The announcement that San Francisco private company Hampton Creek faces an SEC inquiry related to their alleged “buyback” program of vegan mayo comes as no shock. See reporting on Bloomberg. As soon as the facts were initially reported it seemed only a matter of time until the regulators, who have been looking for a poster child (or rather, a whole class of poster children) of private company enforcement in the Bay Area, swooped in.

Indeed, (if the facts as reported are true) this would not be the first time that a company arranged transactions  with related parties (allegedly in this case, contractors) in an effort to boost revenue. The key issue will be what disclosures were made to the company’s VC investors about the program and it’s impact on the company’s financials. Our guess is that the investors were probably not looped in sufficiently for the SEC’s taste, though the full details have yet to emerge.

The SEC investigation into Hampton Creek is remarkable only because of the relatively small size of the company and the sophisticated nature of its investors. Though it has “unicorn aspirations” in funding rounds currently underway, it has not yet achieved a billion dollar valuation and reportedly has annual revenues below $100 million. See The Real Hustle Behind Hampton Creek’s Buy-Up Scheme. At the time of the alleged buyback program, however, the $77,000 in buybacks represented more than 10% of sales revenue. This amount, if proven, almost certainly meets the materiality threshold for a Rule 10b-5 violation if investor disclosures were lacking.

But who are those investors?  When the investors are sophisticated venture capitalists with billions of dollars in assets, as here, should the materiality threshold be reconsidered? Though $77,000 seems like a lot of money to many, for several of those investing in Hampton Creek, the words “pocket change” might be more apt. The SEC’s need to cast these uber-wealthy and sophisticated investors in the “victim” role in private company inquiries like this will continue to raise these new and interesting issues on the cutting edge of securities enforcement. After all, the securities laws were written with public companies, and the protection of “average joe” investors, in mind. When employee investors are not a part of the issue (as discussed more fully in my last post Private Company Employee Stock Sales Highlight Hidden Dangers of Compliance Failures) the “square peg, round hole” nature of private company SEC enforcement becomes ever more apparent. However, I’m certain this will not deter the SEC from this or other private company inquiries—making the need for private company compliance ever paramount.