Private share sales and tender offers

This does not raise money for the company. Only existing shares change hands. Companies use it when founders, employees or early investors want to sell some shares before a sale of the company or a listing, the usual exits the SEC describes.

Why it is not simple: shares in a private company are usually restricted securities. They can be resold only if the resale is registered or fits an exemption, such as:

• Rule 144: a shareholder who is not an affiliate of the company (not an officer, director or controlling holder, and has not been one for three months) can sell freely after holding restricted shares for one year, if the company does not report to the SEC. Affiliates face more conditions.
• Section 4(a)(7): a sale to accredited investors only, with no general solicitation, where the company makes basic information available (its business, officers and directors, the shares outstanding, and recent financial statements). The company itself cannot sell this way, the class of shares must have been outstanding for at least 90 days, and the shares stay restricted in the buyer's hands.

State law too: a resale under Rule 144 must also be registered or exempt under state securities law unless the company reports to the SEC, while a resale under Section 4(a)(7) does not need state registration. States can still require notice filings and fees, and act against fraud.

Tender offers: the company, or an investor, can offer to buy shares from many holders at once at a set price. The SEC's tender offer rules apply even to private companies: the offer must stay open for at least 20 business days, and for at least 10 business days after any change in the price or the number of shares sought.

The company's own rules: a company's documents can limit transfers, for example by requiring its approval or giving the company or other investors the right to buy the shares first (a right of first refusal). Check the articles, bylaws or operating agreement and any investor agreements before agreeing a sale.

Watch the holder count: a company with more than $10 million of assets and a class of shares held of record by 2,000 people, or by 500 who are not accredited investors, must register with the SEC and file reports, which most private companies want to avoid.