Since this blog is primarily aimed at public companies, initially I did not intend to blog on the SEC’s recent enforcement action against a private company that awarded stock options to its employees. However, recent blogs posted by Liz Dunshee, Broc Romanek, and John Jenkins on the subject made me reconsider.
The fact is that the federal securities laws do apply to privately held companies that award stock to employees. In most cases, however, the company is able to take advantage of one of the exemptions for such offerings. Last month, the SEC announced that Credit Karma, Inc. had agreed to settle charges that it unlawfully offered securities to its employees and failed to provide them with timely financial statements and risk disclosures. According to the SEC’s Order instituting cease-and-desist proceedings, the company issued stock options to its employees from October 1, 2014 through September 30, 2015. Credit Karma did not register its offer of stock options. It sought instead to rely on Securities Act Rule 701, which 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. Credit Karma had issued almost $14 million in stock options to employees over a one-year period. Credit Karma failed to provide the required financial statements and risk disclosures information to its employees.
Apparently this is part of an enforcement “sweep” being conducted out of the SEC’s San Francisco regional office. Without admitting or denying the allegations in the order, Credit Karma agreed to pay a $160,000 penalty and consented to the SEC’s order finding that the company violated Section 5 of the Securities Act of 1933 by failing to comply with the registration requirements or to meet the requirements of an exemption to the registration requirements when it offered securities to its employees.
So, let’s be careful out there.