Think of buying a traditional stock, listed on a public exchange like the New York Stock Exchange or NASDAQ. You can buy and sell these stocks freely; you can do so through a broker-dealer, online, or even through an app on your smartphone. You can sell it almost immediately, although there can be some limitations. Similar to the public market, you can invest in private companies through three common types of capital raises and trade your securities on a secondary market.
To sum these exemptions up, they allow private companies to sell securities to US investors without going through the SEC’s registration process. They each vary as to how much capital can be raised. These exemptions include:
- RegA+ is a securities exemption that allows companies to offer and sell securities to US investors and raise up to $75 million in a 12-month period through Reg A+.
- RegCF allows companies to offer and sell securities to US investors and raise up to $5 million through online marketplaces and crowdfunding sources in a 12-month period.
- RegD is a securities exemption that allows companies to raise capital from accredited investors (and a limited number of nonaccredited investors) without limit within a 12-month period.
With all of these exemptions, investors can share the securities they’ve invested in. However, there are some key differences pertaining to the length of time an investor is required to hold the security before selling it on a secondary trading platform. Reg A+ is the closest to an IPO, assets can be sold the next day, and there is no lockout period. On the other hand, securities sold under RegCF cannot be sold for the first 12 months after buying it unless it’s sold to an accredited investor, back to the issuing company, or a family member. With Reg D, investors can not sell these assets for six months to a year unless they are registered with the SEC.
Once you can trade your securities, the transaction will be carried on an alternative trading system or ATS. An ATS is much like a traditional exchange, the only difference is that they do not take on regulatory responsibilities. They are also operated by a FINRA-registered broker-dealer.
Before you make an investment decision, be sure to understand the limitations of secondary trading. If you’re unsure of what the limitations are, please reach out to a transfer agent or broker-dealer for additional information.