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In America, "pitching" to investors is how capital is often raised.

What I don't understand is why this is legal: You supply private information to the investor, who decides to buy stock in your company based on this private information.

Is the fact that the company is private what makes this legal?

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    It's not a securities violation because it doesn't defraud the general public. In a private company the general public can't invest in or be hurt by investments acted on with private knowledge.
    – Ron Beyer
    May 9, 2020 at 0:25

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No, insider trading doesn't apply to private companies. By definition private companies don't trade their stock on the open market. Trading on the open market provides access to an immense pool of capital (anyone with the price of a share of stock), but the trade-off is that there are many more strictures on corporate behavior and governance. Private companies have far more latitude in their corporate governance, but on the other hand they are far more limited in who they can sell stock too, typically being limited to accredited investors.

Edit:

It seems that in the US this answer is actually wrong, but the situation is complex. The SEC has sanctioned privately held companies under Rule 10b-5 for fraud and misrepresentation for stock transactions where material information was withheld from the other parties.

Stiefel Laboratories, a privately held firm, was charged with buying back employee shares without disclosing that it had multiple offers from private equity firms to purchase stock at a higher price, or revealing that it was in negotiations to sell the company to GlaxoSmithKline.

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  • Isn't the general public still allowed to engage in bets involving the stock (That it's under- or over-valued)?
    – MWB
    May 9, 2020 at 1:40
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    The general public? No! Hedge funds, and private equity firms can make all sorts of deals with private companies, but they are all populated by accredited investors. That's what private means: not accessible to the public at large. May 9, 2020 at 1:44
  • Stockholders don’t generally owe duties (fiduciary or otherwise) to the company or other stockholders. People in a position to control or influence the company do. While a large stockholders may be in such a position the duty derives from that and not merely holding stack.
    – Dale M
    May 9, 2020 at 4:47
  • @DaleM Hmm. Maybe I've overstated it, but my impression was that at least majority stockholders had a fiiduciary duty to other stock holders, and that this was the major protection against self-dealing. May 9, 2020 at 5:00
  • @CharlesE.Grant majority stockholders are in a position of control - that’s where the duty comes from
    – Dale M
    May 9, 2020 at 5:30

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