Private secondary markets don’t have to stop “trading” simply because of the filing of an S-1. There are other rules and tests that may come into play and the business of market makers is generally independent of the issues, unless the market maker is also acting as an underwriter or has some other relationship with the issuer that taints independence.
The secondary market for private placements is generally done as an agent – not as a principal where capital is committed. That said, buyers or sellers should be restricted if they are insiders or possibly where there are consents that need to be given by the issuer. Is the transaction subject to a “Right of First Refusal” deal or a shareholder agreement that requires the consent of the company, or places other restrictions on the shares? Generally speaking, most attorneys will tell companies to conclude any meetings with institutional investors and to wrap up public communications about six months prior to the IPO to avoid a gun jumping provision. This may limit a prospective investors’ ability to conduct due diligence on the issuer since the issuer, under the advice of counsel, may not be willing to meet until the filing of the S-1 and without the consent of the underwriters.
Another question to weigh is whether the shares are directly or indirectly controlled by the issuer. I believe SecondMarket has the ability to deliver customized markets largely with the consent/control of the issuer. So, I suspect that if an issuer is overseeing the control of a market, there may be an argument that the SEC might look past SecondMarket and apply the same rules to the market maker that they would apply to the issuer.
We believe that it is safest to assume that all employees are insiders and that as a matter of issuer policy employees should be required to seek explicit permission from the CFO or General Counsel’s office (whoever is charged with this responsibility) to sell shares. Companies should conduct their affairs around the sale of shares as if they were public and should define and publicize when stake sales are appropriate. Additional choke points for control over these executions can be with the transfer agent and/or with a designated marketplace with which employees may be required to transact in the private secondary markets.
Companies need to consider not just the regulatory, but also the reputational risks.
David Weild is an advisor within Grant Thornton’s Capital Markets group and former Vice Chairman of Nasdaq. Opinions expressed here are entirely his own.