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

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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 issuer, all of which must be reasonably current, and make it available to the prospective purchaser:

  • The exact name of the issuer, 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 issuer’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 issuer 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 issuer’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 issuer (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 issuer 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, issuers 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 issuers in preparing the disclosures required under 4(a)(7)?

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

Issuers 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. Issuers 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 issuer, such as improving price discovery and increasing investor confidence, as well as serving as a useful starting point for issuers that are considering going public in the future.

How will CartaX help issuers 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 listed companies. CartaX offers listed companies controls on disclosure throughout the transaction process through a secure platform where confidential disclosure information is disseminated to all issuer-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 issuer 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 issuer-approved materials when acting as a private placement agent for a transaction, or if an issuer 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.

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