Market Insight Update: Secondary Dealmaking – How Broker-Dealers Navigate Transaction Complexity

There are two principal objectives of a secondary broker dealer. Locating a counterparty to match the corresponding buy side or sell side order and executing the secondary deal. Both of these steps take several weeks in a direct secondary transfer, which results in a complex flow of procedures as outlined below.

 Secondary broker dealers align a buyer and seller in terms of pricing and size in private later stage securities. Pricing is dependent on the last round pricing, which serves as a benchmark, along with the forces of supply and demand. With sellers wanting the highest price and buyers seeking to pay the lowest price in any market, the process of counterparty identification can be quite challenging. Once buy side and sell side parties are confirmed and agree to transact at a set price and size, they will sign the binding Stock Transfer Notice which is sent to the company.

 Execution is the next step of a secondary deal. The company will typically have a ROFR (Right of First Refusal) which tends to last 30 days. During this period, the company or an early shareholder can choose whether they would like to purchase the shares themselves at the corresponding price and size listed on the Stock Transfer Notice. There can be additional obstacles such as board approval which permits the company's board to elect whether they would like the buyer to be on the cap table or revised ByLaws which might restrict secondary sales to a select portion of sellers.

 Once the buyer has received the company’s blessing to transact, they will wire the seller the funds corresponding to the transaction size. After the seller confirms the receipt of the funds, the company will reissue the shares in the name of the approved buyer.

 Using an experienced broker dealer, such as Rainmaker Securities, will allow buy side and sell side clients to be cognizant of their time and effort by gauging whether a secondary transaction is feasible in a select private later stage securities.