Magazine Article | March 30, 2015

Liquid Courage – Evaluating Insider Liquidity

Source: Life Science Leader

By Robert Biggs and Jacob Guzman, Morgan Stanley

When we meet with CEOs of emerging growth companies, there are two main concerns that keep them up at night: raising money and best positioning their business to maximize shareholder value. Most CEOs understand that their molecule is either going to work or not work; after all, biotech is a binary business.

However, it is their job to shepherd their asset through the necessary pathways in order to maximize value for investors. Since the IPO window opened for biotechnology companies, we have had a number of wealth management clients who are executives of biotechnology companies jump headfirst into the public markets. The hope is that they will be able to utilize the capital markets to raise subsequent money for their company while providing liquidity for current shareholders. In a perfect world, these are both possibilities, but, as we all know, the market is far from perfect.

From an outsider’s perspective, some of the key advantages of having a publicly traded company are liquidity and access to capital markets. However, as many senior executives of recently public healthcare companies have found, a successful offering does not always translate into personal liquidity. As you consider your personal liquidity, there are a number of factors to consider including, but not limited to, trading volume and overall market optics.

Most importantly, as an executive of a newly public company, there are a number of rules and regulations you must follow in order to gain liquidity from your equity position. We have been able to help our clients diversify away from their large single-stock positions in a variety of ways such as a Rule 144 sale of stock (i.e., the public resale of restricted or control securities if a number of conditions are met including holding period, current public information, trading volume, and filing of a form 144), exchange funds (i.e., transferring company stock into a diversified, actively managed pool of assets), collateralized loans (i.e., borrowing against your company stock), and 10b5-1 trading plans (i.e., entering into an agreement during an open window to sell stock with predetermined parameters over a set time period in the future). Given the often fluid nature of trading windows for healthcare companies, and biotech in particular, a popular strategy for liquidity is the 10b5-1 trading plan. Such a selling plan allows you to set the parameters (i.e., price, amount, time frame) for the sale of your stock at a future point in time in order to avoid potential blackouts and periods in which possession of nonpublic material information may prevent the sale of stock. Through disclosure on both Form 4 and 144, a 10b5-1 trading plan can help to mitigate negative signaling issues associated with your intentions to sell in the future. If implemented properly, a 10b5-1 trading plan also provides an affirmative defense against insider trading claims.

"There are a number of rules and regulations you must follow in order to gain liquidity from your equity position."

The feedback that we have received from seasoned biotechnology entrepreneurs of newly public companies is that the market is more receptive to preset trading plans today than ever before. However, it is clearly on a company-by-company basis. Given volume restrictions, as well as overall optics, some executives end up with only slightly more liquidity than they had before the IPO.

As you consider the personal impact of an IPO, one question to ask yourself is, “What do we really want to get out of this IPO?” From a diversification perspective, what is your ideal level of exposure relative to your overall liquidity profile? Being thoughtful and deliberate in the handling of your equity position can make a significant difference for you and for the overall performance of your company’s stock.

If you do decide to sell, the next decision is how to go about doing so. Are you going to sell in a block, or will you use a 10b5-1 plan? When evaluating your plan for personal liquidity, it is important to consider how you own your shares as well as the different nuances between incentive stock options, nonqualified stock options, and restricted stock. Determine the personal tax ramifications of a sale of stock or the exercising of options. There are various strategies that can be implemented to help make your eventual stock sale as tax-efficient as possible. Even during the post- IPO lockup and blackout windows, you can put the appropriate pieces in place to execute your selling strategy once your window opens.

Two key factors in this whole process will be the volume of your stock and the optics around your sale of stock. As a senior executive, you will be subject to sale quantity limitations relative to your company-stock trading volume. This may prevent you from selling the amount of stock that you would like in the period of time you prefer. Another important factor is that, as an executive, you are required to file a Form 4 with the SEC to identify any change in beneficial ownership (regardless of whether the trade is part of a 10b5-1 plan or an open window transaction). There have been a number of scenarios in which executives have found that it was more beneficial to the long-term value of the company’s stock to hold their shares.

Robert Biggs (right) holds the following registrations: Securities Agent: CA, CO, CT, D.C., DE, FL, IL, MA, MD, MI, NC, NJ, NV, NY OH, PA, RI, SC, TX, VA, VT, & WV

Jacob Guzman holds the following registrations: Securities Agent: CA, CO, CT, D.C., DE, FL, IL, MA, MD, MI, NC, NJ, NV, NY OH, PA, RI, SC, TX, VA & VT

Robert Biggs and Jacob Guzman are financial advisors with the Global Wealth Management Division of Morgan Stanley in Philadelphia. The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors, as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Investing involves risks, and there is always the potential of losing money when you invest. The views expressed herein are those of the authors and may not necessarily reflect the views of Morgan Stanley Smith Barney LLC, Member SIPC, or its affiliates.