A private block trade is a type of secondary market transaction in which shareholders of a private company sell some or all of their stock to one or more investors. These deals allow the seller to realize a cash return and give investors a chance to acquire positions in private companies whose stock doesn’t trade on a public exchange.
Private block trades have to be approved by the company, but they don’t have to be initiated by the company: Existing shareholders or outside investors can also initiate a private block trade. This distinguishes private block trades from tender offers, which are always organized by the company whose shares are for sale.
While other types of block trades exist across the public and private markets, a bilateral transaction between investors trading shares in a private company is the most relevant type of block trade when it comes to startup liquidity.
To understand how these deals fit into the broader landscape of the private markets, we’ll cover:
The role of private block trades and how they work
How private block trades differ from tender offers
How private block trades compare to block trades of publicly traded shares
The fragmented nature of the market for private block trades
Carta’s role in facilitating private block trades
How private block trades work
Private block trades are the main pathway to liquidity for shareholders in private companies that don’t offer company-sponsored liquidity programs, which typically take the form of tender offers. Private block trades can be initiated in a few different ways:
Shareholder-initiated private block trades
Shareholders initiate private block trades when they want to sell some or all of their shares. This allows them to trade illiquid assets (private stock) for cash. In a shareholder-initiated private block trade, a current investor in a company can put some of their shares up for sale through a broker-dealer to find interest from potential buyers.
Investor-initiated private block trades
Institutional investors and accredited investors initiate private block trades when they want to buy stock in a private company but haven’t had access to one of the company’s fundraising rounds. Investors already on the company’s cap table also sometimes initiate private block trades to add to their existing holdings. Sometimes these buyers coordinate deals on their own by approaching current shareholders to see if any are interested in selling. More frequently, a broker-dealer acts as an intermediary to facilitate private block trades and match supply and demand.
Company approval of private block trades
Companies approve private block trades to create a liquidity opportunity for some of their shareholders. When companies are involved in facilitating the transaction, they are careful to structure a private block trade differently from a tender offer because tender offers are subject to stricter SEC regulations. U.S. law does not define a tender offer or a private block trade. Instead, companies and regulators use what’s called the Wellman Test to determine whether a transaction qualifies as a tender offer. The Wellman test looks at eight aspects of a deal, such as whether the price is firm or negotiable and whether there’s active solicitation of buyers.
No matter who initiates them, all private block trades require company approval. A private company can reject a request to transfer share ownership to a new buyer if it objects to a proposed sale.
Private block trades vs. tender offers
Tender offers are company-sponsored secondary transactions that allow buyers and sellers to transact at a price set by the company. This price may be based on a company’s fair market value from a recent 409A valuation.
Private block trades and tender offers differ in several ways.
Private companies are involved in the pricing of a tender offer, but they aren’t involved in the pricing of a private block trade negotiated between contra-parties.
Buyers and sellers can negotiate private block trades on a one-off basis. This ad hoc nature means that two different private block trades involving the same company might occur at different prices. This pricing uncertainty may be a reason some companies try to limit private block trades. Different transactions occurring at different prices can send mixed signals to potential buyers, rather than the single, unified valuation used for a tender offer.
A company can also determine which class of shareholders are eligible to participate in a tender offer and restrict how many shares they’re able to sell. When a company allows a private block trade, shareholders and investors make their own decisions about whether and how many shares they will sell.
Private tender offers are more of a regulated process than private block trades. For instance, companies running tender offers must provide financial documents and other disclosures to all potential sellers, and a tender offer must remain open for at least 20 business days. There are no such specific requirements in private block trades, meaning that not all potential buyers and sellers have access to the same company data.
Sometimes, a private block trade or set of private block trades might closely follow the close of a sponsored tender offer. If the tender was oversubscribed (meaning not all shareholders were able to sell as many shares as they desired), some might turn to a private block trade as an alternate path to liquidity.
If shareholders and investors have a strong desire for liquidity, but the company isn’t ready to conduct a tender offer, private block trades can be an alternative. Managing a string of private block trades might be complicated and time consuming, but giving employees additional opportunities for liquidity can help retain talent. Companies may factor these considerations into their decisions about whether and when to allow private block trades.
