26/04/2011 20:12:00

Private companies are forced to register shares Interaction btw federal security law & secondary market

Private equity stock largest revenue stream for secondmarket inc for the last two years IPOs are for much seasons companies now; unlike in the 90s when every company can go IPO More companies are doing M&A Roots to the phenomena Companies controlled by founders, can easily go public four years ago o But SH relations, quarterly report, are nuisance o Founder want to concentrate on development o IPO- obligate to tell the whole world about the strategy, educate SHs, compliance requirement o Previous, company gets capital from IPO; not now Less than 500mm market cap, not cost-efficient to go IPO o Time consuming 1 yr gap between deciding to IPO and actually go IPO market fluctuation risk Who should care Increased liquidity for SHs (esp. for employee-SHs), but o Avoid liability for violation of law o Avoid 500 holders until IPO o Virtue in choosing Shs (if insider are selling responsibility to get to the buyers the info of the company, but do not want to disclose to the public) o Employee issues fairness (get liquidity) o Want smooth IPO or sale of company

o Reduce distraction overwhelming point! Intend to Stay focus on business Administration burden Insider buyers or sellers o Increased liquidity, but Avoid liabilities from informational disparity Insider sells shares for boosted share price liable

How 2nd market handle information issues Only deal with companies that agree to put info in a confidential shareroom (NDA, similar to an MA dataroom) Company with 701 style/GC211? Continued disclosure requirement BIG improvement o Offer auction, where the buyer did not the market cap (like a lottery ticket)

SECs real concern is insider trading SEC is positive on companys disclosure of information **SECs letter to congress summary of capital market What can companies do Set up company correctly with traditional tools, including o Transfer restrictions for all equity (charter, bylaw, investor rights agreement, vendor/consultant equity) Transfer restrictions should be broad enough to prevent potential violation of law or public company reporting obligations

o ROFRs rights of first refusal (when employee selling) by company or its assignee ROFS which are transferable by company allows company to conserve cash and direct sales to desirable parties Cant just say no should design a sensible scheme o Voting agreement Transferee has agree to vote for current board members avoid frequent change of governance o Drag-along rights Dont want exercise dissender rights to hold transaction up Think through overall secondary sales strategy, rather than react o E.g., groupon turned down googles offer to buy it out what if google holds 35% shares of groupon before making the offer? o Need to fix deficiencies in existing documents to strghthen transfer restrictions or ROFRs? Need to cmply with DGCL 202 (what kind of transfer provisions you can put in) You cant have more restrictions that apply to people that aldreay have stock. But can re-incorporate; or adopt a amendable agreement, amend charter and have majority approve Ok to address 500 holder problem or violation of laws Consider desirability of discretion vs. objective standards for board o Fairness, duty of loyalty o Selection buyers Relief valves o Pro actively offer liquidity for employees Price setting How to determine?

Implications for 409jA/accounting for equity compensation Employee considerations Who participate? How much? Maintaining sufficient retention incentives Facebook screw up employees cant sell, but ex employees can o Employees selling FB stocks when valuation goes up and start their own companies RSU possible solution o Problem written by IRS (possible exercise tax for employees) Securities law issues Tender offer rules Available exemptions Should company pro actively offer liquidity for investors/former employees/vendors/consultants? How to identify sellers In either case , must consider identifying buyers insider buyers fairness, duty of loyalty, etc. outside buyer desirability, demand for ancillary rights suitability under 1933 act Securities la issues Informational asymmetry/confidentiality concerns Managing company involvement/liability exposure Transfer/voting/IPO lock up/other restrictions on transferred shares Required waver/consent

 *if employee gets under-water money option, tax has to be paid for the variance btw strike price and FMV Corp Governance Issues The companies are operating w/o outside directors, no proper issuance, etc. o Big private companies have got better governance (Currie) o Private companies going public expense can be cheaper if precautionary governance is taken o Private companies routinely buy insurance This is a new area

26/04/2011 20:12:00

26/04/2011 20:12:00