Amendments to Advisers Act rule 203(l)-1

The FAST Act amended two sections in the Advisers Act regarding the registration of investment advisers to "small business investment companies" ("SBICs").  First, the FAST Act amended Advisers Act section 203(l), which provides an exemption from registration for investment advisers that solely advise "venture capital funds" (the "venture capital fund adviser exemption").  The FAST Act deemed SBICs to be "venture capital funds" for purposes of the exemption, which had the effect of permitting these advisers to advise both SBICs and other venture capital funds without registering as investment advisers under the Advisers Act.  However, these venture capital fund advisers are considered exempt reporting advisers under the Advisers Act.

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Amendments to Advisers Act rule 203(m)-1

The FAST Act also amended Advisers Act section 203(m), which directs the Commission to provide an exemption from registration to any investment adviser that solely advises "private funds" if the adviser has assets under management in the United States of less than $150 million (the "private fund adviser exemption").  The FAST Act amended the private fund adviser exemption by excluding the assets of SBICs for purposes of calculating private fund assets towards the registration threshold of $150 million.  Investment advisers relying on the private fund adviser exemption also are considered exempt reporting advisers under the Advisers Act

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What Is Private Company Stock?

A private company is a privately-held commercial entity. While it may issue shares of stock, these shares are not offered to the general public and aren't listed on a public stock exchange. Private company stock includes shares issued by the company to employees or investors.

For example, startups often use equity to compensate employees during the early stages when cash flow is limited. Public companies also use equity compensation programs. These programs are designed to motivate employees by tying a portion of their pay to the company's earnings. 

Contrary to a public company, a private company doesn't have to provide financial information to investors or shareholders. In addition, due to the often smaller size of private companies, they typically issue fewer shares of stock. That can make the shares less liquid and difficult to sell.

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KEY TAKEAWAYS

• Private company stock is a type of stock offered exclusively by a private company to its employees and investors. 

• Unlike public stocks, the purchase and sale of private stock must be approved of by the issuing company. 

• Buying private stock of a company that intends to go public can be a lucrative investment strategy. 

• Private companies are not required to provide inside information to the public, so investors are often hesitant to buy private equity.

• Although private stocks are not registered with the SEC, SEC regulations still apply to their purchase and sale.

How Private Company Stock Works 

Selling stock in a private company is not as simple as selling stock in a public company. Public company employees and investors can sell company shares through a broker. To sell private company stock—because it represents a stake in a company that is not listed on any exchange—the shareholder must find a willing buyer.

In addition, a sale of private stock must be approved by the company that issued the shares. Some companies may not want their shares to be widely distributed.

What's more, some employees of startups may feel pressured to hold onto their company stock as proof of loyalty. If there is a good reason for the sale—such as a down payment on a house—a company could be persuaded to approve a sale. 

Special Considerations 

Pre-IPO Private Stock

Shares of a startup company that plans to go public with an initial public offering (IPO) are often easier to cash out. A number of web-based companies, such as Equity Zen and Forge, connect sellers of, and investors in, pre-IPO shares. 

Pre-IPO private company stock exchanges are essentially venture capital markets for the masses. An employee who holds stock in a pre-IPO private company can list shares for sale on such an exchange. Some of these secondary market sites offer loans to buy pre-IPO stock. 

Non-pre-IPO Private Stock

It is trickier to sell the stock of a private company that has no intention of going public. The lack of information about most private companies dissuades most outside investors. They can be reluctant to buy into a company that they know nothing about and cannot thoroughly research in public documents. In any case, the company may not approve the sale of its stock to outsiders.

The simplest solution for selling private shares is to approach the issuing company and ask how other investors liquidated their stakes. Some private companies have buyback programs, which allow investors to sell their shares back to the issuing company.

In addition, an insider may be able to provide leads about current shareholders or potential investors who have expressed interest in buying the company's shares.

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How Do I Sell Private Company Stock?

First, contact the company to obtain permission to sell your shares. Also, you'll need agreement on the manner of sale. The company can provide you with a valuation of its stock. Next, you'll need to find a buyer.

Perhaps the simplest way to sell your stock is through a buyback program offered by the company. The company can also explain how other investors sold their stock. Finding a buyer can be a challenge due to the lack of public information about a private company. 

How Do Private Companies Issue Stock?

These days, private companies usually issue stock electronically instead of via paper certificates. Shareholders receive an email providing proof of ownership and all other details.

How Do Stock Options Work for Private Companies?

Stock options give you the right to buy a company's stock at a predetermined price within a particular time period. They're often used by a private company as an incentive for employees to stay and participate in the growth of the company.