With the enactment of the Jumpstart Our Business Startups (JOBS) Act of 2012, more private companies are deferring an IPO in favor of remaining private longer. To give you an idea on how the IPO market has changed, in 1999, the median time to IPO for a private company was just 4 years; today it has stretched to over 11 years. While companies have benefited from increased time to develop their products and business models, shareholders and employees of these companies now face a much longer wait time for liquidity. Secondary markets for private shares have developed to alleviate the pressure for liquidity that results from high valuations and large mature shareholder bases. As the private markets have grown in size, there have been impactful legislative changes to improve access to liquidity for employees and shareholders. The Reforming Access for Investments in Startup Enterprises (RAISE) Act, which was signed into law on December 4, 2015, is a pivotal piece of legislation that provides a new safe harbor for private resales of securities, Section 4(a)(7) under the Securities Act of 1933.
The RAISE Act clears away much of the previous legal grey area around resales of private company shares.
How it will impact shareholders and employees of private companies:
- The new law clarifies whether employees exercising vested options could simultaneously sell the underlying common stock and use those proceeds to cover their option exercise and income tax costs.
- All buyers must be accredited investors. The seller cannot generally solicit investor interest and the seller cannot be a “bad actor” as defined under the exemption.
- Section 4(a)(7) transactions are exempt from state law, eliminating the need to work through the complexities created by inconsistent state resale exemptions.
How it will impact private companies:
- The ‘safe harbor’ exemption removes subjective ambiguity for transactions that meet the law’s qualifications.
- The exemption requires a range of disclosure be provided to buyer and seller, including U.S. GAAP financial statements.
As a market leader, NASDAQ Private Market has helped companies facilitate secondary transactions totaling over $1.6 billion in volume in 2015 alone. We performed an anonymized analysis each of the liquidity programs facilitated by our technology platform during the past two years. The analysis was to specifically determine whether the level of disclosure provided by private companies in these transactions would have satisfied the Section 4(a)(7) information requirements. We were pleased to find that the majority of the Section 4(a)(7) disclosure requirements were made available in those transactions, and created an infographic to break down the results.
 Data collected from the SecondMarket platform may include transactions conducted through current and former affiliates of SecondMarket.
The information contained herein is provided for informational and educational purposes only. None of the information provided is an offer or solicitation to buy or sell any securities, or to provide any legal, tax, investment or financial advice.
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