Many of today’s growing companies are staying private much longer, as much of their growth is occurring before entering the public markets. These days some pre-IPO companies are taking as long as a decade to go public, and are raising so much cash as private companies they may never take the leap. This has led to investors of all levels trying to get a piece of the action. Whether you are seeking to generate cash, diversify your holdings, or looking to make gains, experienced business attorneys can help guide you through the complex world of buying and selling private stock. Purchasing Private Shares Small or private business brokers that specialize in buying and selling private stock are a good place to start if you are interested in buying shares in a private company. Another option is private equity firms. Some publicly traded private equity firms offer shares that can be purchased by any investor. Certain mutual funds can also provide access to private companies. Another option is purchasing shares of the company for which you work. Private companies have come to realize that secondary sales can be a powerful tool for recruitment and retention, allowing employees more financial flexibility, which in turn helps employees to maintain focus on growing company value. Qualified contracts lawyers can help you determine which option is best for you when purchasing private shares. Shareholder Management A fundamental goal of private companies that allow secondary sales is to protect their corporate information such as valuation, financials, and key customers. Most private companies employ some form of share restriction to ensure that a specific level of shareholding is maintained at all times. Selling Your Shares Before selling shares in a private company, an investor must determine what type of stock is held (preferred versus common), then refer to a section of the company’s bylaws called “Transfers of Capital Stock”. This section contains the governing conditions and requirements for that class of stock. You will be asked to identify any restrictions that apply to your shares, and to provide copies of the documents containing the restrictions. This provides a Buyer with knowledge of the restrictions in advance of entering into any agreement. Your local Contracts attorneys can provide assistance with any legal issues that may be applicable to the transferability of your shares. The Bottom Line It is important to remember that investing in private stock is usually a long-term endeavor. Most investors will need an eventual liquidity event to cash out, such as when the company buys out private shareholders, goes public or is bought out by a competitor. It is now easier than ever to invest in private companies, but an investor still has to do his or her homework. Overall, an investor has to overcome more obstacles when investing in a private firm as compared to a public one, but the work can be worth it as there are a number of advantages to investing in private companies. Lastly, all of these transactions must comply with SEC regulations, as well as stae regulations pertaining to the purchase and sale of stock. Also, for certain transactions, only certain types of investors are legally qualified to make those investments. Skilled lawyers can help make sure the decisions you make regarding selling or buying private stock work to your advantage and comport with state and federal regulations and laws.
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