With the enactment of the Jumpstart Our Business Startups (JOBS) Act of 2012, private companies have the ability to defer an IPO and SEC reporting, and remain private longer than at any time in the past. One result, however, is that shareholders and employees of these companies now face a much longer wait time for public liquidity, a fact that negatively impacts private company capital formation and job creation. The RAISE Act, which was signed into law on December 4, 2015, establishes Section 4(a)(7) under the Securities Act of 1933, a new federal securities exemption for resales of unregistered securities by private company shareholders seeking to obtain pre-IPO liquidity.
Section 4(a)(7) clears away much of the previous uncertainty around resales of private company shares, such as 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. Section 4(a)(7) transactions are also exempt from state law, eliminating the need to work through the complexities created by inconsistent state resale exemptions. In order for a seller to rely on Section 4(a)(7), 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. In addition, the exemption requires that a range of disclosure, from the name of the company to two years of US GAAP financial statements, be provided to sellers and buyers in order for the exemption to be available to sellers.
To get a sense of whether private companies would be willing to provide the required disclosures under this new law, we analyzed each of the secondary liquidity programs facilitated by our technology platforms during the past two years ($3.2 billion in total transaction volume) to determine whether the level of disclosure provided by private companies in those programs would have satisfied the information requirements under Section 4(a)(7). We found that the majority of the Section 4(a)(7) disclosure requirements had in fact been made available by issuers in those programs. Most interestingly, we found that private companies provided two years of US GAAP financial statements to shareholders using our platform in 75% of liquidity programs. The complete results of our analysis, available here, led us to believe that private companies sponsoring a liquidity event will likely be willing to provide the required disclosures necessary to satisfy the new exemption.
In addition, based on NASDAQ Private Market’s discussions with key Congressional members and staff involved in the drafting and passage of the RAISE Act, we compiled a series of frequently asked questions regarding the new safe harbor, available here, to help provide clarity around the requirements of the new safe harbor, which we believe to be a pivotal development for private companies and their shareholders.
Annemarie Tierney is the Vice President, Head of Strategy and New Markets at NASDAQ Private Market.