Corporate Finance & Securities

New Law Makes Resale of Private Stock Easier

New Law Reduces Hurdles to Resale of Private StockCongress recently passed a new securities law exemption (Section 4(a)(7) of the Securities Act of 1933) that eases the limitations and restrictions surrounding the resale of private stock.  Prior to the new law, there were several regulatory hurdles that made the resale of private stock in a company difficult. As we’ve highlighted in prior posts, securities regulations require any sale of stock to be registered with the SEC (a time-consuming, expensive process), unless the sale is “exempt”—which means that the sale falls within one of the exemptions provided for in the securities regulations. (Check out one of our prior posts on securities exemptions and Rule 144 for more background on the regulations specifically surrounding selling stock in private companies as they applied prior to the Section 4(a)(7) update.)

Here is a brief discussion of the new rule and what it means for your business:

Section 4(a)(7) of the Securities Act of 1933

Section 4(a)(7) makes it substantially easier for founders, employees, and investors to resell their stock in a private company. This new law provides a simpler exemption and gives early stage shareholders access to liquidity for compensation that they’ve received from the company (usually in the form of stock or stock options).

The new rules are a substantial upgrade from the previous regulations regarding the resale of private stock, but they aren’t without their own set of requirements. These include that:

  • The seller has a reasonable belief the buyer is an accredited investor;
  • The shares being sold are in a class of shares that has been authorized and outstanding at least 90 days;
  • The seller can’t advertise or use general solicitation;
  • The seller isn’t considered a “bad actor” by the SEC; and
  • The buyer can obtain basic relevant information from the company.

The requirement to disclose “relevant information” appears to be this new law’s potential greatest hurdle on the path to making the resale of private stock easier, though the information should be relatively easy to collect (famous last words, right?). The information includes the name and contact information of the company, the nature of the business and its products or services, the names of the company’s directors and officers, and GAAP or IFRS-compliant balance sheet and P&L statements for up to two prior years. Also, if the seller has control of the company, then the seller needs to provide a statement about the seller’s affiliation and that the seller has no reasonable grounds to believe the company is in violation of securities regulations.

Do state securities laws still apply to the resale of private stock?

One important feature of Section 4(a)(7) is that it trumps state securities laws. That is, shares sold under Section 4(a)(7) are considered “covered securities,” which means they are not subject to state securities law requirements.

Structuring Limitations on Resale of Stock in Startups and Early Stage Companies

This new development in the securities regulations surrounding the resale or private stock is important to understand as you consider how to structure early equity in your startup or early stage company. Specifically, now is a good time to revisit your company policies related to the resale of restricted stock. Many early stage companies have contractual limitations on the resale of stock, and these contractual limitations may be worth revisiting to make sure your company’s compensation package is up-to-date with the new regulations.

This post was inspired by a great piece published by TechCrunch and written by Josh Maher, Joe Wallin, and John Myer. You can check out their article here.

If you would like to learn more about Section 4(a)(7) or other regulations surrounding the resale of stock in a private company, please contact us today.

Photo: Phil Roeder | Flickr


Gavin Johnson

Gavin enjoys craft beer and is learning the art of brewing.

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