25 March 2018

US Corporate Law News: SEC brings enforcement action against pre-IPO Silicon Valley fintech company for Rule 701 violations


Flora Tsui
Associate | US

On March 12, 2018, Credit Karma, Inc., a pre-IPO financial-technology company, settled with the SEC in an enforcement action against Credit Karma for violating Section 5 of the Securities Act by issuing almost $14 million in stock options over a one-year period in reliance on Securities Act Rule 701 without complying with Rule 701. Rule 701 allows privately-held companies to compensate their employees with securities without incurring the obligations of public registration and reporting as long as, once the company issues $5 million worth of securities, it provides essential information about the investment to employees. The SEC alleged that although Credit Karma's executives were aware of Rule 701, they failed to comply with its disclosure requirements, and that Credit Karma employees exercised employee stock options and purchased stock in an unregistered offering without being provided access to the required information. The SEC imposed a $160,000 civil penalty on Credit Karma for the violations. For more information, see https://www.sec.gov/litigation/admin/2018/33-10469.pdf.

Flora Tsui Associate | New York