United States: Securities Enforcement Alert: SEC Increases Scrutiny Of "Unicorns" And Other Private Companies And Secondary Market Trading Of Pre-IPO Shares

Urges Private Companies To Adopt Enhanced Controls Long Before IPO

In an unprecedented one-day blitz, the Chair of the Securities and Exchange Commission was joined by the SEC Enforcement Director in events in Silicon Valley and San Francisco on March 31 focused on one message:  the SEC is closely watching the conduct of private companies as well as emerging platforms that trade in private company securities, and will bring enforcement cases as needed to protect investors. Dubbed the "Silicon Valley Initiative," the senior officials emphasized that although the SEC wants to encourage capital formation for innovative Bay Area companies, because they play such a critical role in our economy and our markets, the SEC expects even private companies to embrace and demonstrate sound corporate governance.

Financial Controls and Corporate Governance

At an informal morning reception sponsored by Women In Securities (WISe), co-founded by Fenwick's Susan Muck, SEC Chair Mary Jo White emphasized that private companies who reach a certain size and maturity are not immune from SEC scrutiny or shareholder complaints. Chair White reminded her listeners that private companies are subject to Exchange Act Section 10(b) and Rule 10b-5 and owe fiduciary duties to shareholders. Chair White recommended that private companies take steps to enhance internal controls and governance procedures.

Later that evening in a speech at Stanford Law School, Chair White proposed questions that directors, officers, advisors and pre-IPO companies should be asking themselves:

  • Does your board include outsiders with public company or large company experience?
  • Do you have board members with regulatory and financial experience?
  • Does your board have expertise in the industry so that you can analyze different viewpoints and spot critical issues?
  • Is the company run and governed for the benefit of all of its investors?

As an illustration, Chair White noted the case of Marrone Bio Innovations, Inc. Charges were brought against the company and one of its former executives in February 2016 for inflating financial results in order to meet its projections during its first year as a public company.  This occurred, Chair White said, "[b]ecause, in part, of insufficient internal controls" that allowed the executive to direct subordinates to obtain false documents and intentionally ship the wrong product in order to book sales.

Enforcement Director Andrew Ceresney, participating in a panel after the Chair's remarks at Stanford, emphasized that companies "can't simply just turn on effective controls" once they become public; instead companies need to develop such controls while they are still private.

Secondary Market Trading

In addition to internal controls and corporate governance, Chair White noted that the SEC was also focused on the secondary market for trading pre-IPO shares.  The SEC's core mission is to protect investors, including employees of private companies or other shareholders who hold what may be illiquid shares.  In fact, the SEC already has brought at least one case alleging that a private company and its CEO defrauded shareholders—some of whom had been employees—by failing to disclose material information as part of a share buy-back.

In particular, enforcement chief Ceresney singled out the SEC's concern about trading platforms that enable investors to purchase derivative interests in private shares. He noted that this new model has arisen because companies have restricted the transfer of shares, leading to employees and others retaining the shares themselves but selling an economic interest in the shares or promising to deliver shares after a liquidity event. Ceresney noted that, depending on the structure of the deals, such transactions may be securities-based swaps which are most likely illegal if sold to retail investors under SEC rules passed in the wake of Dodd-Frank. Last year, the SEC brought its first enforcement case under these rules against a Silicon-Valley start-up who was offering investors swap contracts based on the value of pre-IPO shares.

These comments appear to herald what may be the beginning of increased scrutiny as the SEC turns its attention to private companies. In an April 1 news article in The Recorder, Fenwick's Mike Dicke noted the fear that the SEC will attempt to use the proliferation of secondary market trading in pre-IPO shares as "a hook to more closely police private companies." Despite arguments that most transactions in Silicon Valley involve sophisticated parties on both sides who understand the risks, Director Ceresney stated that the SEC's mission includes protecting even sophisticated investors, and pointed to a danger that investors broadly will lose faith in the markets if the SEC fails to prosecute fraud or misstatements involving securities transactions, in whatever sectors those transgressions occur.

Suggestions for What Private Companies and their Boards Should Be Doing Now:

In the wake of the SEC's increasing scrutiny, private companies should consider doing the following:

  • Develop written and enforceable compliance policies and procedures over financial reporting, disclosure, compensation (including the granting of equity-based compensation), cybersecurity, insider trading, and policies designed to prevent violations of the Foreign Corrupt Practices Act (if the company does business overseas).
  • Develop a whistleblower program that provides an avenue for employees and consultants to bring issues to the attention of senior management and the Board. As public companies have learned, if employees do not feel they have an effective way to bring concerns to senior leadership, employees will instead bring those concerns to the government. As the SEC increases its interest in the affairs of private companies, whistleblowers are likely to avail themselves of the SEC whistleblower process, thereby potentially triggering an SEC inquiry.
  • If their shares trade in the secondary market, companies should develop procedures to monitor and review company disclosures or other publicly available information that may impact trading, as well as monitoring what material, nonpublic information is available to directors, employees and others who may be selling shares in the secondary market.
  • Boards should consider meeting with experienced regulatory counsel on a regular basis—as public companies do—to keep abreast of current issues and best practices. In addition to the inherent benefits of having improved corporate governance, should regulators undertake an investigation, it is important to be able to show that the Board and the company are sophisticated and have heeded the SEC's recommendation to adopt improved internal controls.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
18 Oct 2017, Conference, California, United States

This three-day program will focus on the tax issues presented by the entire spectrum of modern major corporate transactions, from relatively simple single-buyer acquisitions of a division or subsidiary to multi-party joint ventures, cross-border mergers, and complex acquisitions of public companies with domestic and foreign operations, including spin-offs and other dispositions of unwanted operations.

19 Oct 2017, Conference, California, United States

Privacy professionals are facing a number of challenges in determining how best to achieve GDPR compliance and maintain compliance for the long term. The Alliance of Global Privacy Solution Providers (the "Alliance") has been formed with a mandate to educate privacy professionals on making informed decisions on their approach to planning, implementing and managing GDPR and long-term privacy compliance.

30 Oct 2017, Seminar, California, United States

This program will address some of the hottest legal and policy topics that online platforms have brought to the fore: free speech, hate speech, fake news, privacy and surveillance, artificial intelligence, augmented reality, changing notions of “ownership” of information and software-enabled consumer products, and the perennial issue of copyright.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.