During a coordinated event in Silicon Valley, the SEC Enforcement Director
joined the Chair of the Securities Exchange Commission to convey a message
to private companies and brokers who engage in the sale of securities
that the SEC is keeping a close eye on their transactions. The “Silicone
Valley Initiative,” as they call it, has the SEC portraying a focused
scrutiny for companies that deal in private stock sales and secondary
markets for pre-IPO offerings.
Fenwick’s Susan Muck, co-founder of Women In Securities (WISe), sponsored
a morning meeting where SEC Chair Mary Jo White spoke to listeners about
how private companies are not immune from oversight when engaging in the
sales of securities. White made sure to note that these private entities
are subject to Exchange Act Section 10(b) and Rule 10b-5 which binds companies
to their fiduciary duty to their stockholders. The speech was meant to
send a signal to these companies to get their internal procedures aligned
with the requirements set forth by the SEC.
Later that night, Chair White put forth questions to pre-IPO companies
with regards to what is required of them to maintain compliance.
Does your board of directors include outside members experienced with large
Do any board members have regulatory or financial experience?
Do board members have the requisite experience in the industry that allow
them to identify crucial issues within the operation?
Does the company in the best interest of all stakeholders?
Chair White used an example of another company that had charges brought
against it in February of this year for fudging prospective financial
numbers. White explained that the SEC believes this happened because internal
controls were not in place to prevent an executive of taking advantage
The Secondary Market
Besides those companies that are offering private shares or Pre-IPO investment,
the SEC is looking towards the secondary markets to enforce compliance.
The Chair believes that trading platforms that deal in selling derivative
interest securities, could exploit investors into buying shares for companies
that are still pre-revenue start-ups with securities-based swap contracts.
The SEC’s goal under Dodd-Frank is to protect investors and employee
shareholders of pre-IPO companies. The SEC has already brought charges
against one Silicone-Valley company that was offering shares are pre-IPO
inflated values. They are now sending a clear message that they will be
monitoring the market to ensure fair play across the private securities markets.
Enforcement Chief Ceresney voiced concerns about traders that allow investors
to purchase derivative interests in private stocks. The SEC is now paying
more attention to these trading platforms when details surfaced about
companies that have placed restrictions on the sale of employee shares
while offering interests in those shares to prospective investors. The
SEC has deemed these transactions securities-based swaps that may be illegal
under Dodd-Frank if sold to individual investors.
Private Companies Duties and Responsibilities
Under renewed SEC scrutiny, private companies should begin shoring up internal
procedures and guidelines. The following is a list of items that should
be addressed by companies who are considering selling private securities.
- Create and implement written compliance policies and procedures for handling
of financial information, reporting, disclosure, security, trading, as
well as management of equity sharing.
- Companies that trade shares on the secondary market should develop procedures
for monitoring the shareholder documentation provided to employees, executives,
traders, and brokerages to ensure full compliance with SEC guidelines.
- Private companies should develop a whistleblower program similar to that
required of public companies. The program should provide written documentation
on how executives manage internal regulatory issues with their employees.
- Employ a regulatory expert, either on staff or as a consultant, who can
educate management and staff on changes within the private securities
marketplace. The regulatory expert should review internal and external
documentation to ensure the company is adhering to SEC regulations and
After Dodd-Frank, the public securities market has seen extensive regulation
and oversight changes. It now appears with the new announcement, that
the private securities industry will face similar scrutiny from federal
regulators. These developments make it imperative for private companies
to start now in taking a proactive approach to corporate governance and
self-regulation with regards to the sale of securities.
If you would like more information on this topic, or would like to set
up a free consultation, please call the main office line at (949) 298-8050 or
email Kevin Kim, Esq.