SEC Eyes Tougher Stance on Silicon Valley, Pre-IPO Market

Recent speeches by SEC Chair Mary Jo White and Enforcement Division Director Andrew Ceresney in Silicon Valley have signaled increased scrutiny of private market transactions from the SEC.

“Whenever they fly out the two most senior leaders to come all the way across the country for one topic, they are trying to signal that this is important,” said Michael Dicke, co-chair of Fenwick’s securities enforcement group.

White warned that pressure among private companies to achieve coveted “unicorn” status is resulting in questionable accounting, and cautioned that the anti-fraud provisions of Exchange Act Section 10(b) and Rule 10b-5 also apply to private companies. She also expressed concerns about irregularities in pre-IPO trading as Silicon Valley technology companies stay private longer.

Dicke, who formerly served as head of enforcement for the SEC’s San Francisco regional office, shared his perspective about the SEC’s heightened attention with Law360. Dicke mentioned he expects stronger policing from the SEC of pre-IPO trading via secondary platforms and potentially a closer look at private companies themselves.

Dicke said the warnings that the SEC is closely monitoring platforms that trade private securities – and the conduct of private companies that issue them – suggest that Silicon Valley has become a bigger priority for the SEC.

Dicke told Law360 that he expects more cases like the one filed against Sand Hill Exchange in June 2015, noting that derivative interests in private shares have increased now that more private companies restrict transfer of their shares. Such restrictions ensure that the company retains control in secondary-market transactions, though employees might still want to sell derivative interests in those shares.

“Overall, the message is, certainly as you mature and get bigger and move closer to what they call the pre-IPO stage, you really need to have effective controls over all sorts of things,” said Dicke.

Fenwick issued a securities enforcement client alert this week, urging private companies to adopt enhanced controls long before an IPO – including written, enforceable compliance policies over financial reporting, disclosure and compensation, including the granting of equity-based compensation.

The full article is available through the Law360 website (subscription required)​.