Private Equity Firm Must Offer Rescission for Misleading Investors about Portfolio Company

The SEC sanctioned a private equity fund sponsor and its principals for making misleading statements about an underlying portfolio company. According to the SEC, rather than pass information directly from the issuer, the respondents “took full control of the sales campaign” for the offering and made several misstatements about the issuer’s customers, prospects, and pipeline. The firm had formed two funds – one that aggregated qualified purchasers and one that aggregated accredited investors – for investment in the issuer because the issuer only permitted direct investments of greater than $2 Million. The respondents agreed to offer rescission to investors, appoint an independent compliance consultant, and pay over $1 Million in penalties.

OUR TAKE: Private equity firms always had to consider the anti-fraud rules. However, they have a higher standard of care (fiduciary) and a much greater enforcement risk now that they are registered with the SEC.

http://www.sec.gov/litigation/admin/2012/33-9362.pdf