SEC Enforcement of Trading in Pre-IPO Securities

Just within the past 5 years, there has been an explosion in trading in the shares of private, pre-IPO companies. Insiders at companies looking for liquidity have found rapturous investors looking to get a piece of hot new companies before they go public. To facilitate these sales, new on-line marketplaces have sprung up to match buyers and sellers, and to start funds akin to mutual funds, only with pre-IPO shares. This trend has not gone unnoticed by the SEC. In fact, the SEC enforcement division has brought a steady stream of cases for violations ranging from violations of the broker-dealer registration rules to intentional fraud. With interest rates stuck near zero, and the stock market approaching all-time highs, investors will continue to chase the prospect of higher returns through pre-IPO shares. Consequently, expect the SEC enforcement division to devote increasingly more attention to this space.

Please join Michael S. Dicke, formerly the head of enforcement for the SEC’s San Francisco Office and now at Fenwick & West LLP, and Catherine D. Kevane of Fenwick & West LLP, as they discuss enforcement issues in the pre-IPO securities market, including:

• How the SEC’s first enforcement cases in 2012 in the pre-IPO securities market helped change the landscape;
• The impact of the SEC’s August 2015 no action letter to Citizen VC, which outlines steps on-line portals can take to avoid running afoul of the general solicitation prohibitions of the Securities Act;
• How two Silicon Valley entrepreneurs with a website offering contracts based upon the prices of pre-IPO securities ended up in June 2015 as defendants in the SEC’s first case under a new Dodd- Frank Act rule designed to regulate complex security-based swaps;
• How fraudsters are taking advantage of the limited supply of shares in hot private companies to fleece unsuspecting investors, and the SEC enforcement response; and
• Where the SEC enforcement division likely will be focusing its efforts in the pre-IPO securities space.