What is a private secondary market?

Startups and other companies that raise capital via exempt offerings—sometimes referred to as private offerings—issue 

securities to investors that are often illiquid. Unlike securities of publicly traded companies, securities of privately held 

companies may not be freely traded by investors. 

The transactions or markets where investors sell these securities to other investors are called private secondary 

transactions or private secondary markets. 

What do I need to consider before engaging in a private 

secondary transaction?

Do my securities have federal securities law restrictions? 

This resource represents the views of the staff of the Office of the Advocate for Small Business Capital Formation. It is not a rule, regulation, or 

statement of the Securities and Exchange Commission (“Commission”). The Commission has neither approved nor disapproved its content. This 

resource, like all staff statements, has no legal force or effect: it does not alter or amend applicable law, and it creates no new or additional obligations 

for any person. This resource does not provide legal advice. This resource was produced and disseminated at U.S. taxpayer expense.

Generally, depending on how the securities are sold initially, the securities may be deemed restricted. This can include 

securities purchased from the company or in a secondary transaction from an affiliate of the issuer. Restricted securities 

are not freely tradeable and typically bear a “restrictive” legend that notes the resale limitations of the securities.

Some examples of restricted securities include securities acquired in: 

Private placement offerings

(Section 4(a)(2) 

and Rule 506(b))

Rule 506(c) general 

solicitation offerings

Certain Rule 504 

limited offerings

Certain employee 

benefit plans

(Rule 701)

Offshore transactions

(Regulation S)

Resales under

Section 4(a)(7)

Resales by an affiliate or 

control person of the issuer 

(Rule 144)

Resales to a qualified 

institutional buyer 

(Rule 144A)

Some examples of securities that are not deemed “restricted” include securities acquired in:

Regulation A offerings Regulation 

Crowdfunding offerings

(after 12 months)

Intrastate offerings

(generally, after 

6 months)

Resales under

Section 4(a)(1)

Resales by a holder 

that is not an affiliate or 

control person of the 

issuer (Rule 144)

What federal pathways are frequently used by smaller business investors to sell 

their securities and how do those pathways overlap with state requirements?

There are several federal exemptions available for small business investors to sell their securities in a private 

secondary transaction. 

If an investor’s offering meets the requirements of one of the following exemptions, that resale offering still needs to 

be registered or meet an exemption under state securities laws, unless the issuer of the security is a reporting 

company. In addition, state securities regulators have authority to investigate and bring enforcement actions for fraud, 

impose state notice filing requirements, and collect state fees.

Section 4(a)(1) Ordinary Trading Exemption

Section 4(a)(1) is a commonly used exemption for the resale of securities by any person other than 

an issuer, underwriter, or dealer. 

Some investors structure their resale transactions based on practices that have been developed 

through case law. Any such offerings would need to comply with the requirements of this or another 

available exemption.

Rule 144 Safe Harbor under the Section 4(a)(1) Ordinary Trading Exemption

Rule 144 provides one pathway for the resale of restricted securities. Depending on whether the 

issuer is a reporting company and whether the investor is an affiliate, the rule has conditions on the 

length of time the securities must be held, the way in which they are sold, and the amount that can 

be sold at any one time.

Section 4(a)(3) Dealer Exemption

Broker-dealers may rely on the Section 4(a)(3) exemption. This exemption is for transactions by a

dealer that is not acting as an underwriter, which includes any person who bought the securities with a

view to distribute them. This exemption is not available for the resale of restricted or control securities.

If an investor’s offering meets the requirements of one of the following exemptions, that resale offering is not required 

to be registered or qualified by state securities regulators. State securities regulators, however, have the authority to 

investigate and bring enforcement actions for fraud, impose state notice filing requirements, and collect state fees.

Section 4(a)(4) Broker Exemption

Broker-dealers often rely on the Section 4(a)(4) exemption. This exemption is for the broker’s part 

of a transaction that executes an unsolicited customer order in the market. It is not available when 

the broker knows or has reasonable grounds to believe that the selling customer’s part of the 

transaction is not exempt from registration.

Section 4(a)(7) Safe Harbor Exemption

Section 4(a)(7) provides one pathway for the resale of restricted securities. The exemption has 

several conditions, including limitations on the types of purchasers and the way in which the 

securities are sold, as well as information that must be provided to prospective purchasers.

Have suggestions on additional educational resources? Email smallbusiness@sec.gov.