Issuer

The statute also contains special rules for certain kinds of securities, because for some of them the person who issued the security is not the obvious choice. For certificates of deposit, voting-trust certificates and collateral-trust certificates, the issuer is the person performing the acts and assuming the duties of depositor or manager under the agreement that created the securities. The same approach applies to certificates of interest or shares in an unincorporated investment trust that has no board of directors or is of the fixed, restricted management or unit type. For equipment-trust certificates and similar securities, the issuer is the person by whom the equipment or property is or is to be used. For fractional undivided interests in oil, gas or other mineral rights, the issuer is the owner of the right who creates the fractional interests for the purpose of a public offering.

The statute also addresses personal liability. In the case of an unincorporated association that provides for limited liability of its members, or a trust, committee or other legal entity, the trustees or members are not individually liable as issuers of the securities issued by that association, trust, committee or entity. The point of these provisions is to identify the party that actually stands behind the security.

Types of Issuers

Issuers fall into a few broad groups. The SEC's investor education materials describe the main categories of bond issuers, and the same groups apply to securities generally.

Corporations are the most familiar issuers. A corporation can issue equity, which gives the holder an ownership interest, and it can issue debt, which gives the holder the right to be repaid. A company that sells shares to the public is issuing stock. A company that borrows from investors by selling bonds is issuing debt securities.

Governments and municipalities are a second group. States, cities, counties and other local governmental bodies issue municipal bonds to finance public projects. These issuers raise money from investors in the same way a corporation does, although the securities are treated differently under the securities laws, as described below.

The United States government is a third group. The Treasury issues Treasury securities to finance the federal government. Because the issuer is the federal government, these securities are obligations of the federal government.

Other entities issue securities as well. Investment companies and trusts issue shares or units to investors. For some of these structures, as the statutory definition shows, the person treated as the issuer is the depositor or manager of the trust and not the trust itself.

What an Issuer Owes to Holders

The obligations of an issuer depend on the type of security it has issued. The SEC's investor education materials describe the bond relationship plainly. Borrowers issue bonds to raise money from investors who are willing to lend them money for a certain amount of time. The issuer promises to pay a specified rate of interest during the life of the bond and to repay the principal when the bond matures. A bondholder is therefore a creditor of the issuer.

The risk that goes with this relationship is credit risk. The SEC describes it as the danger that the issuer may fail to make interest or principal payments on time and thus default on its bonds. This is why investors look at an issuer's financial condition before buying its debt, and why credit rating agencies publish ratings that reflect their view of an issuer's ability to repay.

The quality of an issuer's credit affects what it must offer to raise money. An issuer that investors regard as more likely to repay can generally borrow on better terms than an issuer that investors regard as less likely to repay. Investors who accept more credit risk usually expect a higher return in exchange. This relationship is one reason the identity and financial condition of the issuer sit at the center of how debt securities are priced.

The stockholder's position is different. A stockholder owns a share of the issuer rather than lending it money. The issuer does not promise a fixed return, and any dividend is a decision of the issuer's board of directors. The SEC's materials note that shareholders in a public company can elect members of the board of directors and vote on matters such as mergers and executive compensation through proxy statements. The stockholder's rights are therefore rights of ownership and governance, while the bondholder's rights are rights to payment.

The Issuer in the Primary Market

The primary market is where an issuer first sells its securities. The SEC defines it as the market in which newly issued securities are sold to investors and the issuer receives the proceeds. The last part of that definition is the most important. In the primary market, the issuer gets the money.

A hypothetical shows the point. Suppose a corporation sells ten million new shares to investors at twenty dollars per share. The corporation receives the proceeds of the sale, less the costs of the offering, and it uses the money to build a new facility. This is an illustration only and does not describe any actual company or offering. The investors who buy the shares become shareholders of the issuer, and the corporation has more equity on its books.

An initial public offering is the first time a company sells its stock to the public. A company that sells securities this way becomes a public company, which the SEC describes as a company that has public reporting obligations. The company, as the issuer, is the seller in the transaction, although it normally uses an underwriter to help it distribute the securities.

The Issuer and the Secondary Market

After the initial sale, the securities trade among investors in the secondary market. In the secondary market, the issuer is generally not a party to the trade and does not receive proceeds. If an investor sells shares of the corporation in the earlier example to another investor, the buyer pays the seller, and the corporation receives nothing from the trade.

