SEC settles first-of-kind security swap case

The Securities and Exchange Commission has settled charges against Equidate, a private-company share marketplace, for its failure to register security-based swaps that were sold online to shareholders in pre-IPO companies.

The San Francisco-based firm’s platform provided liquidity for employees of private, growth-stage tech companies and others holding restricted shares of their stock.

The case is the first involving shareholders of pre-IPO companies seeking to monetize their existing shares through contracts involving prospective investors in those companies, a source familiar with the matter told pfm.

“Equidate essentially matched those shareholders with people who wanted to invest in the potential economic return on those pre-IPO shares,” the SEC said.

It conducted transactions through contracts that its subsidiary entered into with the shareholders and investors, and payment provisions were triggered by mergers, acquisitions or IPOs involving the underlying company.

But Equidate never filed a registration statement for the swaps, nor sold them through a national securities exchange, as required by federal law.

“Market participants are free to capitalize on the growth of private technology companies in the Silicon Valley or elsewhere, but laws must be followed to ensure security-based swaps are registered and sold through platforms where investors have full disclosure and protections,” said Jina Choi, director of the regulator’s San Francisco regional office.

Equidate neither admitted nor denied the findings, and agreed to pay an $80,000 penalty. It stopped offering and selling security-based swaps in December 2015 as a result of the investigation.

The risks of investing in direct secondaries for both institutional and individual investors was highlighted by SEC chairwoman Mary Jo White in a speech earlier this year. White said secondary liquidity for private investors was being “attended to” by the agency.