How to Invest in a Privately Held Company

Not all corporation stocks are publicly traded on the New York Stock Exchange or other stock exchanges. Many are privately held companies, including some major corporations (a link to Forbes Magazine’s list of the largest privately held firms is at the end of this article). However, sometimes you can invest in a privately held company.

Understand the differences between publicly owned and privately owned corporations. A publicly traded stock is offered for sale and traded on a stock exchange, where anyone with the money can buy shares in the company. By contrast, privately held firms are just that—private. Often, the stock is held entirely by the founders. But sometimes it can be relatively easy to purchase shares. The advantage for a privately held firm is that it is exempt from many regulations. For example, publicly traded corporations must submit quarterly earnings statements to the Securities and Exchange Commission, while private firms do not.

Familiarize yourself with the different types of privately held corporations. A limited partnership offer (LPO) is a type of privately held corporation commonly set up to limit liability for specific projects, such as real estate developments. Private placement memorandum (PPM) stock offerings are a method used by companies to raise capital quickly and inexpensively. By far the most common privately held stock people invest in is stock issued under small corporation offering registration (SCOR) rules. Although the company remains private, SCOR stock can be sold to any number of people. SCOR stocks are often called hybrids because they share some of the characteristics of publicly traded stocks.

Research carefully before you invest in a privately held company. It’s a good idea to be patient. Prices of privately held company stocks are less volatile, since they aren’t subject to short term market changes, so you need not worry about losing a good price by waiting. Get a copy of the company’s annual report or the equivalent and assess the company’s past performance, current status and future prospects.

Understand the potential risks when you invest in a privately held company. Because the stock is not publicly traded it may be difficult to sell later on. Keep in mind tat the price of the stock is set by the owner and not by trading on an open market, so you should look carefully at the company’s earnings potential and other factors to be sure you are paying a reasonable amount. Use the link at the end of this article to get more information on the risks and benefits of buying privately held stock.

Talk to your employer if you work for a privately held firm. Many have employee stock ownership plans, and this can be an ideal way to invest in a privately held company. If this option is available to you, it has some distinct advantages. Usually you can invest small sums (frequently through payroll deductions) and under these plans the company will normally have a guaranteed buyback plan.