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SEC Looking at Employee Access to Private Tech Financials

When a former Domo employee in December won a legal fight for access to financial statements of the private software company, it highlighted an obscure Delaware law that gives investors the right to financial information of private tech firms in which they hold stock.

That law applies only to Delaware-incorporated companies. But federal securities law gives employees of any U.S. private company a right to detailed financial information, as long as their employer has issued more than $5 million in stock awards in a year. And the Securities and Exchange Commission in recent months has been investigating whether major private tech companies follow the rule. It’s part of an increased focus on private tech securities instigated by the agency’s former chairwoman, Mary Jo White.

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The SEC has in recent years increased its focus on private tech securities, signaled in a speech given last year by Ms. White. In the last two years, the SEC has also sent letters to private tech companies to determine whether they were properly disclosing their fundraisings in filings, according to Sam Angus, an attorney at Fenwick & West, but that effort does not appear to have resulted in much further enforcement. Many private companies do not file documents with the SEC when they close a fundraising round, relying on a loose interpretation of the law and calculating that the consequences will not be severe, Mr. Angus said. The agency has also announced enforcement actions against firms involved in secondary market sales of private tech stock and reportedly looked into how mutual funds are valuing private tech shares. 

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Attorneys described the inquiries as a broad sweep aimed at so-called “unicorn” companies.