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danger Investors may like to see an IPO participation rights clause in a term sheet because it signals the company is headed toward an IPO,* but this clause can cause trouble with the SEC if the participation rights are granted too close in time to the IPO. Before a public offering, a company’s shares are not registered with the SEC and Section 5 of the Securities Act of 1933, as amended, prohibits selling or offering to sell unregistered securities unless an exemption applies. To stay on the right side of the SEC, founders and investors may consider including language that grants IPO participation rights only “if permissible under the securities laws.”*