SEC Launches Probe into Derivatives Trading Based on Pre-IPO Employee and Investor Shares

The SEC announced that it is investigating several transactions where investment firms have traded derivatives in hot pre-IPO companies that are based on employees and investors selling rights to appreciation in their equity. While secondary markets for such shares are not illegal, the SEC is concerned about fees for these securities and claims by the packagers about what they are selling. Because many of these firms release limited financial information, the field can be ripe for fraud. Employees may also be violating company policies at some firms by agreeing to trades. The investigation does not focus on established secondary markets, such as the NASDAQ National Private Market, which allows firms to allow employees to sell their equity investments on a regulated exchange.