Series 65: Issuer And Non-Issuer Transactions And Section 402(b) Exemptions

Unlike Section 402(a), which provides to certain securities blanket exemptions from registration, Section 402(b) of the USA exempts certain securities from registration as long as they are limited to certain transactions. In other words, as long as securities that would otherwise require registration only change hands in one of the following circumstances, registration is not required.

In order to understand 402(b) exemptions, it is important to understand the difference between issuer transactions and non-issuer transactions. When an issuer raises money by selling securities to investors, the sale is an issuer transaction. The proceeds of the sale go to the issuer. Securities bought in an initial public offering and sales of mutual fund shares are both considered issuer transactions. An issuer repurchasing its own securities would also be an issuer transaction. An issuer transaction takes place in the primary market.

• • Note: If an exam question mentions “an underwriter” or “the primary market,” it is usually referring to an issuer transaction.

In contrast, a non-issuer transaction is when one party sells a security to another party, and neither party is the issuer. The proceeds of this kind of transaction do not go to the issuer, and these kinds of transactions take place in the secondary market.

• • Note: Generally, the sales of open-ended mutual fund shares are considered issuer transactions, because when an investor buys shares of a mutual fund, the shares are issued new. Likewise, when the investor wants to sell these shares, they are then redeemed by the fund. If a mutual fund decides to sell some of the securities that are included in the fund, however, this transaction is considered a non-issuer transaction. This stands in contrast to closed-end mutual funds, exchange-traded funds, and unit investment trusts, which are issued in the primary market once and