The SEC has already made it clear that it intends to pursue enforcement actions against firms that misrepresent their Artificial Intelligence (AI) capabilities. In the latest example of the SEC’s commitment in that regard, earlier this week the SEC filed an enforcement action against an investment advisory firm, its holding company, and the two firms’ CEO, in part based on allegations that the advisory firm claimed it would provide exceptional returns for investors through its use of artificial intelligence. The firm also sought to attract investors by claims about the firm’s plans to go public and about the firm’s relationships to well-known banks and law firms. The SEC’s August 27, 2024, complaint against the firm and its CEO can be found here. The SEC’s August 27, 2024, press release can be found here.Continue Reading SEC Files Enforcement Action Alleging AI-Related and Pre-IPO Misrepresentations
Many fledgling companies aspire toward completing an IPO. Some succeed, but many others do not. Occasionally when a company falls short of its IPO plan, litigation results, in the form of a “failure to launch” claim. A recent example involving a California-based cannabis company illustrates how these kinds of claims can arise. As discussed below, these possibility for these kinds of claims has insurance implications.
When private companies are on track toward a planned IPO, much of the focus and attention is on readying the company for the burdens and responsibilities it will face as a public company. Among other things, this also means a focus on the potential liability exposures for the company and its directors and offices once the company goes public. Until the company actually completes its planned offering, however, it is still a private company — albeit one with a heightened set of risk exposures because of the company’s pre-IPO activities. If the planned IPO never happens, the company and its senior officials sometimes face liability claims arising from pre-IPO activities. A recent complaint filed in the Northern District of California against the former directors and officers of a pre-IPO company that ultimately went bankrupt illustrates the kind of claims pre-IPO companies and their executives can face. Pre-IPO companies’ liability exposures have important implications for the companies’ D&O insurance programs, as discussed below.
IPO activity so far this year is well off the pace compared to this time a year ago. 
The Securities and Exchange Commission is primarily concerned with public companies and the securities markets in which the shares of public companies trade. However, in a series of recent speeches and presentations as part of what the agency had called the “Silicon Valley Initiative,” the agency made it clear that it is increasingly concerned with private and pre-IPO companies as well, particularly so-called “unicorns” – that is, the private start-up firms with valuations greater than $1 billion. SEC Chairman Mary Jo White highlighted these concerns in a March 31, 2016 speech at the Rock Center for Corporate Governance at Stanford Law School, a copy of which can be found 