SEC
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The SEC and the DOJ just charged this startup founder with fraud, saying he lied to Tiger and others
Today, both the U.S. Department of Justice and the Securities and Exchange Commission charged Manish Lachwani, co-founder of mobile app testing company HeadSpin, with fraud. The SEC says he violated antifraud provisions, and the civil penalties it’s seeking include a permanent injunction, a conduct-based injunction, and to bar him for serving as a corporate executive or board member.
The DOJ, which arrested Lachwani earlier, has accused him of one count of wire fraud and one count of securities fraud, and the associated penalties if he’s found guilty are more harsh, including, for wire fraud, a maximum sentence of 20 years in prison and a fine of $250,000. If he’s found guilty of securities fraud, he faces a maximum sentence of 20 years in prison and a fine of $5,000,000.
Both the the SEC and the DOJ say Lachwani — who led the six-year-old company as CEO until May of last year — defrauded investors out of $80 million by falsely claiming that HeadSpin had “achieved strong and consistent growth in acquiring customers and generating revenue” when he was pitching its Series C round to potential backers.
By the SEC’s telling, his fabrications were designed to help secure the round at a so-called unicorn valuation. That apparent plan worked, too, with Palo Alto-based HeadSpin attracting coverage in Forbes in February of last year after Dell Technologies Capital, Iconiq Capital and Tiger Global provided the company with $60 million in Series C funding at a $1.16 billion valuation. Forbes reported at the time that the valuation was double the valuation investors assigned HeadSpin when it closed its Series B round in October 2018.
The SEC also says that Lachwani was looking to enrich himself, saying he did so “by selling $2.5 million of his HeadSpin shares in a fundraising round during which he made misrepresentations to an existing HeadSpin investor.” (It isn’t clear from its complaint whether the SEC is referring to the Series C or an earlier round.)
The two federal complaints suggest that Lachwani’s alleged scheming to inflate HeadSpin’s valuation dates back to “at least 2018,” and the DOJ says it picked up momentum when the company was fundraising in late 2019.
More specifically, the DOJ complaint alleges that “in materials and presentations to potential investors, Lachwani reported false revenue and overstated key financial metrics of the company … he maintained control over operations, sales, and record-keeping, including invoicing, and he was the final decision-maker on what revenue was booked and included in the company’s financial records.”
In the investigation that led to the DOJ’s charges, the FBI discovered “multiple examples” of Lachwani “instructing employees to include revenue from potential customers that inquired but did not engage HeadSpin, from past customers who no longer did business with HeadSpin, and from existing customers whose business was far less than the reported revenue,” says the department.
How far off were these collective calculations? The complaint says that ultimately, Lachwani “provided investors false information that overstated HeadSpin’s annual recurring revenue … by approximately $51 million to $55 million.”
According to the complaint, Lachwani’s fraud unraveled after the company’s board of directors conducted an internal investigation and revised HeadSpin’s valuation down from $1.1 billion to $300 million. Indeed, in August of last year, The Information reported that the company was planning to lower the value of its Series C stock by nearly 80%.
The outlet reported at the time that Lachwani had already been replaced by another executive. That person, according to LinkedIn, is Rajeev Butani, who joined HeadSpin as its chief sales officer early last year.
Nikesh Arora, a former SoftBank president and the current CEO and chairman of Palo Alto Networks, helped lead the internal review as a then-director on the board of HeadSpin, said The Information.
The SEC says its investigation is continuing. The DOJ similarly notes in its announcement that “a complaint merely alleges that crimes have been committed, and all defendants are presumed innocent until proven guilty beyond a reasonable doubt.”
Either way, the outlook doesn’t look very promising right now for Lachwani, who, according to Forbes, previously sold a mobile cloud business to Google and wound up co-founding HeadSpin after Yahoo co-founder Jerry Yang introduced him to Brien Colwell, a former Palantir and Quora engineer who was working at the time on a different startup.
Colwell remains with HeadSpin as its CTO. He has not been named in either the SEC or the DOJ’s complaints relating to HeadSpin.
The company itself, which says it has been cooperating with the government’s investigation, was also not charged.
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Robinhood is going public and we’re very excited
It’s a sweltering day here in New York City, and that means Wall Street is on fire, and so is Robinhood, apparently. The popular stock trading app officially filed its Form S-1 with the SEC a few hours ago to go public, where it will trade under the ticker “HOOD.”
The Equity crew has been yammering about Robinhood for years now, and we have been chomping at the bit to see those S-1 results for what feels like ages. Well, we finally got the numbers, we chomped that bit (or at least Alex and Danny did, since Natasha went on vacation about 15 minutes before the IPO hit the wires), and so here’s a special Equity Shot to talk about all the highlights.
We talked about so much in an itsy-bitsy 15-minute episode: crazy revenue growth, crazy revenue concentration from two major sources, regulatory hurdles that the company has been clearing up, better financials with a bit of nuance on the company’s Q1 finances, and the company’s special plan for its IPO.
Wowza.
Here’s what we got up to:
- Historical growth and profitability.
- Revenue mix and revenue concentration, along with constituent concerns.
- The importance of options-related incomes for the company.
