By: Lori Smith, Michael Psathas and Jamie Wang

On March 12, 2018, the US Securities and Exchange Commission (SEC) brought an action against Credit Karma, Inc., a Silicon Valley-based fintech company, for issuing stock options to its employees in violation of US securities laws. The action resulted in a cease and desist order and settlement imposing a $160,000 penalty on the company. Like so many other private companies, Credit Karma sought to rely on Rule 701 promulgated under the Securities Act to provide equity-based compensation to its employees. However, in this case, the company failed to comply with certain disclosure requirements (out of confidentiality concerns) including providing financial statements and risk disclosures after the aggregate sales price of the stock options issued exceeded $5 million in a 12-month period. (more…)