Issuer is the legal entity that registers and sells securities after developing them to fund its operations. Issuers can be corporations, domestic or foreign governments, or investment trusts. They usually offer securities like common and preferred stocks, debentures, bonds, derivatives, and note bills, while other issuers might collect financing to issue exchange-traded funds or mutual fund shares.
It is an issuer’s legal responsibility to maintain the obligations of the issue. Typically, these issues finance the issuing entity’s operational expansion or new projects. In addition, they aim to raise maximum funds from investors and issue bonds or stocks. In the United States, the issuing entity should comply with the Securities Act of 1933 while carrying out such issues.
Table of contents
- An issuer is any entity that registers and sells securities after having designed or developed them to finance their operational expansions or new projects.
- These can be investment trusts, large corporations, banks, municipalities, or governments.
- They are required to disclose necessary information to the Securities and Exchange Commission and shall scrutinize the disclosed information.
- Issuing entities’ insolvency, lack of information, and financial conditions are a few risks of such investments.
An issuer is any entity that looks to raise funds through the issuance of bonds, stocks, or other financial instruments. They aim to raise the maximum funds to finance their operational expansion or new projects.
They are legally bound to remain responsible for the obligations of the issue and comply with the Securities Act of 1933. Accordingly, it is mandatory for issuing entities to give prospective investors a detailed account of the information relating to the prospectus. Moreover, they might be instructed to provide details that do not make it to the prospectus but is accessible to the general public.
According to Section 7 of the Securities Act of 1933, the Securities and Exchange Commission (SEC) has complete authority to instruct issuing entities on the required information disclosure.
The required information usually includes the following:
- Issuer’s managers and officers
- Business Profile
- Risks of the business
- Past performance
- Executive compensation
- Audited financial statements
- Tax and legal issues, if any
- Terms and conditions of the issued securities.
Upon receiving the documents with information, the SEC ensures all the required data is published without deficiencies or omissions. If there are any irregularities, the SEC issues deficiency letters to the bond or debt issuer and get the required information added.
These issuers can be corporations, banks, or governments that want to raise funds to finance their projects or expansions. It is important to note that these entities can be domestic or foreign. Any entity other than a foreign government incorporated or functions under the jurisdiction outside the U.S. and more than half of their voting securities are held by non-US citizens is referred to as a foreign private issuer.
Their functionality as an issuing entity remains the same, while their business’ origin and operations function on soil foreign to the United States.
Risk-rating firms rate these issuing entities. These ratings are published in alphabets such as AAA, BB, or DDD. Each of these ratings signifies the creditworthiness of the security and the issuing entity. The rating terms include:
- AAA- Exemplary record and very minimal chances of default.
- BBB- The business is being operated in good faith, with high confidence.
- BB- Moderate to high risks.
- DDD- In default.
Let us understand this concept better with the help of the examples below:
XYZ Corporation is a real estate company that builds residential apartments and commercial spaces in developing cities and towns. They wanted to raise funds to finance their upcoming project in a small town. The total cost of the project was $20 million. They wanted to raise 50% of that amount.
Therefore, they issued 10,000 bonds at $100 each with an interest of 5% per annum for five years. To do so, they filed their documents with a detailed account of the project, their previous profits, details about the managers and officers of the project, and so on with the authorities.
Upon receiving the approval, they began the project. Within five years, XYZ completed the project, and the money was returned with interest to the lenders of their project by the bond issuer.
ArcelorMittal, one of the largest steel manufacturing companies in the world with fully integrated steel mills in Kazakhstan, North America, and other countries, announced the pricing of their bond issue in November 2022.
The company carried out the issue to finance its general corporate purposes and acquire a company.
The bond issuer set the total size of the issue as $1.2 billion with an aggregate amount of principal of 6.55% for notes due in 2027 and a $1 billion aggregate principal amount of 6.80% expected in 2032.
An exempt issuer can issue securities without disclosing particular regulatory reporting prerequisites.
A few exemptions that are allowed under the Securities Exchange Act of 1934 are discussed below:
- Affiliates of foreign private investors do not have to fill Section 15 of the Securities Exchange Act mandatorily.
- However, Form 144 is the regulatory authorities may ask the sole disclosure affiliates to submit around or at the time of the sale.
- Typically, banks and depositories, specific non-profit organizations, authorized insurance companies, governments, and issuers of tax-exempt securities like municipalities are except issuers.
The risks of investing in an instrument issued by the issuer are subject to risk factors like any investment across asset classes. However, the risks in these investments are most often directly related to the issuing entity and not the nature of the investment. Let us discuss the dangers of issuer-led investments in brief through the points below:
#1 – Insolvency
Due to unforeseen circumstances or mismanagement in the issuer’s firm, if the issuing entity files for insolvency or bankruptcy, the investor or the lender will lose a significant chunk of their investment.
#2 – Lack of information
In general, when investing in unrated or non-publically traded securities, the access to information is much less as the issuer is not obligated to disclose data in a detailed manner. Therefore, the investors might have to invest purely based on the financials disclosed and not on the creditworthiness of the issuing entity.
#3 – Financial Condition
The securities issued are vulnerable to change in value due to the financial condition of the issuing body. If the financial condition deteriorates, the security most often tumbles in the secondary market.
Issuer vs Acquirer vs Non Issuer
Another industry with the everyday use of both terminologies – Issuer and Acquirer, is the banking industry. Even though they are closely linked and discussed, it is vital to understand the differences and their functionalities to understand the concept fully. Let us discuss the same through the points below:
- In simple terms, the issuer bank work on behalf of the cardholders by providing them the credit and debit cards.
- On the other hand, acquirers are representatives of businesses that accept cards and electronic transactions by aiding them to accept card payments.
Let us understand the differences between the issuer, acquirer, and non-issuer through the table below:
|An entity that files with the SEC and issues securities
|Acquirers are businesses that accept payments and transactions.
|An entity that neither issues securities nor files with the SEC.
|Raises funds to finance the expansion of business or a new project.
|Acts as the bridge between the borrower and lender.
|Sources the funds internally.
|The necessary disclosures must be submitted to the SEC, subject to scrutiny from their end.
|The transaction fee and other rules have to be followed.
|Do not have to file disclosure for raising funds with the SEC as it is sourced through sources internal to the organization.
Frequently Asked Questions (FAQs)
It refers to the issuing authority allowing cardholders to make their purchases. It refers to the bank issuing the credit or debit card for the consumer to pay for goods and services.
These shares are acquired through a direct relationship with the issuing company or entity, which can include employee shares. If the shares are held online, the holder will be required to disclose the holder or serial number containing all the holdings and dividends details. Once the documentation is submitted, the shares are executed within a couple of business days.
FPI refers to any entity other than a foreign government that is organized or incorporated under the jurisdiction outside the soil of the United States. They issue shares, bonds, or other securities to raise funds for their new projects or operational expansion.
These shares refer to the securities held by the issuing entity’s share registry. The holder can trade them through a broker, provided the conditions set for the broker are met. These shares are tagged with a registered number known as the Securityholder Reference Number (SRN).
This has been a guide to Issuer and its meaning. Here, we explain its examples, exemptions, risks, and comparison with acquirer and non-issuer. You can learn more about it from the following articles –