The reach and scope of the federal securities laws is a concern most obviously relevant to publicly traded companies. However, as I have emphasized previously, private companies are not immune from scrutiny under the federal securities laws. The SEC has in fact an extensive history of pursuing enforcement actions against private companies for alleged federal securities laws violations; one needs to go back no further than the high-profile enforcement action brought against the supposed blood testing company Theranos for an example of this phenomenon in action.
A recent memo from Wiley law firm underscores these points about the exposures of private companies; as the memo’s authors put it, “private entities should be aware that an aggressive SEC can investigate and penalize them (and their executives), even if they are not directly involved in issuing securities.” The law firm’s September 23, 2023, memo, entitled “Think Because You Are a Private Company the SEC Is Not Your Problem? Think Again,” can be found here.Continue Reading Private Companies and SEC Enforcement Actions
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.
Readers of this blog know that there have been several SPAC-related securities class action lawsuits filed in 2021, with the suits mostly coming in after the de-SPAC transaction has been completed. Even readers who think they get the idea already will want to be sure to take a look at the new SPAC-related lawsuit that came in earlier this week. What makes this one different is that, though the lawsuit names both the SPAC and the SPAC merger target company as defendants, the merger, though announced, has not yet even taken place. And, mind you, this is not your garden variety merger objection lawsuit, it is a full blown 10b-5 class action lawsuit. Interested? Read on.
On my beat here at The D&O Diary, I cover the liabilities of corporate directors and officers. One objection I frequently hear is that I focus too much public companies and not enough on private companies. The reason I write about public company issues more than private company concerns is that the public company world usually is more eventful. However, every now and then, something comes up involving a privately-held company that reminds all of us that plenty happens in the private company D&O world, too. The most recent example is the shareholder derivative and class action lawsuit filed last week against executives of the electronic cigarette company, Juul Labs. As discussed below, this new lawsuit highlights the exposures that private company directors and officers can face and underscores the fact that even private companies can get hit with shareholder class action lawsuits.
WeWork may not have been able to complete its once-planned IPO, but even so it now has something that many IPO companies often experience – a shareholder class action lawsuit. On November 4, 2019, a WeWork investor filed a lawsuit in California state court on behalf the company’s minority shareholders as well as on behalf of the company itself. As discussed below, the shareholder complaint makes a number of interesting allegations and raises some interesting issues as well.
Privately-held companies, on the one hand, and companies whose shares are public traded, on the other hand, face very different liability exposures. Because of these differences in liability exposures, the directors and officers liability insurance available for these types of entities varies – the D&O insurance form available for private companies is quite a bit different from the D&O insurance form available for public companies. A recent law firm memo took a brief look at the differences between the two forms of coverage. There some important additional considerations, that I discuss below.
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Although it is not always appreciated or taken into account, the fact is that executives of private companies can be held liable for statements or other actions made in violation of the federal securities laws. One very recent and high-profile example where this happened involved the SEC enforcement action (and subsequent criminal proceedings) 
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Executives at companies whose securities are publicly traded typically don’t need to be persuaded that their company needs D&O insurance. They understand that the exposures public companies face make D&O insurance indispensable. However, the view of some private company managers may be different, particularly for officials at companies whose shares are very closely held. These company officials may believe their company has little risk of getting hit with a D&O lawsuit and as a result conclude that they don’t need D&O insurance. However, the reality is that D&O insurance is an indispensable part of every company’s risk management arsenal, whether or not a company’s shares are listed.