This distinction explains a point that new investors often find surprising. When a stock price rises or falls on an exchange, the issuer's cash balance does not change as a result of those trades. The issuer is affected indirectly, because a higher stock price may make it easier to raise money in a later offering and a lower price may make it harder, but the trades themselves are between investors.

The issuer remains connected to its securities even though it is not part of each trade. It still owes interest and principal to bondholders, it still reports information to the public, and its stockholders still have the rights that go with ownership.

The Issuer and the Underwriter

An issuer rarely sells a large offering to the public by itself. It usually engages an underwriter, a firm that helps distribute the securities. The Securities Act defines an underwriter as any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or who participates in any such undertaking.

The definition shows how the two roles relate. The issuer is the source of the securities. The underwriter is the intermediary between the issuer and the investors who buy them. A hypothetical illustrates the relationship. A corporation that wants to raise money for expansion hires an investment bank. The investment bank markets the new shares to investors and either buys them from the corporation for resale or sells them on the corporation's behalf. In both cases the corporation is the issuer and the investment bank is the underwriter. This illustration does not describe any actual firm or transaction.

Registration and Exemptions

The Securities Act of 1933 places obligations on issuers that offer securities in the United States. The SEC states the rule this way: all securities offered in the United States must be registered with the SEC or must qualify for an exemption. The issuer is the party that has to register an offering or find an exemption.

A registration statement gives investors information about the offering. According to the SEC, registration forms include a description of the company's properties and business, a description of the security to be offered for sale, information about the management of the company, and financial statements certified by independent accountants. The offering document that investors receive, called a prospectus, is part of the registration statement.

Not every offering has to be registered. The SEC lists common exemptions, including private offerings to a limited number of persons or institutions, offerings of limited size, intrastate offerings, and securities of municipal, state and federal governments. Regulation D contains rules under which many private offerings are made.

The exemption for government securities comes from Section 3(a)(2) of the Securities Act. That provision exempts any security issued or guaranteed by the United States or any territory, by the District of Columbia, by any State, by any political subdivision of a State or territory, or by any public instrumentality of one or more States or territories. This is why a state or city selling municipal bonds does not file a registration statement with the SEC in the way a corporation does. The exemption concerns registration under the Securities Act. It does not mean that municipal issuers may mislead investors.

Public and Private Issuers

Issuers are often described as public or private, and the label depends on reporting obligations. The SEC describes a company as public when it has public reporting obligations and must disclose business and financial information regularly. A company usually reaches that point after selling securities through an initial public offering or after reaching a certain investor threshold. A private company has not taken those steps. It may still be an issuer, because it may sell securities in a private offering, but it does not file the regular public reports that a public company files.

The difference matters to investors because the amount of available information is very different. For a public company, an investor can read audited annual financial statements and current reports of major events. For a private issuer, the information available to investors is usually limited to what the issuer provides in connection with the offering. Private offerings, as the SEC notes, are generally made to a limited number of persons or institutions.

Ongoing Reporting by Public Issuers

An issuer that has public reporting obligations has to keep investors informed after the offering. The SEC describes the main reports. Form 10-K is the annual report, and it contains the company's audited annual financial statements and a discussion of the company's business results. Form 10-Q is filed for the first three quarters of the year and includes unaudited financial statements and information about the company's business. Form 8-K is the current report, which companies file to announce major events that shareholders should know about.

These reports are filed with the SEC and can be read by the public. The SEC states that public disclosure by companies serves to advance its mission. For a reader studying the securities industry, the reporting system shows why the identity of the issuer matters. An investor who wants to evaluate a stock or a corporate bond can look up the issuer's reports and see its financial statements and its description of its own business and risks.

How Investors Research an Issuer

An investor who wants to evaluate an issuer has several places to look. The first is the issuer's own filings. The SEC makes the reports of public companies available through its EDGAR database, and the SEC's investor education materials explain how to read a Form 10-K, a Form 10-Q and a Form 8-K. The annual report shows audited financial statements and a discussion of business results. The quarterly report updates the picture, and the current report announces major events.

A second source is the credit rating. Rating agencies publish ratings on the debt of many issuers, and bond investors use those ratings as one input in judging credit risk. A rating is an opinion, and it is not a guarantee that an issuer will meet its obligations.

A third source is the offering document. When an issuer sells securities in a registered offering, the prospectus describes the issuer's business, the securities and the risks of investing. A careful investor reads it before buying.

