"The SEC is looking at late-stage companies with the same lens that it has been using to look at public companies from an internal controls and disclosure standpoint," said Susan Resley, who worked in the SEC’s Division of Enforcement and is now a partner at law firm Morgan Lewis & Bockius LLP.
OrderUp ’Shock’
During the early stages of a startup, founders often provide updates as requested, not wanting to alienate their first backers. If the startup grows, it forms a board of directors who get most important information. Early shareholders can retain access if they reserved a board seat as a term of their first investment.
But being early doesn’t guarantee information flows, as Mu Sigma and a more recent lawsuit involving OrderUp show. Some of the earliest backers of OrderUp sued the company and its founder Christopher Jeffery in May saying they didn’t have full access and were intentionally misled into believing the online restaurant delivery company was in trouble.
Plaintiff Charles Lipson said he and other investors were in "shock" following a "sudden dire forecast" that differed significantly from updates the previous month. Based on those details, and mounting pressure from Jeffrey, the group sold back their shares to the company in April 2014, four months before Steve Case’s Revolution Ventures invested $7 million.
Had they had accurate financial, M&A disclosures and other information, Lipson and the other investors would have held onto to the stock and made millions when Groupon Inc. acquired OrderUp for at least $69 million a year later, according to the suit.
"Had the investors known the true facts, which Jeffrey deliberately concealed from them, they would never have tendered their notes," the suit stated. Jeffrey did not respond to a request for comment.