Author: Lenin Lopez
High-growth private companies, particularly those in the AI and tech sectors, are staying private longer and reaching multibillion-dollar valuations well before considering an initial public offering (IPO). As these private companies mature, pressure builds to offer liquidity to employees, early investors and founders. This has fueled an expanding private secondary market.
For the uninitiated, private secondary markets allow existing shareholders, like employees, early investors and founders, to sell shares of a privately held company to new buyers in private transactions, e.g., outside of a public exchange like the New York Stock Exchange or Nasdaq.
As this type of market activity increases, so does regulatory scrutiny. The US Securities and Exchange Commission (SEC), for example, has been clear that private doesn't mean unregulated, and companies have learned that transacting in these markets involves risks that increasingly resemble those faced by public companies.
This article will:
- Provide a brief overview of the growth of private secondary markets.
- Discuss the SEC's evolving scrutiny of this space, including why that scrutiny is unlikely to fade.
- Offer governance practices companies can adopt to help navigate these risks.
- Explain the role private-company Directors and Officers (D&O) insurance plays in supporting sound oversight.
How secondary markets became a liquidity tool
The current flavor of secondary markets that high-growth companies are leveraging developed as a function of the 2008 financial crisis.1 Understanding why these markets have become so central helps explain both the regulatory attention they've received and the governance expectations placed on companies that use them.
The liquidity gap created by staying private longer
High-growth companies now routinely remain private for a decade or more,2 supported by deep pools of late-stage capital and strategic investors that allow them to scale rapidly without accessing public markets. While this approach avoids the burdens of public company reporting, it creates a liquidity gap. That is, shareholders of these companies may end up sitting on significant equity positions with no real path to liquidity.
Secondary transactions help bridge this gap in a few ways.
- Employees gain the ability to convert a portion of their equity into cash, providing financial flexibility without waiting for an exit, like an IPO or acquisition.
- Early investors, like venture capital and private equity firms, can use secondary sales to exit or rebalance portfolios after years of illiquidity, while founders often seek modest liquidity to diversify personal risk while maintaining operational control.
- At the same time, new investors view secondary markets as an opportunity to gain exposure to high-performing companies that are otherwise inaccessible.
A market that has quietly reached enormous scale
What began as occasional, ad hoc transactions has evolved into a sophisticated and institutionalized marketplace. On top of that, some of these transactions make headlines with company valuations3 that would make many Fortune 10 companies envious.
Annual secondary trading volumes now reach into the tens of billions of dollars,4 supported by dedicated secondary funds, large asset managers and specialized platforms actively competing for access to high-quality private-company stock. To put the growing popularity of secondary markets into context, the volume of completed secondary market transactions in 2016 was $42.15 billion,5 2022 came in at $108 billion, and at the time of the writing of this article, estimates for 2025 were at $210+ billion.4
So, how are companies leveraging secondary markets? Many are now operating recurring or structured liquidity programs as part of their capital and compensation strategy, effectively creating periodic trading windows that resemble limited public-market activity, like quarterly trading windows for public companies. As these programs grow in frequency and size, they increasingly mirror public markets in scale and participation, and what develops is a call for and reliance on company disclosures.
On the point about reliance on company disclosures in the context of secondary markets, remember these private companies aren't subject to the same disclosure obligations that public companies are. That said, the SEC has been clear in delivering the message that private secondary markets don't mean unregulated markets.
The SEC's longstanding focus on private secondary markets
A warning delivered nearly a decade ago
In 2016, then SEC Chair Mary Jo White delivered a speech in Silicon Valley, warning that private secondary markets were expanding rapidly, with risks that mirrored those found in public markets.6 Her concern centered on the accuracy of company information, how information was shared (or withheld) among buyers and sellers and how informal communication practices could mislead investors.
Chair White also highlighted risks associated with selective disclosure, opaque valuation methodologies and inconsistent information flows, particularly in fast-growing companies with complex business models. As private companies grew larger and more systemically important, the message was clear: The scale and impact of private markets meant they could no longer operate outside the SEC's core investor-protection mandate.
This speech reinforced something that the SEC has been deliberate about periodically emphasizing over the years: that federal anti-fraud provisions apply fully to private secondary marketsi.7 At the foundation are federal anti-fraud rules, most notably Section 10(b) of the Securities Exchange Acti8 and Rule 10b-59, which apply to any securities transaction, public or private. The short of it is that when companies provide financial metrics, growth narratives, technical claims or forward-looking statements that influence secondary-market trading, those communications must not be misleading by omission, misstatements or exaggeration.
Importantly, liability doesn't require the company to be the seller. If corporate communications materially influence trading decisions, regulators and plaintiffs may argue that the company and its leadership played a central role in the transaction.
Four enforcement actions, one clear warning for private companies
SEC enforcement actions against different private companies and their executives send a clear message to founders, management teams and boards: Private markets are no longer viewed as enforcement-lite environments, particularly when capital raising or secondary transactions are involved.
Across these matters, the SEC focused on a common fact pattern: Senior executives allegedly sold personal holdings or facilitated capital transactions while in possession of material nonpublic information, including deteriorating financial performance, missed revenue projections, liquidity pressures, regulatory risks or weaknesses in internal controls. At the same time, investors and secondary-market buyers allegedly received optimistic narratives that weren't fully aligned with internal data.
In these enforcement actions, the SEC emphasized information asymmetry, selective disclosure and the use of incomplete or misleading statements in private financings and secondary sales. In several instances, the companies themselves, not just individual executives, were charged under federal anti-fraud provisions for statements about regulatory compliance, product capabilities, revenue sustainability or financial condition.
