Secondary transactions in pre‑IPO companies have evolved from a niche practice into a central feature of private capital markets, driven by marquee issuers remaining private for longer and by pent‑up investor demand for exposure ahead of any potential public listing. Companies such as SpaceX and OpenAI have attained substantial scale while private, prompting employees and early investors to seek liquidity and encouraging institutional investors, family offices, and accredited individuals to pursue allocations through negotiated transfers. While these markets can provide access, liquidity, and pricing preferences, they are structurally complex and entail legal, operational, and information risks that require disciplined scrutiny.
Why These Markets Have Expanded
The prolonged private lifecycle of high‑growth companies has shifted much of the value creation that once occurred post‑IPO into the private domain. This fuels both supply and demand for secondary shares: insiders may monetize a portion of holdings for diversification or life events, and outside investors often view secondaries as the only practical channel to participate. The marketplace that has emerged is vibrant yet fragmented, characterized by opaque pricing, limited disclosures, and bespoke documentation that varies widely by issuer and transaction structure.
Intermediaries and Market Infrastructure
Marketplace platforms, including Forge and other private securities venues, connect sellers and accredited or institutional buyers, coordinate company transfer approvals, and frequently route trades through registered broker‑dealer affiliates. They may offer standardized documentation, escrow, KYC/AML, and accreditation checks that add transparency and process discipline. However, platform involvement does not guarantee issuer approval, remove transfer restrictions such as rights of first refusal, or ensure future liquidity. These intermediaries facilitate transactions; however, they do not underwrite risk or assure outcomes.
Broker‑dealers are central to compliant execution. Registered firms are supervised by the SEC and FINRA and are subject to suitability, disclosure, recordkeeping, and supervision requirements. By contrast, “finders” or other unregistered intermediaries who solicit investors or receive transaction‑based compensation without registration present significant legal exposure. Their involvement can jeopardize exemptions relied upon for private placements, invite rescission claims, and trigger enforcement actions. Investors should verify registration and standing, define the intermediary’s role and compensation in writing, and avoid nonstandard payment flows or personal accounts.
Core Legal and Structural Risks
Secondary transactions involve recurring issues that can impair value, delay closing, or fail outright if not managed carefully.
- Transfer restrictions and approvals. Most issuers impose strict transfer controls in charters, investor rights agreements, and equity plans. Company consents, rights of first refusal, blackout periods, and repurchase rights can block or unwind transfers. High‑profile issuers often enforce these provisions rigorously, and transfers should not be viewed as complete until all approvals are obtained and legends can be lawfully addressed.
- Information asymmetry and MNPI concerns. Unlike public markets, private companies are not obligated to provide regular, audited disclosures. Valuations often reference recent primary rounds that may include preferential terms unavailable to secondary buyers. Sellers may hold material nonpublic information (or MNPI). Trading on MNPI creates securities law risk even where contractual representations are in place.
- Title, encumbrances, and settlement mechanics. Employee and early‑investor shares may be subject to vesting, liens, lockups, or company repurchase rights. Confirm ownership, vesting status, absence of liens, and cap table entries. Where forward purchase agreements or other synthetic constructs are used to navigate restrictions, investors assume additional counterparty, documentation, and corporate‑action risks prior to settlement.
- SPVs and fee layers. Special purpose vehicles can provide access but add fees, governance complexity, and counterparty risk. Understand the SPV’s terms, control rights, expense leakage, and the issuer’s stance on SPV holders.
- Red flags and unregistered brokerage. Investors should exercise heightened caution when encountering pressure to act quickly, limited or vague documentation, unusually high or undisclosed fees, refusal to use a reputable escrow agent, or promises of guaranteed liquidity or imminent IPOs. Equally important is verifying that any intermediary involved in the transaction (whether a broker, finder, or platform) is properly registered and operating within applicable regulatory frameworks. Engaging with unregistered or improperly accredited intermediaries can expose investors to significant legal and financial risk, including invalidated exemptions, rescission rights, and regulatory scrutiny.
Regulatory Framework and Enforcement
U.S. secondary trades do not generally rely on Regulation D for the resale itself. Regulation D is an issuer‑focused safe harbor (most commonly Rule 506 under Section 4(a)(2)) used for primary offerings by the issuer or by a special purpose vehicle (SPV) that is issuing its own interests to investors. In secondary deals that use an SPV, the SPV’s issuance to investors may, if certain requirements are satisfied, proceed under Reg D, but the separate transfer of the issuer’s shares from the selling holder to the SPV (or to the end buyer) must independently satisfy a resale exemption.
Common resale pathways include:
- Section 4(a)(1): exempts transactions by “any person other than an issuer, underwriter, or dealer.” The key risk is being deemed an “underwriter” (i.e., participating in a distribution). Where there is no distribution and no underwriter involvement, ordinary resales by non‑affiliates can rely on 4(a)(1).
- Section 4(a)(7): a federal resale exemption for private transactions to accredited investors with specified information delivery and other conditions. It is non‑exclusive, preempts state blue sky registration for “covered securities,” and is often used when the buyer base is accredited and the issuer will not or cannot provide public‑style disclosures.
- Rule 144A: permits resales to qualified institutional buyers (QIBs) of eligible restricted securities, providing liquidity for institutional secondary trades. 144A resales are often paired with initial acquisitions made in reliance on another exemption.
- Regulation S: provides an offshore safe harbor for offers and sales made outside the United States with no directed selling efforts into the United States.
Even compliant resales of restricted securities can implicate federal and state “blue sky” considerations, holding periods, restrictive legends, issuer consent, and transfer agent procedures. Care is required to map the exemption for each part of the transaction (e.g., SPV issuance under Reg D and the separate resale under 4(a)(7), Rule 144A, Regulation S, or 4(a)(1)). Regulators have intensified scrutiny of private market intermediaries, particularly unregistered brokerage, misleading marketing, and failures in information delivery, with potential consequences including fines, rescission, and investor losses.
Best Practices for Investors
Sophisticated investors can mitigate risk through disciplined process and documentation. Confirm that any intermediary is a registered broker‑dealer or that the platform executes through one, and route all funds via reputable escrow under written instructions. Diligence should encompass issuer transfer restrictions, approval pathways, seller title and encumbrances, and any SPV or synthetic structure terms. Incorporate robust representations regarding authority to sell, absence of MNPI, and compliance with issuer agreements, together with appropriate indemnities and, where warranted, holdbacks or conditions precedent for company approvals.
If misconduct is suspected, such as unregistered brokerage, misrepresentation, or failure to deliver, halt funds movement if possible, escalate to the platform’s or broker‑dealer’s compliance team, consult securities counsel promptly to assess rescission or fraud remedies, and consider reporting to regulators such as the SEC or FINRA.
Conclusion
Pre‑IPO secondaries in companies like SpaceX and OpenAI offer compelling access to growth but operate within a complex legal and regulatory framework marked by transfer controls, limited disclosures, and execution risk. Intermediary platforms and registered broker‑dealers can improve transparency and process integrity, yet they do not eliminate issuer‑level constraints or investment risk. Prudent participation that is grounded in diligence, regulatory awareness, careful documentation, and involving skilled legal counsel is essential in this growing segment of the private markets.
Article by Chad J. Gottlieb and Douglas B. Otto
About Chad J. Gottlieb and Douglas B. Otto
Douglas B. Otto and Chad J. Gottlieb are partners at DarrowEverett LLP, where Otto focuses on complex business litigation and Gottlieb leads the firm’s Corporate and Business Transactions practice.
