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SEC Takes a Longer Look at Pre-IPO Companies, Rule 701

April 25, 2018

Fenwick securities enforcement co-chair Michael Dicke spoke with Compliance Week about the “Silicon Valley Initiative,” the SEC’s enforcement effort aimed at examining various compliance aspects of late stage private companies. 

Formerly the head of enforcement for the SEC’s San Francisco regional office, Dicke noted the SEC’s recent focus on Rule 701 under the Securities Act of 1933e 701, an exemption which many companies use to grant options and other equity-based compensation.

Dicke discussed how the SEC Enforcement Division recently conducted a “sweep” through its San Francisco office and sent Rule 701 information requests to large pre-IPO companies.

Dicke noted, “I also think the SEC was especially interested in looking at Rule 701 because it hasn’t been the subject of an enforcement action since 2005. The Commission is also interested in a democratization of information flow within companies.”

“There is concern that at a lot of fast-growing pre-IPO companies, management and board members have a lot of good financial information and can evaluate prospects for the company. But more junior employees don’t have access to that information, so it is very hard for them to evaluate what their options are. That is important, especially in Silicon Valley where there is a great competition for talent, especially for engineers,” Dicke continued.

Dicke has co-authored Fenwick articles looking at the SEC’s increased scrutiny of unicorns and other private companies and the secondary market trading of pre-IPO shares, as well as the SEC’s first enforcement action resulting from a Rule 701 option grants investigation.

The full article is available on Compliance Week.​​​​​​​​​