The enforcement outcomes varied, but the themes were consistent. Executives faced significant monetary penalties and industry bars, while companies incurred substantial costs, operational disruption and reputational damage, even where corporate liability was ultimately avoided. In some cases, finance leaders were charged for failing to exercise reasonable care in connection with financial disclosures or transaction documents that implied a level of board oversight or approval that didn't, in fact, exist.
Notable takeaways
Private companies shouldn't rely on private-company status to avoid taking disclosure and internal controls seriously, especially when investors are making liquidity and investment decisions.
The SEC has repeatedly focused on scenarios where companies ignored internal warnings, had underdeveloped compliance functions or failed to reconcile what was being disclosed with the actual realities of the business. When companies allowed shares to trade, facilitated transactions or continued fundraising while failing to correct known misstatements, the SEC treated those omissions as company-level misconduct, not merely individual failings.
For boards of private companies, one notable lesson is that weak oversight, particularly around disclosures and internal controls, can translate into institutional liability — even if misconduct originates with senior leadership.
Finally, enforcement actions make clear that path-to-IPO narratives carry legal risk. Companies that promote or imply an imminent public offering to support secondary sales or private valuations and then fail to pursue or qualify for an IPO can face scrutiny about whether those representations weren't well-founded at the time they were made. For clarity, the issue isn't that an IPO fails to materialize. The issue is whether statements about timing, likelihood or readiness were misleading when expressed to investors considering the purchase of a company's shares. For startups navigating secondary-market pressure, aspirational messaging around going public should be carefully grounded in reality, supported by internal analysis and subject to board-level oversight to avoid becoming an enforcement trigger.
Why SEC scrutiny is unlikely to ease, even as IPO activity becomes a priority
Given deregulation trends, some assume the SEC may soften private-market enforcement to encourage more companies to go public. The opposite may be more realistic, for three reasons:
- Technical-disclosure risk is too high. Valuations increasingly depend on AI models, autonomous systems, robotics, advanced aerospace technologies and other highly abstract and complex ideas. This approach increases the risk of overstated, incomplete or misunderstood technical claims.
- Private markets are systemically important. With billions of dollars in annual trading volume, private secondary markets continue to function as a significant component of the capital markets, making oversight essential to market integrity.
- Strong private-market governance supports public-market health. Companies that adopt disciplined disclosure and governance practices early tend to transition more smoothly into public markets, making private-market enforcement complementary to IPO revitalization efforts.
Governance practices for companies active in secondary markets
To help avoid becoming the subject of a regulatory investigation or being pulled into litigation, what follows are a few suggested governance practices for companies that are considering or active in secondary markets.
- Centralize and control all information shared during liquidity events. Adopt a disclosure-style committee, formal or informal, to review financial and operating metrics, market narratives, claims and any materials distributed to employees or investors.
- Treat secondary transactions as securities-disclosure events. Even when the company isn't the seller, its communications may influence trading decisions. Statements should be accurate and complete, reviewed by legal and finance, version controlled and fully supportable. Along those lines, it wouldn't hurt to also communicate — ideally in written materials — the more notable risks that may impact the company.
- Strengthen oversight of insider sales. Companies, and in some cases, boards, should oversee insider participation in liquidity events, including material nonpublic information assessments, conflict-management frameworks and documented decision-making. Along these lines, it would be worth considering whether it makes sense for the company to implement a formal insider trading policy.
- Establish rigorous controls over technical disclosures. Technical claims should be vetted by engineering leadership or other relevant experts, supported by evidence, consistent across channels and updated as technology evolves.
- Build repeatable, documented liquidity programs. Standardized processes, including vetted templates, employee education materials, transparent valuation explanations and consistent eligibility criteria, help to reduce risk and support defensible governance.
The role of private-company D&O insurance in secondary-market risk
As secondary-market activity increases and regulatory scrutiny intensifies, private company D&O insurance has become a critical component of risk management for high-growth private companies. Liquidity events can trigger claims alleging misleading disclosures, failures of oversight, insider trading or breaches of fiduciary duty — exposures that often fall squarely within D&O coverage.
For many high-value private companies, however, the question is no longer whether they have D&O insurance, but whether their coverage matches their risk profile. Companies with active secondary markets, large and diverse shareholder bases, complex technologies and recurring liquidity events increasingly present the same risk characteristics as public companies, despite remaining privately held.
As a result, some private companies are choosing or being required to access public-company-style D&O insurance. This shift is driven less by corporate form than by valuation scale, trading activity, disclosure practices and regulatory visibility. Public company programs typically bring higher limits, different retentions and greater scrutiny of governance and disclosure controls, particularly around insider trading and liquidity oversight.
This evolution has a secondary effect that companies shouldn't overlook: Companies that are "insurance-ready" for public-market risk are often better positioned for IPO optionality, even if going public isn't imminent. Conversely, insurance misalignment can surface governance gaps well before an S-1 is ever drafted.
Ultimately, insurance strategy has become an extension of governance. As secondary market activity expands, D&O programs should be evaluated alongside disclosure practices and oversight structures, not treated as a static procurement exercise.
Parting thoughts
Secondary markets continue to play a critical role in providing liquidity for high-growth private companies, but they also bring regulatory expectations that closely resemble those applied to public companies. Companies whose valuations depend on complex technologies would be wise to adopt disciplined governance and disclosure practices well before any potential IPO. By strengthening controls early, companies can reduce regulatory risk, protect stakeholder trust and position themselves for long-term success in both private and public markets.