Public blocks vs. private blocks
Block trades are much more common in public markets than in private ones. They are also more closely defined. The New York Stock Exchange and Nasdaq consider a block trade to be any transaction involving at least 10,000 shares or $200,000 worth of shares that is privately negotiated outside of a public exchange.
In the public markets, investors often use block trades to buy or sell a large chunk of shares while aiming to minimize the transaction’s impact on a company’s stock price.
They can do this in a few different ways, including:
Breaking up a larger purchase into several smaller orders that are all routed through different brokers to mask the size of the overall transaction.
Routing a large order through a dark pool, a type of private exchange often used to limit exposure on public block trades.
Selling the entire block through a bidding process to brokers in a single transaction that’s executed very quickly and after market hours, thus reducing the immediate impact on stock price. The broker then re-distributes the shares to other buyers.
If an investor were to put an equivalent portion of publicly traded shares up for sale on the open market, the influx of available supply would likely drive down the price. By negotiating a block trade in publicly traded shares outside the usual order-matching framework of a stock exchange, sellers aim to mitigate that financial hit. Most block trades in publicly traded shares still occur at a discount to the company’s latest share price.
As with block trades in publicly traded shares, many investors in private block trades want to acquire shares at a discount to the primary valuation from a company’s latest round of venture funding. But some private block trades still occur at that valuation—or even at a premium, depending on investors’ evaluation of the company, rights and preferences for the underlying shares, or recency of the latest primary round.
Many of the differences between block trades in publicly traded shares and private block trades come down to the overarching differences between public and private markets. Public stock exchanges and markets are more transparent and often more liquid than private ones, given greater market information availability, which more easily leads to a market-driven price. In addition, public stock exchanges can act as a central platform for dealmaking, while the private markets lack this centralization. Transparency and centralization create more certainty among public market participants, which in turns creates a larger and less fragmented market.
As with private block trades, valuations of block trades in publicly traded shares can vary across different transactions involving the same company. But the variation is typically greater among private companies—another symptom of the opacity and lack of information transparency in the private markets.
Roadblocks to private block trades
Private block trades have grown popular in recent years. But the market for these deals is still taking shape, and several obstacles still prevent it from being as efficient as other equity markets.
The market for private block trades is highly fragmented, with no single place where buyers and sellers congregate and no centralized database detailing what shares are up for sale or at what price. To feel out the market, some sellers might advertise the same stock at different prices to different brokers and potential buyers. This means that a buyer can sometimes agree to a proposed deal, only to find that it’s no longer available. The lack of a centralized marketplace means that private block trades can still depend heavily on an investor’s existing relationships, creating a higher barrier to entry.
Lack of equity education
Some employees might not fully understand their vesting schedules and other restrictions. These employees sometimes try to liquidate shares they can’t yet legally sell. Employees also typically have less insight than investors into the fair market valuations of their shares.
Lack of transparency
Unlike with tender offers, companies aren’t required to provide verified financial information to deal participants.
These three factors can create a lack of trust in the private block trade market. Participants are often unsure about whether advertised supply and demand is real and whether they will actually be able to buy and sell shares at the advertised price.
Conducting private block trades with Carta Liquidity*
Carta Liquidity can help companies and investors bypass some of the obstacles that arise when conducting private block trades.
Accurate supply and demand
Carta’s equity management software can be used as a source of truth, reducing confusion over what shares are eligible for sale.
Carta Liquidity facilitates private block trades. The integration with Carta’s equity management software can reduce the time, energy, and resources that private company finance and legal teams might otherwise dedicate to completing transfers of shares. Carta Liquidity’s team can also help link buyers and sellers, reducing the need to rely on existing relationships between the two sides of a private block trade.
Want to learn more about how Carta Liquidity can help your company achieve its liquidity goals? Fill out the form below to speak with a member of the Carta Liquidity team about private block trades.
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*Brokerage accounts and other brokerage services are offered through Carta Capital Markets, LLC (Member: FINRA/ SIPC).