Tag: SEC Rules and Regulations

SEC Warns of SAFE Investment Instrument Popular in Equity Crowdfunding Campaigns

The SEC issued a bulletin warning investors about SAFE securities used in equity crowdfunding offerings.

Issuers in equity crowdfunding campaigns have offered various types of securities since it became legal to do so, such as various classes of stock, notes and instruments known as SAFE instruments.  ‘SAFE’ stands for ‘Simple Agreement for Future Equity.’

SAFEs were originally designed to be an alternative to convertible notes for early-stage technology investments.  The idea was that they would become simple, standardized vehicles for investing in very young companies without dealing with a lot the terms needed to make a convertible note or stock investment.

As the SEC points out, a SAFE is not like investing in common stock.  It is an agreement that converts into issuer securities in the event of future triggering events, such as a future investment round, an IPO, a change of control or a liquidation.

Some people seem to think of them like convertible notes.  However, convertible notes have maturity dates, among other terms.  SAFEs do not and may never convert.  SAFEs are more like derivative contracts with springing conversion based on listed events.

SAFEs have been increasing in use in the venture capital and angel investing worlds, and more recently other investors have gained some exposure and comfort with them.  However, the SEC wants investors to know that:

  • SAFEs do not represent a current equity stake in the company in which you are investing.
  • SAFEs may only convert to equity if certain triggering events occur.
  • Depending on its terms, a SAFE may not be triggered.

To the people who have seen them before, none of this is a surprise.  To a new investor, the SEC is concerned that these terms may be unexpected.  As the SEC said:

SAFEs were developed in Silicon Valley as a way for venture capital investors to quickly invest in a hot startup without burdening the startup with the more labored negotiations an equity offering may entail.  Oftentimes, for the venture capital investor, it was more important to get the investment opportunity, and possible future opportunities, with the startup than it was to protect the relatively small investment represented by the SAFE.  In addition, the various mechanisms of the SAFE, from the triggering events to the conversion terms, were designed to best operate in the context of a fast growing startup likely to need and attract additional capital from sophisticated venture capital investors.  This may or may not be the case with the crowdfunding investment opportunity you are exploring.

SAFEs can make a lot of sense to particular parties in particular deals, but investors such as crowdfunding investors should make sure to understand exactly what rights they have in what they are purchasing.

SEC issues warning about SAFE instruments in equity crowdfunding campaigns.
SEC issues warning about SAFE instruments in equity crowdfunding campaigns.

SEC Issues Alert and Addresses Weaknesses of Investment Advisor Plans in Disruptions Caused By Weather

Following Hurricane Sandy, the SEC contacted investment advisors in the Northeast to try to understand how they were impacted by the storm.*  The SEC just released its findings, which it believes will help improve responses and reduce recovery time after “significant large scale events.”

Among the weaknesses noted by the SEC in certain advisors’ “business continuity plans,” or BCPs, were:

  • Some BCPs that did not adequately address and anticipate widespread events, such as adequate plans addressing situations where key personnel were unable to work from home or other remote locations.
  • Some advisers did not have geographically diverse office locations, and many smaller advisers had fewer geographically dispersed staff.
  • Some advisers did not evaluate the BCPs of their service providers.
  • Some advisers did not engage service providers to ensure that back-up servers functioned properly and relied solely on self-maintenance.
  • Some advisers did not adequately plan how to contact and deploy employees during a crisis, and inconsistently maintained communications with clients and employees.
  • Some advisers inadequately tested their BCPs relative to their advisory businesses.
  • Some advisers opted not to conduct certain critical tests because vendors provided disincentives or charged for testing.

The alert did not distinguish between large and small advisors or how appropriate BCP provisions addressing these weaknesses would be for smaller firms.  Geographic diversity is the most obvious example in that case.

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*Investment advisors are required to implement these types of BCPs under the SEC’s interpretation of Rule 206(4)-7.