No public market: Overview, definition, and example
What is no public market?
No public market refers to the absence of a formal exchange where a company’s securities, shares, or financial instruments can be freely bought and sold. This typically applies to private companies, restricted securities, or investment agreements where shares are not publicly traded on stock exchanges.
For example, in a private equity investment, an investor purchasing shares in a startup may be subject to a no public market clause, meaning they cannot immediately sell their shares on an open exchange. Similarly, in a restricted stock agreement, employees granted equity may be unable to trade their shares unless a public offering occurs.
Why is no public market important?
A no public market clause helps manage investor expectations, clarify liquidity restrictions, and ensure compliance with securities laws. Without such a provision, investors or shareholders may incorrectly assume they can freely sell their interests.
For businesses, including a no public market clause in agreements helps prevent unauthorized share transfers, maintain control over ownership, and avoid potential legal risks associated with unregistered securities. It also protects private companies from premature public trading.
Understanding no public market through an example
Imagine a venture capital firm investing in a startup. The agreement includes a no public market clause, stating that the startup’s shares cannot be sold on an exchange until the company goes public or approves a sale. This ensures that early investors understand the lack of liquidity.
In another scenario, a company issues stock options to employees as part of an incentive plan. The plan includes a no public market provision, meaning employees cannot trade their shares on an exchange until the company completes an IPO or is acquired.
Example of a no public market clause
Here's an example of a no public market clause:
“The Parties acknowledge that there is currently no public market for the Company’s securities. As such, any transfer, sale, or disposition of such securities shall be subject to the Company’s approval and applicable securities laws. The Company makes no representations regarding the future availability of a public market.”
Conclusion
A no public market clause clarifies liquidity restrictions, protects private companies, and prevents unauthorized securities sales. It ensures that investors, employees, and stakeholders understand the limitations on selling shares or securities in a non-public company.
By including a no public market clause in investment agreements and stock option plans, businesses can manage investor expectations, maintain control over ownership, and comply with securities regulations.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.