TheCorporateCounsel.net

With major corporate scandals involving private companies coming to light in recent years—from Theranos to FTX—it may not come as a surprise that the SEC seems poised to ramp up regulation and scrutiny to protect private investors in early-stage startup companies. This Perkins Coie alert advises that all privately held companies should be mindful of their representations to investors, sophisticated or not, given the following recent developments:

– The SEC’s April 2023 announcement of an action against the founder and CEO of a private startup company that was sold to a financial institution for $175 million based on alleged false and fabricated data concerning the number of customers

– Commissioner Crenshaw’s January 2023 speech at the 50th Annual Securities Regulation Institute where she called for increased disclosure and accountability for private companies that raise funds under the Rule 506 exemption

– SEC considering amending Form D

The alert goes on to suggest that private companies adopt some practices that are “par for the course” for public companies, including recruiting board members who will hold management accountable, creating a disclosure policy, keeping financial information up to date, and hiring independent technical experts.

– Meredith Ervine