAKING DOWN Non-Issuer Transaction

Isolated non-issuer transactions are exempt from the registration requirements of the SEC. For instance, if Joe sells 100 shares of XYZ stock to his brother, this non-issuer transaction is exempt from registration requirements. However, once Joe sells that 100 shares to his brother, he officially becomes what's known as a non-issuer broker-dealer. Regulations are much lighter on non-issuer broker-dealers, but they're also very limited in what they can do while legally remaining a non-issuer broker-dealer.

Section 2(a)(7) of the Sarbanes-Oxley Act of 2002 defines the term “issuer” as “an issuer (as defined in section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c)), the securities of which are registered under section 12 of that Act (15 U.S.C. 781), or that is required to file reports under section 15(d) (15 U.S.C. 78o(d)), or that files or has filed a registration statement that has not yet become effective under the Securities Act of 1933 (15 U.S.C. 77a et seq.), and that it has not withdrawn.” If a broker-dealer is not an issuer as defined in the Act, it would not be subject to the provisions of the Sarbanes-Oxley Act that apply only to issuers.

Auditors and Non-Issuer Broker-Dealers 

Auditors of a non-issuer broker-dealer must be registered with the Public Company Accounting Oversight Board (PCAOB​)​​​​​​ as of the date of the auditor’s report. Auditors are encouraged to begin the registration process with the PCAOB as soon as practicable. Non-public broker-dealers are encouraged to contact the Commission’s Division of Trading and Markets to discuss individual circumstances if necessary.

Auditors of non-issuer broker-dealers must continue to comply with Exchange Act Rule 17a-5(f)(3), which states that the auditor “shall be independent in accordance with the provisions of §210.2-01(b) and (c) of this chapter.” However, auditors of non-issuer broker-dealers are not subject to the partner rotation requirements or compensation requirements of §210.201(c). 

Types of Exempted Non-Issuer Transactions

  • Isolated Non-Issuer Transactions: States define what "isolated" means on a local basis but it is specifically non-recurring. For example, an individual brought stock certificates for PDQ stock to Idaho when he moved from Tennessee. The stock is not registered in Idaho, but he may sell it to his neighbor and the transaction is exempt because the individual is not the issuer and the transaction is "isolated".
  • Non-Issuer Transactions in Outstanding Securities: This is often called the "manual exemption". If the security being traded is from an issuer that is currently up-to-date on all financial reporting with the SEC, is not experiencing financial difficulties, and is not a "blind pool", or "shell corporation", the transaction is exempt from registration. The securities involved in the transaction must have been in the hands of the public for at least 90 days.