The Growing Public Market for Private Company Shares

The Jumpstart Our Business Startups Act, or JOBS Act, was designed to facilitate capital-raising transactions by smaller companies, including private companies. A likely but less heralded consequence of the JOBS Act is that it will also increase the number of private company shares available for sale by investors in essentially public online markets available to accredited investors. The development of these markets may prove to be helpful to some investors and may provide liquidity for employees who receive equity compensation from private company employers. Yet the rules for these markets, and for companies whose shares are or will be traded on them, are currently less than clear. Moreover, private companies and their principal investors should consider the impact of potential market transfers when planning their companies’ capitalization structure and transferability restrictions.

Where will the shares come from? As is now the case, some shares may come from grants to employees. Once the SEC adopts the regulations required under the JOBS Act, the shares may also come from crowdfunding transactions by early stage companies. More shares are likely to come from investors who acquired their interests in private financing transactions. These might be traditional private placements or online offerings of private company shares to accredited investors, a form of financing that will be facilitated by the JOBS Act removal of the ban on general solicitation in certain offerings limited to accredited investors. The SEC has proposed, but not yet adopted, final rules relating to these JOBS Act provisions.