Toehold purchase financial definition of Toehold purchase
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A purchase of less than 5% of the stock
of a publicly-traded company
. This is called a toehold purchase because one is not required to register and explain one's purchase to the SEC
until one meets the 5% threshold. This allows one to begin the process of a potential hostile takeover
by accumulating stock quietly, though one eventually would have to disclose one's intent.
The purchase of less than 5% of the outstanding common shares of a target company before establishing a much larger stake. A toehold purchase allows a party to buy stock in a company without filing a notice with the SEC and with the target company.
A toehold purchase is one in which an individual investor or investment firm caps holdings in a potential target company at less than 5% of the company's outstanding stock.
Presumably that's because once an investor has acquired 5% or more of the stock, the investor must notify the company, the market where the company is listed, and the Securities and Exchange Commission (SEC). That notification must explain the next steps the investor intends to take, such as a possible takeover bid.