The SEC Just Fined A Unicorn Startup For the 1st time

The Securities in addition to also Exchange Commission, which polices bad behavior by publicly traded companies, has for the 1st time taken action against a privately held Silicon Valley “unicorn” startup for misleading its investors, according to a Discharge on Thursday.

The human resources startup Zenefits in addition to also its co-founder Parker Conrad have agreed to pay a combined $980,000 to settle accusations by the SEC of which they made “materially false in addition to also misleading statements in addition to also omissions” to investors over their compliance with state insurance laws, the agency said.

The settlements, following separate deals with insurance regulators via 49 states in addition to also the District of Columbia, help Zenefits in addition to also Conrad conclude a nearly two-year legal cleanup of which started off after a BuzzFeed News report in November 2015.

Joshua Stein, Zenefits’ general counsel, said in an emailed statement: “This specific settlement closes the chapter on a journey we began 18 months ago to transform Zenefits through brand-new values in addition to also leadership. We are pleased of which the SEC clearly acknowledged our cooperation, our extraordinary remedial efforts, in addition to also our commitment to compliance.”

Conrad, in a statement emailed by a spokesperson, said: “I’m pleased to have reached an agreement with the SEC regarding Zenefits, in addition to also I’m incredibly proud of what we built there in addition to also grateful to have worked with such a talented group of people.”

For the broader startup world, the Zenefits case is actually a clear sign of which the SEC sees itself as a brand-new cop on the Silicon Valley beat. Such an enforcement action by the agency against a prominent privately held startup appears to be unprecedented.

The SEC has relatively limited authority inside the earth of private companies; by law, of which can only genuinely police misrepresentations in addition to also fraud inside the sale of private company stock. Historically, part of the reason the SEC has left startups alone is actually of which investors in such companies are considered both wealthy in addition to also “sophisticated,” meaning they understand the risks in addition to also can take care of themselves. of which’s when a company goes public, This specific thinking goes, of which of which can pull a fast one on naive investors.

Zenefits in addition to also Conrad did not admit or deny the SEC’s findings, according to the agency. The company agreed to pay $450,000 to the SEC — a tiny penalty compared with the over half a billion dollars of which has raised. Conrad agreed to pay nearly $534,000, of which $0,000 is actually a penalty in addition to also $350,000 represents the disgorgement of ill-gotten gains.

Zenefits has separately agreed to pay over $11 million in penalties to state regulators, in addition to also — in deal with its investors last year — of which agreed to reduce its valuation to $2 billion via $4.5 billion.

The SEC previously cracked down on Silicon Valley a decade ago, after The Wall Street Journal revealed of which tech companies were backdating stock option grants to boost CEO payouts. nevertheless the companies caught up inside the options backdating scandal were all publicly traded.

The corporate world has since changed, with many significant tech companies choosing to remain private. The SEC telegraphed last year of which of which could be keeping a watchful eye on these unicorns — private companies worth at least $1 billion.

“of which is actually axiomatic of which all private in addition to also public securities transactions, no matter the sophistication of the parties, must be free via fraud,” Mary Jo White, then the SEC’s boss, said in a speech in March 2016.

San Francisco-based Zenefits, a health insurance broker of which makes human resources software for some other startups, achieved its $4.5 billion valuation just two years after its 2013 debut. nevertheless in pursuit of rapid growth, Zenefits allowed employees to sell health insurance without the necessary state licenses. Conrad, further, created in addition to also shared with employees a program to cheat on California insurance broker licensing requirements. He was forced to resign as CEO in February 2016.

The SEC today asserts of which Zenefits in addition to also Conrad, when they sold shares to investors in 2014 in addition to also 2015, failed to adequately disclose their knowledge of these compliance lapses. While investor documents inside the 2015 financing included a reference to possible licensing issues, the SEC said the startup’s disclosures were “misleading,” since they did not represent the full extent of the problem.

One investor inside the 2015 financing round asked for more information about the licensing issue, according to the SEC, nevertheless Zenefits said in response of which of which was “above 0% compliance” at the time, in addition to also of which any past violations could incur only tiny penalties between $5,000 in addition to also $10,000. In reality, the agency says, Zenefits lacked adequate licensing policies in addition to also had learned just a month earlier of which employees had done business in Washington state without local licenses.

Conrad also sold $10 million of his personal shares to a big investor in 2015, nevertheless, according to the SEC, he didn’t provide any disclosures about compliance beyond what investors were told inside the primary financing rounds.

“Zenefits was not compliant with state insurance licensing laws, in addition to also its controls were insufficient to ensure compliance,” the SEC said in its order. “Zenefits in addition to also Conrad failed to fully disclose these facts to investors.”

Zenefits, the SEC noted, has since overhauled its compliance by implementing brand-new controls, replacing top leadership, in addition to also requiring employees to complete training.

Conrad, for his part, has started off a brand-new company, Rippling, which stores worker information to help companies onboard brand-new employees. He said inside the emailed statement of which he “could not be more excited about my brand-new company.”

Zenefits may not be the last Silicon Valley unicorn to be chastised by the SEC. The agency has also been investigating whether the embattled blood-testing startup Theranos made deceptive statements to investors, The Wall Street Journal reported last year. The SEC hasn’t announced any enforcement actions in of which case.

An SEC investigation doesn’t always result in enforcement. The agency looked into a product buyback program by the vegan mayo maker Hampton Creek nevertheless closed of which inquiry This specific year.

William Alden is actually a business reporter for BuzzFeed News in addition to also is actually based in San Francisco. Alden covers the technology industry.

Contact William Alden at [email protected]

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