Markets

Carta Cross disclosure for Section 4(a)(7) transactions

October 8, 2021
The CartaX Team

CartaX is a platform for trading restricted securities of private companies and funds. It brings liquidity to the private markets through an efficient, electronic, auction-based transaction type for secondary trading of private securities: the Carta Cross. The Carta Cross offers private companies a market-driven price discovery mechanism along with standardized and enhanced disclosure. Much of the disclosure burden is automated by Carta Capital Markets, LLC (CCMX), the broker-dealer operator of CartaX. 

The Carta Cross disclosure framework under Section 4(a)(7) 

The default framework for disclosure in a Carta Cross is based on Section 4(a)(7) of the Securities Act of 1933, which provides an exemption from registration for resales of restricted securities, subject to meeting certain requirements. 

In order to rely on Section 4(a)(7), a seller of private equity securities must request the following information from the company, all of which must be reasonably current, and make it available to the prospective purchaser:

  • The exact name of the company, the address of its principal executive offices, and the names of its officers and directors. 
  • The title, class, and par value of the equity security, and the number of shares outstanding as of the end of the company’s most recent fiscal year.
  • The name and address of the transfer agent, corporate secretary, or other person responsible for transferring shares and stock certificates.
  • A statement of the nature of the business of the company and the products and services it offers, presumed to be “reasonably current” if the statement is as of 12 months before the transaction date. 
  • The names of any brokers, dealers, or agents receiving any commission or remuneration in connection with the transaction. 
  • The company’s most recent balance sheet and profit and loss statement for the two preceding fiscal years, presumed to be “reasonably current” if the balance sheet is as of a date less than 16 months prior to the transaction and the profit and loss statement is for the 12 months preceding that balance sheet—plus interim profit and loss statements if the balance sheet is not as of a date less than 6 months before the transaction date, prepared in accordance with GAAP or IFRS
  • If the seller is a “control person” of the company (such as a major shareholder, officer, or director), a brief statement regarding the nature of the affiliation, and a certification that the seller has no reasonable grounds to believe the company is in violation of securities laws.     

Most of the above disclosures and more would typically also be provided (or, in some cases, are required to be provided) pursuant to other common resale exemptions such as 144A and the so-called “Section 4(a)(1½)” common law exemption. In addition, companies that are subject to the enhanced disclosure requirements of Rule 701 under the Securities Act will already be in the practice of preparing and disclosing the required financial statements. 

Why rely on Section 4(a)(7) for Carta Cross transactions?

The Section 4(a)(7) exemption offers certain advantages compared to other private resale exemptions, such as Rule 144A, Rule 144, and Section 4(a)(1½):

Section 4(a)(7) Other Exemptions: Rule 144A, Rule 144, Section 4(a)(1½)
Certainty The disclosure requirements of Section 4(a)(7) are clearly enumerated and established by statute. Disclosure requirements may not be clearly defined, or may rely on informal procedures that provide less certainty. 
Broader access Section 4(a)(7) purchasers must only be “accredited investors,” a broader category than “qualified institutional buyers,” and there is no limitation on the number of purchasers in a 4(a)(7) transaction.   Other exemptions may limit purchasers to “qualified institutional buyers,” or impose explicit or implicit limitations on the number of purchasers that may participate in a transaction.
Holding period  There are no required holding periods under Section 4(a)(7).  Other exemptions may require the seller to have held the subject security for a specified time period. 
Preemption of state registration or qualification Securities sold in reliance on Section 4(a)(7) are “covered securities” and are therefore exempt from state blue sky registration or qualification requirements.  A sale of private securities under the other exemptions would be subject to state blue sky registration and qualification requirements.   

How will CCMX assist companies in preparing the disclosures required under 4(a)(7)?

CCMX offers a low-touch solution that helps make the disclosure process easier for companies. We standardize much of the required disclosures, alleviating the administrative burden to companies and law firms. We do so by using the supplemental information collected in the CartaX onboarding process and, with the authorization of the company, information collected from the company’s cap table. 

Companies that are already subject to enhanced disclosure requirements under Rule 701, or that have recently prepared disclosure for other exempt securities offerings, will likely be able to leverage their existing disclosure to satisfy most or all of the Section 4(a)(7) requirements. Companies may also provide supplemental disclosures, such as industry-specific KPIs. 

Enhancing disclosure through the low-touch CartaX framework offers a number of potential benefits to the company, such as improving price discovery and increasing investor confidence, as well as serving as a useful starting point for companies that are considering going public in the future.

How will CartaX help companies protect their disclosure?

When designing the CartaX platform, we created information security and access policies to protect the confidentiality and maintain the trust of our onboarded companies. CartaX offers onboarded companies controls on disclosure throughout the transaction process through a secure platform where confidential disclosure information is disseminated to all company-approved participants. 

  • Participant approval and access: Upon company approval and onboarding to CCMX, eligible participants will be able to participate in company-approved transactions.
  • Access to company disclosures: The disclosures will be made available to participants, subject to signing a standardized non-disclosure agreement (NDA).  
  • In-app disclosure document security: To further prevent unauthorized dissemination, the disclosure materials provided on the CartaX platform during the auction will be watermarked and can be limited to read-only format. 
  • Pre-auction disclosure document security: CCMX will also require an NDA before providing any company-approved materials when acting as a private placement agent for a transaction, or if a company is hosting an Investor Day.

To learn more about CartaX, visit our website or contact our Issuer Services team by writing to issuer_services@cartacapitalmarkets.com.

© 2021 Carta Capital Markets, LLC (“CCMX”). All Rights Reserved. CCMX Member FINRA/SIPC. CCMX undertakes no obligation to update content herein. No business, investment, tax, or legal advice is provided by CCMX. Potential investors are advised to conduct their own due diligence and consult with their tax, legal, and financial advisors with respect to any investment. All securities involve risk and may result in partial or total loss. Investments in private securities are speculative, illiquid, and involve a high degree of risk, including the possible loss of the entire investment. There is no guarantee that a private company will conduct an initial public offering or provide an alternative exit strategy for invested capital. Images are illustrative and may differ from application experience.