Nonissuer Transaction

Two sales of Bramber Weald Ceramics common stock settle on the same afternoon. In the first, Bramber Weald itself sells 200,000 newly created shares to raise plant capital. In the second, retired founder Hesper Nunn sells 40,000 shares she has owned since 2011, and every dollar goes to her personally. Under the Uniform Securities Act, which statement is correct?

1. A.Bramber Weald is the issuer and its sale is an issuer transaction, while Nunn sale is a nonissuer transactionCorrect. The proceeds test separates the two: new shares sold for the company account versus existing shares sold for the holder account.
2. B.Nunn is an issuer, because a founder who sells her own shares is deemed to act for the companyNo such deeming rule exists. She receives the proceeds herself and is a selling shareholder.
3. C.Both are nonissuer transactions, because the shares were already authorised by the company charterAuthorisation is not issuance. Selling newly created shares for the company benefit is an issuer transaction.
4. D.Both are issuer transactions, because both involve Bramber Weald common stockThe security is the same but the seller and the destination of the proceeds differ, which is what defines the transaction type.

Why: An issuer is a person who issues or proposes to issue a security, so Bramber Weald is the issuer in the first sale and that sale is an issuer transaction. Nunn is selling shares that already exist and the proceeds go to her rather than to the company, so she is not an issuer and hers is a nonissuer transaction. The distinction drives which registration route and which transaction exemptions are available.

The Administrator of State Q is classifying four transactions in the shares of Thornwood Cider: (i) Thornwood sells newly authorized shares to raise capital; (ii) a founder sells 5,000 of her own long-held shares through a broker-dealer into the secondary market; (iii) an underwriter resells to the public the shares it bought from Thornwood in a firm-commitment offering; and (iv) the executor of a deceased shareholder estate sells his shares through a broker. Which are NONISSUER transactions?

1. A.(ii), (iii) and (iv)The underwriter resale in a distribution benefits the issuer indirectly and so is not a nonissuer transaction.
2. B.All fourTransaction (i) is a direct sale by the issuer for its own account, the paradigm issuer transaction.
3. C.(ii) and (iv) onlyCorrect. Only the founder and the executor sales send the proceeds somewhere other than the issuer.
4. D.(ii) onlyThe executor sale in (iv) is equally a nonissuer transaction; the estate, not the issuer, receives the money.

Why: A nonissuer transaction is one in which the issuer does not receive the proceeds, directly or indirectly. The founder sale in (ii) and the executor sale in (iv) send the money to the selling shareholder and the estate, so both are nonissuer transactions, and both are also the classic examples of exempt transactions. Transaction (i) is plainly an issuer transaction. Transaction (iii) is part of the same distribution: the underwriter is selling for the issuer benefit, so the issuer benefits indirectly and the transaction is not a nonissuer transaction.

Hollis Trenary, an individual investor, sells 400 shares of a listed stock she has held for years through her broker in a one-off trade unrelated to the issuer. Under the Uniform Securities Act, this is best characterized as:

1. A.An exempt security, so the antifraud provisions do not applyThis is a transaction exemption, and no exemption ever displaces the antifraud provisions.
2. B.An isolated nonissuer transaction, which is an exempt transaction under the ActCorrect. A one-off secondary-market sale by an individual is the classic isolated nonissuer transaction.
3. C.An issuer transaction requiring registration by qualificationThe issuer receives none of the proceeds, so this is a nonissuer transaction.
4. D.A private placement under Regulation DRegulation D governs an issuer's exempt offering, not a shareholder's secondary sale.

Why: An isolated nonissuer transaction is an exempt transaction under the Uniform Securities Act. Exempt-transaction status attaches to the transaction rather than to the security, and it relieves the parties of registration and filing obligations for that trade only. The antifraud provisions of the Act continue to apply to every transaction, exempt or not.

Imogen Trewhella bought 5,000 unregistered shares of Penbarrow Optics in a transaction that plainly qualified as an exempt transaction under the Uniform Securities Act. Eighteen months later she instructs her agent to advertise the block in State O and sell it to whichever retail buyers respond. She reasons that the shares became exempt when she bought them. Under the Act, her planned resale:

1. A.is exempt, because any sale by an individual of her own shares is an isolated nonissuer transactionAn advertised sale to whichever retail buyers respond is a public distribution, not an isolated transaction.
2. B.is exempt if she holds the shares for at least two years before sellingThe Uniform Securities Act imposes no such holding period exemption.
3. C.needs its own exemption or a registration, because a transaction exemption does not make the security itself exemptCorrect. Exempt transaction status is consumed by the transaction and does not attach to the certificate.
4. D.is exempt, because the shares acquired exempt status in her original purchase and keep it in her handsSecurities do not acquire exempt status from the transaction in which they were bought.

Why: A transaction exemption attaches to a particular transaction and to nothing else. It does not convert the security into an exempt security, and it does not travel with the certificate into the hands of the next seller. Trewhella resale must therefore stand on its own footing, either because the security is registered or because her resale itself fits an exemption, and a general advertised sale to retail buyers fits none.