None of these sources removes risk. They give the investor information with which to judge the issuer. The securities laws are built on the idea that investors who have accurate information about the issuer can make their own decisions.

The Issuer Compared With Other Participants

The securities industry has several kinds of participants, and the issuer is only one of them. The issuer creates the security and raises money from it. The investor buys the security and either lends money to the issuer, in the case of a bond, or takes an ownership interest in it, in the case of a stock. The underwriter helps the issuer distribute a new offering. A broker-dealer may sell the securities to customers, and a dealer may also trade them for its own account. An exchange or another market provides a place for later trading.

Each role has different obligations. The issuer owes the holder what the security promises. The underwriter owes the duties that come with distributing an offering. The broker-dealer owes duties to its customers. The exchange operates the market. Keeping the roles separate is a skill that securities professionals use daily, because a question such as who is responsible for a disclosure, who receives the money from a sale or who owes interest on a bond can only be answered by first identifying which participant is meant.

A Worked Example

Consider a hypothetical corporation that needs money to open new plants. It has two basic choices. It can sell new shares, or it can borrow by selling bonds.

If the corporation sells shares, the investors who buy them become owners. The corporation does not have to repay the money. It has no obligation to pay dividends, although the board may choose to. The new shareholders can vote for the board of directors and on other matters put to shareholders.

If the corporation sells bonds, the investors who buy them are lenders. The corporation, as issuer, promises to pay interest and to repay the principal when the bonds mature. If it fails to make those payments on time, it is in default. The investors have a claim against the issuer, and they bear credit risk throughout the life of the bonds.

In either case the corporation is the issuer. It has to register the offering or qualify for an exemption, and if it becomes a public company, it has to file annual, quarterly and current reports. The underwriter that helps it sell the securities does not become the issuer. The investors who buy the securities do not become the issuer either, even if they hold a large amount of them. This example is an illustration only and does not describe any actual company.

Now compare a municipal issuer. A city that sells bonds to build a water system is the issuer of those bonds. Its securities are exempt from registration under the Securities Act, but it is still the party that has promised to pay interest and repay principal, and investors in its bonds still bear the credit risk that the city may fail to make the payments.

Finally, consider the United States Treasury as an issuer. When the Treasury sells Treasury securities, it is raising money for the federal government and promising to pay the interest and principal on those securities. The securities are exempt from registration under the Securities Act, because the exemption covers securities issued or guaranteed by the United States. The Treasury is still the issuer, and the investors who buy its securities are still creditors of the issuer, even though the registration process that a corporation goes through does not apply.

Common Misunderstandings

One misunderstanding is that the exchange where a security trades is its issuer. An exchange is a marketplace. It does not issue the securities that trade there. The issuer is the entity that created the securities.

A second misunderstanding is that the issuer receives money every time its stock trades. The issuer receives the proceeds only when it sells newly issued securities in the primary market. Later trades between investors in the secondary market do not put money in the issuer's hands.

A third misunderstanding is that only corporations are issuers. Governments, municipalities, the United States Treasury, investment companies and trusts are also issuers. The securities laws treat each of them as an issuer, although government issuers have a different registration treatment.

A fourth misunderstanding is that an underwriter or a broker-dealer that sells a security is the issuer. The firm that helps distribute or sell the security is an intermediary. The issuer is the party that created the security and owes its obligations to the holder.

A fifth misunderstanding is that a bondholder and a stockholder have the same rights against the issuer. A bondholder is a creditor with a right to interest and principal. A stockholder is an owner with the rights of ownership and governance.

Key Points

An issuer is the person who issues or proposes to issue a security, as defined in Section 2(a)(4) of the Securities Act of 1933 and Section 3(a)(8) of the Securities Exchange Act of 1934. The definition includes entities that are about to offer securities, and it has special rules for certain trusts, certificates and equipment securities.

Corporations, governments and municipalities, the United States Treasury, and investment entities all act as issuers. A bond issuer promises to pay interest and repay principal at maturity, and a stock issuer owes its shareholders the rights of ownership.

In the primary market the issuer sells newly issued securities and receives the proceeds. In the secondary market investors trade among themselves and the issuer does not receive proceeds.

Securities offered in the United States must be registered with the SEC or qualify for an exemption. Securities issued or guaranteed by governments are exempt from Securities Act registration under Section 3(a)(2). Public issuers report to the SEC through Forms 10-K, 10-Q and 8-K.