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Selling Private (ESOP) Stock

If you have ever participated in an employee stock ownership plan (ESOP), you've acquired some equity in your employer. Participation over time allows the stock to vest and can add up to a nice investment for you. Most investors don't want to hold a stock perpetually, however. At some point, you will probably want to liquidate your holdings and realize a gain (hopefully) in whole or in part. But what are your options if you want to "cash out"?

The answer is found in the Agreement that you entered into with your employer when you chose to participate in the ESOP. These plans have transfer restrictions that limit your ability to sell your stock. For example, if you are still an employee, the Company may prohibit any sale whatsoever or only allow a sale with the Company's written consent. If you are no longer an employee, you will still have restrictions and probably a waiting period. The Company might require that a sale only be made to another Company shareholder. If the Company is privately held, i.e. not traded on the open market where the stock is available to the public, then certainly you will be restricted from selling to the public. Not just the Company but the U.S. Securities & Exchange Commission prohibit the sale of restricted stock in the public marketplace.

If you've been issued a stock certificate you will see a Restrictive Legend on the back. This doesn't mean you can't sell your stock ever; just that you have to sell it privately and in accordance with SEC and Company rules. Before you decide you want to sell your stock, review all of the applicable requirements to determine if your chosen course is even possible. The Company can provide you with a copy of the ESOP Agreement's stock transfer restrictions and may even be willing to walk you through the necessary steps.

Finding a potential buyer when you can't sell to the public creates a challenge. However, there are qualified ("accredited") persons/businesses that purchase privately held stock and several agents or "Finders" that can match you up with one of those Purchasers. If the Company has given you the green light, understand that they still likely have a First Right of Purchase, which means they can buy the stock from you at the price the Purchaser offered. Once that First Right of Purchase expires (typically 30 to 45 days after you provide written notice of the proposed sale to the Company) you can then make the sale as long as you comply with the rules. The Company and the Purchaser will require a legal opinion that the transaction is compliant with the law, i.e., they will want a letter from an attorney who has given a "thumbs up" to the deal. This is very important for all the parties since no one wants to violate securities laws!

As it looks like the deal is going to be approved, you will need to get a transfer agent to assist in 1) transferring the funds from the Purchaser and 2) transferring the stock to the Purchaser. If this is an unfamiliar thing, chances are good that your bank, your attorney, the Finder, the Purchaser, or the Company will be able to refer you to a transfer agent; one with which they are familiar and have utilized before.

We have not covered everything but this is the gist of it. As far as expected costs, each one of the parties in the transaction besides the Purchaser and the Company will expect some payment to facilitate the deal. The Finder will take a small commission on the amount Purchaser pays you per share. The transfer agent will take either a small percentage or assess a flat fee. These amounts will be deducted from the proceeds before the balance gets into your hands. The attorney will charge you an hourly rate or a flat fee that will probably be a few hundred dollars if its more of a standard transaction or possibly a four-figure (or even greater) sum if the deal is large and complex.

Whatever your circumstances, when is comes to selling privately held shares of stock, always get legal advice! Securities law is one area where you do not want to make a mistake!

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