Legal Insights
As the secondary market for pre‑IPO shares continues to mature, transactions involving the private stock of late‑stage companies have become increasingly common—but so too have lawsuits and regulatory scrutiny. This growing litigation landscape underscores the importance for issuers, investors, and intermediaries to reassess their compliance frameworks, transfer policies, and contractual protections.
The U.S. Securities and Exchange Commission (SEC) and private litigants alike are focusing on disclosure practices, transfer restrictions, and broker‑dealer registration issues surrounding these trades. Several recent cases highlight the risks for both sellers and buyers in secondary market deals.
Regulatory Context
Trump-appointed SEC Chair, Paul Atkins, is generally viewed as favoring deregulation and expanded market access. Still, in his remarks at the Investor Advisory Committee Meeting this past September 2025, he acknowledged the need for investor protections and safeguards in the private markets. Atkins stated, “[t]he Commission is exploring ways to facilitate the ability of individual investors to participate in the private markets, while at the same time protecting those investors from bad actors and fraud.” He went on to stress the need for appropriate guardrails to address issues like liquidity, valuation, diversification, and investment terms that, if left unchecked, could harm ordinary investors.
At the state regulatory level, several jurisdictions have indicated increased enforcement under state broker‑dealer and anti‑fraud statutes for unregistered activity involving pre‑IPO shares.
Types of Lawsuits
- Misrepresentation and Fraud Claims
Buyers sometimes allege that sellers failed to disclose material facts, such as pending regulatory investigations or valuation issues. Conversely, sellers may claim the buyer misrepresented accreditation status or its intent to hold the shares. - Other Common Law Claims
Secondary market transactions frequently generate private litigation outside the federal securities laws, including contract disputes and claims based on breach of fiduciary duty.
- Breach of Transfer Restrictions
Many companies restrict transfers of their stock through right-of-first-refusal (ROFR) provisions or approval requirements. When shareholders attempt secondary transactions without company consent, issuers may sue to invalidate the sale or seek damages. - Rule 10b-5 Fraud Claims under the Securities Exchange Act of 1934
Claims under Rule 10b-5 of the Exchange Act remain the predominant category of federal securities filings, comprising the vast majority of federal class actions. These claims require plaintiffs to demonstrate scienter, meaning the defendant’s intention to deceive or reckless disregard for the truth, creating a higher threshold than Section 11 claims.
- Section 12(a)(1) Claims under the Securities Act of 1933
Section 12(a)(1) provides a private right of action to a purchaser when a security is offered or sold in violation of Section 5’s registration requirements. Liability is limited to “statutory sellers,” which includes those who pass title to the security or solicit the purchase for financial gain. It imposes strict liability on sellers, meaning the purchaser does not need to prove intent or negligence, only that a violation occurred. Unlike Section 11, it does not require a registration statement to have been filed—only that the security should have been registered but wasn’t. And, unlike Rule 10b-5, it does not require fraud or scienter.
- Insider Trading and MNPI Issues
Allegations of trading on “material nonpublic information” (MNPI) have also surfaced, especially when employees with inside knowledge sell shares shortly before major corporate events.
Key Litigation Examples: SEC Enforcement and Private Class Action
- SEC v. Keyport Venture Advisors, LLC, et al, 1:24 -cv-06886 (E.D.N.Y. filed Sept. 30, 2024)
The SEC charged three individuals in the New York metropolitan area with perpetrating a $120 million pre-IPO fraud scheme. Also charged were several companies owned and/or controlled by these defendants. The SEC’s complaint charges the defendants with violating, inter alia, Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.
The SEC complaint alleges that from at least October 2019 until December 2022, the defendants raised approximately $120 million from more than 900 investors in the U.S. and abroad by selling interests in private funds that supposedly held shares in pre-IPO companies. The SEC alleged that the defendants, directly and through sales agents, told investors numerous lies about the supposed investments, including that there were no upfront fees in the investments while paying themselves at least $16 million in commissions; that the funds were registered with the SEC when they were not; and that the funds owned shares in pre-IPO companies when they did not. The complaint also alleges that many investors never received the pre-IPO shares that they were promised for which they invested with the defendants.
