If you’re an individual investor you cannot buy shares of private stock, but you can sell them. In most cases, the easiest option is to sell your shares of stock back to the company that issued them. Otherwise, you can find a broker who will help you find a buyer and conduct this transaction. For help selling shares in a private company or with any other financial consideration, consider working with a financial advisor.
What Is Private Stock?
Private stock, as its name suggests, is the equity offered by a privately traded company. This means that the company does not list its stock on any public exchanges like the New York Stock Exchange, and it does not meet the SEC’s regulatory and disclosure requirements for a publicly traded firm.
There is nothing illegitimate about this. Every company starts as a private firm, and only some ever transition to public trading.
However, because a private company does not meet SEC disclosure requirements, only accredited and institutional investors can freely trade its stock. Individual investors cannot buy shares of a private company’s stock. This is meant to protect the market at large. A company that offers its stock to the general public must also publish the details of its finances to the general public. This helps individual investors make better decisions.
A private company does not have to disclose its financial information to the public. As a result, it also cannot sell shares of stock to that same public. It can only sell its stock to investors with the resources and experience to conduct their own due diligence.
Private Stock Can Still Be Individually Owned
While individual investors can’t buy private stock they can still own private stock.
This can happen in any number of ways. One of the most common is through company stock options. Especially among startup companies that can’t meet market salaries, it’s common to offer stock options as a part of an employee’s compensation package. If you exercise these options before the company goes public you can end up owning shares in a private company even though you couldn’t have purchased them outright. (In other cases, you may own shares in a publicly traded company that decides to go private or you may receive private shares as a gift or an inheritance.)
Regardless of circumstance, as long as you acquired the shares legally it’s also perfectly legal for you to own them. In the case of stock options, many people will hold their shares until the company launches its IPO. This is usually the most lucrative option for a successful business.
However you can also sell them. The tricky thing is finding a buyer.
How to Sell Private Shares
Selling private shares is in theory the same as selling public shares. You announce that you’d like to sell some stock, find a buyer to take it off your hands, then agree on a price. What makes this different is that the public market has third-party mechanisms which do those jobs on your behalf.
For a publicly traded stock, the market clearinghouse lets you sell your stocks without having to find a specific buyer. Basically, you give the order to sell shares while someone else gives the order to buy shares of that same stock. Your brokerage contacts the clearinghouse, which pairs up your transaction with the pending “buy” order that it received. It routes your stocks to the buyer and their money to you, letting the whole process happen quickly and anonymously. At the same time, the sheer volume of trading makes it easier to identify a stock’s price.
A privately traded stock has none of these advantages. The market for privately traded stocks is far smaller, so few (if any) third parties manage the market as a whole. It is also much less liquid, so there is little (if any) reliable pricing information. Instead you have to directly find a buyer for your stocks and the two of you need to agree upon a price that you think is fair.
This makes selling private shares much more difficult. It’s also part of the reason why this sector of the market is restricted. It’s easy for large investors to take advantage of less informed individuals when there’s no publicly available pricing information.
If you do have privately held stock, there are two best ways to sell it:
Back to the Issuing Company
The easiest option will usually be to sell this stock back to the company that issued it to you. In fact, especially if you received these shares through a stock option, you will often be required to do so. Many companies restrict trading on their private shares and often require that you sell any shares back to the company itself.
To do this, contact the company directly. For example, speak with your boss or payroll manager if you’re an employee. They can either handle the transaction or can connect you with the right person. Just be careful. If you’re required to sell your shares back to the company, they may not give you a very good price (since, after all, it’s not like you can sell those shares anywhere else).
Make absolutely certain that you speak with either corporate counsel or your own lawyer during this process. Most private stock gives the company some rights over how this stock is sold. You need to make sure that you understand your rights and (most importantly) your responsibilities in this process. Even if the company doesn’t require you to sell your shares back to the business, they may retain veto power over who you can sell it to.
Also consider trying to sell this stock to someone else inside the business. If you can’t sell back to the company directly, or if you don’t like their offer, you may be able to get a better price from someone else who works there. Just remember that you need to find someone who can act as an accredited investor. This will be a private stock sale and you can’t do that with just anyone.
Through a Brokerage
If you aren’t selling your shares back to the company, the next best option is to contact a stock broker.
When it comes to selling private stock the biggest challenge is finding a buyer. You need to find someone who has both the money to buy your shares for what they’re worth and the accreditation required to do so. You do not want to attempt a this on your own. This can create a range of complications given the legal issues that surround a private sale. In addition, if you try to sell private stock on your own, there’s a good chance that you’ll lose money.
Involving a third party broker can help solve these problems. A broker is likely to have the expertise necessary to help you accurately price your shares. They can also act as a middleman. A broker will find a buyer for your private shares, and can ensure that this transaction meets both the legal requirements for a private stock sale and any requirements set by the issuing company.
Many brokers will not do this work, so you might need to search for one who will. Your best option is to start with larger firms since they will be better equipped to handle a sophisticated transaction. But don’t be surprised if you have to make several calls before you find someone who can take this business. (Also don’t be surprised if they expect a fairly steep commission for conducting this transaction.)
Finally, private stock sales can take time. Unlike public shares, it’s not uncommon for sellers to not find an immediate buyer. Your company may not be currently buying back shares of its own stock, so you may need to wait for what’s known as a buyback program or liquidity event before you can sell. If you have approached a broker, don’t be surprised if it takes them some time to find an interested buyer.
Unlike public shares, the private stock market is fairly small and has limited capital. This transaction can simply take time. The best advice we can give is to accept that and move slowly. The last thing you want is to accept fire-sale prices on a valuable asset.
The Bottom Line
While individuals can’t buy stock in a private company, they can own and sell those shares. If you want to sell, you will usually have to sell back to the company that issued those shares. Otherwise, seek out a broker experienced in dealing with sophisticated transactions.
- Here’s another way you can end up owning private stock: By accident. It doesn’t happen often, but public companies can go private. When that happens, you need to decide what to do with your shares.
- A financial advisor will help you make the right investment decisions. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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