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Grown from the Shadows: How Technology and Taxes Can Bring Private Companies into the Public Light

Posted by on Friday, April 9, 2021 in Notes, Volume 23, Volume 23, Issue 1.

Alon Sugarman | 23 Vand. J. Ent. & Tech. L. 189 (2021)

The initial public offering (IPO) has started to make a comeback, but in forms that require less oversight and at a later point in a company’s lifecycle. These new trends cut main street investors out of early-stage corporate growth and have imperiled the fortunes and retirement funds of a generation. One of the most significant precipitating factors in this new dynamic is electronic private markets that allow sophisticated investors to trade pre-IPO shares. These electronic private markets provide liquidity to institutional investors, which relieves institutional pressure on companies to go public. The current approaches to IPO reform are primarily deregulatory, and they do not address the role of electronic private markets.

This Note proposes a tax incentive that would allow investors to defer capital gains on shares that trade on an electronic private market and then go public within a limited window. Investors would receive tax deferral on these “Opportunity Securities” only if they reinvest their proceeds in another qualifying private company or IPO. These requirements would reignite the IPO pipeline. The incentive would apply to private market investors as well as main street investors who buy shares within one year of the IPO. Opportunity Securities would encourage companies to go public sooner because investors would be motivated to seek this tax deferral and pressure companies accordingly. Unlike other proposals, this solution would encourage IPOs and align the incentives of heterogenous investors without sacrificing disclosure or investor protections.

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Alon Sugarman