Understanding transfer restrictions in the private market: What buyers and sellers need to know
In the public market, trading shares can be fast and transparent, with transactions executed using well-established pricing methodology—often requiring little more than several clicks on your computer. But in the private market, the process is less straightforward. Share ownership may be subject to an array of potential transfer restrictions designed to help private companies stay compliant with securities regulations, maintain cap table control and protect confidential information.
For shareholders looking to sell their equity stake(s) and investors looking to buy in, these restrictions can have real implications for deal timing, structure and even feasibility. This article outlines the most common types of private market transfer restrictions, exploring what they mean for both buyers and sellers, and further explains how Forge may be able to help you navigate this complex landscape.
Why share transfer restrictions exist
Some private companies rely on share transfer restrictions to preserve strategic control over their shareholder base and avoid triggering regulatory inquiries. These restrictions help:
- Prevent undesired parties from owning company equity/li>
- Reduce the risk of violating securities laws
- Manage the timing of liquidity events to avoid unwanted volatility
- Protect company confidentiality and operational stability
But, while these policies may serve company's goals, they can also slow down or complicate secondary market transactions—making it important for both buyers and sellers to understand the contours of various types of transfer restrictions.
Common types of transfer restrictions
1. Right of first refusal (ROFR)
A right of first refusal (ROFR) clause gives the company—and sometimes existing shareholders—the opportunity to purchase shares instead of being sold to an external buyer
- For sellers: You must first present your offer to the company. Even after finding a buyer, your deal could be delayed or canceled if the company exercises its ROFR
- For buyers: Your purchase may fall through, even after due diligence and negotiation, if the company steps in to exercise its right.
- For companies with an opportunity to exercise a ROFR: This helps control who joins the cap table and can further preserve the strategic alignment of a company’s long-term goals.
2. Co-sale rights
Co-sale rights, also known as “tag-along” rights, allows shareholders to sell a proportional number of shares alongside another investor's sale. More specifically, they give a shareholder the right to participate in the sale of securities to a third party when another shareholder (like a founder) decides to sell their shares. Essentially, they allow investors to "tag-along" and sell their own shares alongside the other shareholder to help them benefit from the transaction on the same terms.
- For sellers: Larger shareholders may need to coordinate sales with multiple parties, which can complicate the execution of a transaction.
- For buyers: Although not always applicable, buyers may receive fewer shares than expected if shareholders exercise their co-sale rights.
- For minority shareholders: It’s a rare chance to gain potential liquidity alongside major shareholders.
3. Board approval or company consent
Many private companies require written approval from their board or a designated officer before a transfer can proceed. A board approval or designated officer’s consent is a company’s internal process where the board or officer evaluates the terms of a proposed transaction and elects to 1) allow the transaction to proceed, 2) exercise the company’s ROFR or defer to existing shareholders who also have a ROFR, or 3) block the transaction outright (which can be done for a variety of reasons). Where a transaction proposed to a company is not approved, Forge does not charge a fee.
- For sellers: Consent may be withheld or delayed, which can stall or block transactions.
- For buyers: Even a signed agreement isn’t final until the company signs off.
- For companies: It helps ensure that equity ownership aligns with long-term plans and governance policies.
4. Lock-up periods
In the private market, lock-up periods restrict shareholders, especially insiders and early investors, from selling their shares for a set period after an investment. For example, following a financing round or IPO, shareholders may be prohibited from selling their shares for a certain period of time (i.e. IPO lock-up periods typically range from 90 to 180 days following the IPO).
- For sellers: There’s no liquidity, regardless of market conditions, until the lock-up expires.
- For buyers: Lock-up clauses can impact the timing of resale or returns.
- For companies: Lock-ups potentially reduce post-transaction volatility and can present a more stable market image.
How transferability works in practice with Forge
Not all private companies follow the same transferability rules. This is why Forge categorizes how companies treat transferability and provides the following guidance on a company's transferability profile to help set expectations:
Categories of companies:
| How they treat transferability | What it can mean for share buyers and sellers |
| Direct transfers are typically permitted by the company | Then, shares can usually be sold directly through the Forge platform. Negotiations can proceed, pending any required approvals |
| Preferred shares: direct transfers are typically permitted by the company | Preferred shares may be sold directly |
| Common shares: only private funds are permitted | Common shares typically require participation in a private fund |
| The company permits private fund investments only | Direct transfers aren’t permitted. Shareholders can only sell during a company-sponsored liquidity event or through pooled fund vehicles |
| Direct transfers permitted with express conditions | Direct sales may be allowed under certain circumstances. These cases require evaluation by Forge’s private market specialists For example, companies may specify particular conditions—i.e. a limit on the number of shares authorized to trade—that, when observed, will allow the transfer to proceed |
| Transferability permissions unknown | Forge has no prior transactions with this company. Share sellers must consult stock agreements or company bylaws for more information |
Understanding the category that your company may fall into can determine whether your bid or ask is actionable on the Forge platform or if alternative structures (like a private fund) are required to move forward with a transaction.
How Forge helps people navigate transfer restrictions
Share transfer restrictions do not have to be deal breakers. While Forge does not provide financial advice, it does offer tools and expertise to help you. The following are key considerations to reflect on:
- Understand your company’s specific transfer restrictions: Each company's rules are different. A Forge private market specialist (specialist) can review stock agreements and bylaws, but will not provide legal advice.
- Structure deals around those restrictions: Whether it’s through-company single-company Forge fund offerings, tender offers or Forge specialist-facilitated sales, the Forge team can work with you to explore potential paths to liquidity.
- Stay compliant: Forge can help handle share documentation, coordinate with companies, and assist with transactions to help meet regulatory and governance standards.
- Track market activity: With proprietary data tools like Forge Price™ and Forge’s company watchlist, buyers and sellers can have access to data that may support more informed decision-making.
The bottom line: Balancing control with liquidity opportunity
Transfer restrictions are common and key for private companies looking to protect their growth strategy and manage shareholder relationships. But for share buyers and sellers, these same restrictions can limit flexibility and reduce liquidity. The key is finding balance.
By understanding the specific rules associated with a company’s equity—and working with a company like Forge that understands how to navigate them—buyers and sellers can pursue strategic opportunities while respecting the guardrails in place. Whether you're holding common or preferred shares, or looking to invest in the same, it pays to know the fine print and partner with a team of professionals that can help you execute share transactions with enhanced confidence.
Forge is here to help you navigate the complexities of the private market. If you’re unsure about the transferability of your shares or want to explore alternative liquidity options, contact one of our private market specialists today.
About the Author
Jay Manciocchi is a marketing and communications professional with experience in content marketing operations, digital marketing and event strategy. He most recently led these functions at BMC Software. He holds a JD from New England Law | Boston and a BS in Political Science from Northeastern University. Read more from Jay.