- Evangelista v. Late Stage Asset Management, LLC, et al, 1:24-cv-05292 (E.D.N.Y. filed July 29, 2024)
Plaintiff filed a class action on behalf of investors who purchased pre-IPO shares through funds issued by Late Stage Asset Management and related entities. The investors were sold interests in private investment funds holding pre-IPO company stock via a network of unregistered sales agents. The plaintiffs allege that defendants misled them about fees and pricing, specifically that there were no upfront fees or commissions and that the brokers only made money on the “back end” when the company went public. The scheme, which ran from at least 2019 through July 2022, defrauded more than 4,000 investors across the country of approximately $528 million by promising “no-fee” access to pre-IPO shares while actually charging hidden, exorbitant markups—in some instances up to 150% of the share price. Through these undisclosed fees, the defendants generated more than $88 million in illicit profits.
The complaint asserts, inter alia, violations of federal securities laws, including Sections 12(a)(1) and other provisions of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.
Practical Considerations for Clients
- Review and Update Transfer Policies: Ensure shareholder agreements, equity plans, and employee communications clearly outline transfer restrictions and consent requirements.
- Implement Due Diligence Procedures: For intermediaries and platforms, maintain robust “know your customer” (KYC) processes, accreditation, and MNPI controls.
- Assess Broker‑Dealer Obligations: Compensation for introducing investors or matching parties may constitute regulated activity.
- Enhance Disclosure Practices: Representations and warranties in transfer agreements should be detailed, current, and reflect the seller’s actual knowledge.
- Monitor Regulatory Guidance: Be alert to SEC and state updates on private share trading rules and exemptions.
Best Practices for Risk Mitigation
Legal and business professionals can take several steps to mitigate litigation risk in secondary market pre-IPO transactions:
- Comprehensive Due Diligence: Conduct thorough due diligence on both the target company and all counterparties, including verification of share ownership and transfer restrictions.
- Clear Contractual Documentation: Ensure transaction documents clearly address risk allocation, representations and warranties, and post-closing obligations.
- Regulatory Compliance: Verify that all participants are properly registered as broker-dealers where required, and that offerings comply with applicable exemptions from securities registration.
- Disclosure Review: For transactions that may be connected to subsequent public offerings, carefully review all disclosure documents to ensure consistency with prior representations.
- Retention of Records: Maintain comprehensive records of all due diligence activities, transaction negotiations, and disclosure decisions to support potential “due diligence defense” arguments.
Looking Ahead
With large private technology and biotech issuers often delaying IPOs, secondary liquidity will remain essential—but so will regulatory vigilance. The current wave of disputes and enforcement actions demonstrates that courts and regulators are no longer treating these markets as lightly governed private transactions.
These actions emphasize the risk involved in trading private shares, where liquidity is low, information is scarce, and, in some cases, the shares are not legitimately available to the intermediary offering them.
Proactive legal oversight can help clients mitigate exposure and structure compliant, defensible deals as the pre‑IPO secondary market expands.
——————————————————————–
This DarrowEverett Insight should not be construed as legal advice or a legal opinion. This Insight is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The contents are intended for general informational purposes only, and you are urged to consult your attorney concerning any particular situation and any specific legal question you may have. Please reach out to us if you need help addressing any of the issues discussed in this Insight, or any other issues or concerns you may have relating to your business. We are ready to help guide you through these challenging times.
This Insight does not constitute written tax advice as described in 31 C.F.R. §10, et seq. and is not intended or written by us to be used and/or relied on as written tax advice for any purpose including, without limitation, the marketing of any transaction addressed herein. Any U.S. federal tax advice rendered by DarrowEverett LLP shall be conspicuously labeled as such, shall include a discussion of all relevant facts and circumstances, as well as of any representations, statements, findings, or agreements (including projections, financial forecasts, or appraisals) upon which we rely, applicable to transactions discussed therein in compliance with 31 C.F.R. §10.37, shall relate the applicable law and authorities to the facts, and shall set forth any applicable limits on the use of such advice.
