What is a Non-Open Market?

Non-open market describes an agreement to purchase or sell shares made directly with the company. Non-open market transactions do not take place on a market exchange like most purchase and sale transactions. These are private transactions and can include insider buying. While these transactions occur outside of the traditional market, they still need to be filed with the Securities and Exchange Commission (SEC). Such transactions can be referred to as a non-open market acquisition or disposition.

Key Takeaways

  • Non-open market transactions do not take place on a market exchange.
  • The transactions still need to be filed with the SEC.
  • The most common type of non-open market transaction occurs when an insider exercise their options.

Understanding Non-Open Market

The most common types of non-open market transactions occur when insiders exercise their options. If an insider has an option to buy a certain amount of shares at a set price, they are buying the shares from the company and not through an exchange. Once the shares have been purchased, the insider can sell the purchased shares into the open market.

Another type of non-open market transaction is a tender offer where a corporation offers to repurchase shares from outside shareholders.

How Non-Open Market Transactions Are Conducted

Non-open market transactions are comparable to closed market transactions, where an insider places an order to buy or sell restricted securities from the company’s treasury. Closed-market transactions are typically set above or below market price depending on the terms determined by the company. Non-open market purchases often include benefits that are exclusive and not accessible to the public.

Employees, executives, and directors of a company may be granted warrants, options, or shares through programs only available to them. Executives and employees may be granted such opportunities as work incentives or additions to their standard salaries.

Example of a Non-Open Market Transaction

An employee with incentive stock options may have the chance to purchase shares at a discount relative to the latest market price. These options are priced based on the market price at the time they are granted. This is known as the strike price. Employees must wait for these options to vest—which means they stay long enough at the company to earn the right to use the options—before they can be exercised.

The assumption is that the value of the shares will increase during that time. The strike price should be a discount compared with the market price when the employee exercises their options. This gives the option holder the chance to potentially resell the shares for a profit on the open market where outside buyers must pay the current market price.

After employees have exercised an option and acquired the shares, it is possible that they might also be required to hold the shares a certain period of time before selling them on the open market.

Using actual figures, a employee may get 10 stock options, entitling them to 1,000 shares (10 contracts x 100 shares each) at a price of $50. The options can't be exercised for five years. The stock is currently worth $50, but in five years time it is hopefully worth more. This gives the employee incentive to help the company become as profitable as possible. The higher the stock price goes, the more they stand to make.

In five years time the employee may exercise their options. If the stock price is currently $70, each option is worth $20 x (10 contracts x 100 shares) = $20,000. Thought of another way, they receive 1,000 shares at $50 and can sell them on the open market at $70 for a $20,000 profit.