A New Way To Sell Your Restricted Stock
from
March/April 2006
by Randy Myers
Cashing in your restricted stock—acquired when you helped launch a
start-up, perhaps, or during an acquisition—just got a little easier,
thanks to a specialty brokerage firm that is trying to inject liquidity
into a slow-paced market.
Generally, restricted stock can’t be sold in the public arena during the first year after it’s been issued, and only on a limited basis in the second year. And any such stock you might have received as part of your board compensation package probably came with vesting requirements that preclude its public sale until the vesting period has been completed.
On the other hand, the Securities Act of 1933 does allow for the private sale of restricted stock provided certain conditions are met, even during the first year of ownership. But those conditions can make for a long and tedious process—you must find a qualified private buyer who meets SEC guidelines for financial sophistication and wealth, agree on terms, get a written okay from the stock’s issuer to make the sale, and then complete a mishmash of additional documentation.
Enter Restricted Stock Partners, a division of the specialty brokerage firm Keane Securities Co. in New York City, which says it can make the private-sale process run a little more smoothly. Launched last year, RSP has assembled a network of about 175 high-net-worth individuals and institutional investors, including hedge funds, that are willing to consider purchasing restricted shares at a discount. When you engage RSP, the firm discloses the availability of your shares to the most likely buyers in its network, based on their previously indicated preferences, such as the size of the position, the liquidity of the underlying stock, and the industry in which the issuer operates. Once a buyer or buyers are identified, RSP negotiates the terms of the transaction and facilitates the closing.
“I’m comfortable that the transaction process Restricted Stock Partners has put together has worked very smoothly,” says venture capitalist Eric McAfee, who recently enlisted the firm to sell about three million restricted shares of Pacific Ethanol Inc., a NASDAQ-listed ethanol production company, on behalf of himself and some of the company’s other early investors and founders. “That is a key component of the restricted-stock transfer business—just getting the lawyers and transfer agents to act appropriately within a commercially viable time frame.”
Restricted Stock Partners isn’t the only outfit that can arrange private sales of restricted stock; mainstream brokerage firms have been doing such trades for years. However, they often prefer to work only with big transactions. With its network of potential buyers, RSP claims it can handle both small (say, $50,000 worth of stock) and large deals in a more timely fashion. Barry Silbert, the firm’s founder and chief executive, says it began putting its network together last spring and by January was handling four to six sales a week.
A seller can expect to pay a commission that typically ranges between 1% and 6%, says Silbert. What you’ll collect, meanwhile, may be heavily discounted from the stock’s market price.
“The discount ranges from 2% to 60%,” Silbert says, “depending upon the company—is it GE or over-the-counter XYZ Corp.?—and how much longer the stock is restricted.” The one-year waiting period to start selling restricted stock publicly doesn’t disappear in a private sale but merely passes to the new owner.
McAfee says that in the past he seldom tried to arrange the sale of restricted shares before the one-year holding period had expired. In the case of Pacific Ethanol, he explains, the early private sale facilitated the company’s goal of getting more of its shares into the hands of institutional investors. “As a founder and early board member of the company,” he says, “I was very supportive of transferring shares from early, low-cost-basis shareholders to institutional shareholders who have a different investment horizon.”
