With Zenefits Settlement Award SEC Demonstrates Continued Commitment to “Unicorn” Scrutiny Despite Administration Change: Same Old Sheriff in Town

10/31/2017 Articles

Last week the SEC announced it had reached an agreement with privately-held company Zenefits, and its co-founder and former CEO Parker Conrad, to settle allegations that Zenefits materially misled Series B and C investors. The parties agreed to settle for over a combined $980,000 (Zenefits agreed to pay $450,000, with Conrad responsible for the balance). This appears to be a first-of-its-kind SEC enforcement action against a privately-held company, reflecting this ongoing enforcement priority for the agency in Silicon Valley.

As we previously reported, Zenefits provides Human Resources and health care brokerage support to small businesses across the country, and was once valued at $4.5 billion dollars. The company ran into trouble after a November 2015 report revealed that Zenefits failed to ensure that those of its employees acting as health insurance brokers were licensed to do so. Because Zenefits operated in all 50 states, it routinely had brokers assigned to projects for clients in states in which those brokers weren’t licensed to sell health insurance. Further investigation revealed that the company even created a special software program that let employees in California skip the mandatory 52 hour training sessions required for state certification. The company released a full disclosure of its compliance issues in February 2016.

The SEC settlement agreement alleges that, when Zenefits raised its Series B round of funding in June 2014 and Series C round of funding in May 2015, the company and Conrad as CEO materially mislead investors about the scope and existence of the company’s licensing violations. The SEC further alleged that after Zenefits disclosed its compliance problems in February 2016, those investors lowered their internal valuations of their investments in Zenefits. Neither the company nor Conrad admitted wrongdoing in the settlement.

The SEC-private company settlement is unprecedented and reflective of the SEC’s new focus on privately-held “unicorns,” or companies valued over $1 billion, announced in a March 2016 speech by previous SEC Chairwoman Mary Jo White. Despite the agency’s limited enforcement power in the private market, premised on the idea that “sophisticated investors do not need the protections offered by the robust mandatory disclosure provisions of the 1933 Securities Act,” the growth and complexities of the private investment market in Silicon Valley has attracted the agency’s watchful eye. The Zenefits settlement is a signal to current and future “unicorns” that the agency is watching their fundraising behavior and is willing to police private transactions, despite the change in administrations.

In addition to the SEC settlement, Zenefits has also settled claims for operating without a license with state regulators in Arizona, California, Delaware, Massachusetts, Minnesota, New Jersey, South Carolina, Tennessee, Texas, and Washington, totaling more than $11,000,000 in monetary sanctions.