- Dogecoin.
- Why the company’s adjusted income may help it assuage investors who have their eyes pop out of their skulls when they see its GAAP Q1 2021 results.
And a lot more. Of course, if you hate Robinhood, we will be back with our normally scheduled Friday episode of Equity tomorrow.
Equity drops every Monday at 7:00 a.m. PDT, Wednesday, and Friday morning at 7:00 a.m. PDT, so subscribe to us on Apple Podcasts, Overcast, Spotify and all the casts.
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UiPath files confidential IPO paperwork with SEC
UiPath, the robotic process automation startup that has been growing like gangbusters, filed confidential paperwork with the SEC today ahead of a potential IPO.
“UiPath, Inc. today announced that it has submitted a draft registration statement on a confidential basis to the U.S. Securities and Exchange Commission (the “SEC”) for a proposed public offering of its Class A common stock. The number of shares of Class A common stock to be sold and the price range for the proposed offering have not yet been determined. UiPath intends to commence the public offering following completion of the SEC review process, subject to market and other conditions,” the company said in a statement.
The company has raised more than $1.2 billion from investors like Accel, CapitalG, Sequoia and others. Its biggest raise was $568 million led by Coatue on an impressive $7 billion valuation in April 2019. It raised another $225 million led by Alkeon Capital last July when its valuation soared to $10.2 billion.
At the time of the July raise, CEO and co-founder Daniel Dines did not shy away from the idea of an IPO, telling me:
We’re evaluating the market conditions and I wouldn’t say this to be vague, but we haven’t chosen a day that says on this day we’re going public. We’re really in the mindset that says we should be prepared when the market is ready, and I wouldn’t be surprised if that’s in the next 12-18 months.
This definitely falls within that window. RPA helps companies take highly repetitive manual tasks and automate them. So for example, it could pull a number from an invoice, fill in a number in a spreadsheet and send an email to accounts payable, all without a human touching it.
It is a technology that has great appeal right now because it enables companies to take advantage of automation without ripping and replacing their legacy systems. While the company has raised a ton of money, and seen its valuation take off, it will be interesting to see if it will get the same positive reception as companies like Airbnb, C3.ai and Snowflake.
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Robinhood revives checking with new debit card & 2% interest
This time it actually has insurance. Zero-fee stock-trading app Robinhood is launching Cash Management, a new feature that earns users 2.05% APY interest on uninvested money in their account with the ability to spend it through a special Mastercard debit card. The waitlist opens today in the U.S. with the first users to be admitted soon. “If you have $5,000 in your account while you’re thinking about what to invest in, you’d have an extra $105 at the end of the year” thanks to Robinhood Cash Management’s interest, co-CEO Baiju Bhatt tells me.
The $7.6 billion-valuation startup first attempted something similar in December with Robinhood Checking, promising a stunningly tall 3% interest rate. But the product turned into a PR disaster when the Securities Investor Protection Corporation that was supposed to insure users’ funds declared Robinhood ineligible, with its CEO noting it had never agreed to cover checking accounts. That led Robinhood to shelve the feature, scrub its site of any mention of Checking and apologize.
Robinhood Cash Management’s debit cards, featuring the same design from the scrapped Checking launch
Now despite Bhatt claiming “Cash Management is a brand new program built from the ground up,” it will offer the same debit card design and network of 75,000 ATMs. It’s even using an identical promo image for its half-translucent green, black, white and American flag debit card designs. But each user’s funds will be covered by the Federal Deposit Insurance Corporation up to $1.25 million. To get around the $250,000 FDIC limit per bank, Robinhood is partnering with six banks that it will spread a user’s cash across as necessary to bundle up to that sum. Robinhood earns money by taking a chunk of the interchange fees from transactions on its debit card run in partnership with Sutton Bank, and from a fee paid by the six banks cash gets swept into.
To help it avoid further regulatory missteps, Robinhood yesterday added former SEC commissioner Dan Gallagher as its first independent board member. He joins the startup’s recently hired COO, CFO, chief compliance officer, VP of Risk & Compliance and VP of Legal & Regulatory to bring more supervision to Robinhood.
Robinhood co-founders and co-CEOs (from left): Baiju Bhatt and Vlad Tenev
The opt-in feature prevents users from missing out on earning interest if they keep money in their Robinhood account, and makes funds from stock sales quickly accessible via the debit card for spending or withdrawal. That convenience could give Robinhood an edge as its loses one if its key differentiators. Last week, its top incumbent competitors Charles Schwab, E*Trade and AmeriTrade all dropped their $4.95 to $6.95 fees on stock trades to match Robinhood’s free offering. That makes Cash Management and Robinhood Crypto even more critical to its continued growth. That’s necessary to justify the $7.6 billion valuation from its recent $323 million Series E raise led by DST Global that brings it to $860 million in total funding.
How Robinhood Cash Management works
“We decided the best thing to do is giving people the peace of mind that their money is held at these banks, while trying to pay back the very best interest rates,” Bhatt tells me. [Disclosure: I know Robinhood’s co-founders from college.]
With Cash Management, once users deposit cash into the Robinhood accounts and opt into the program, they’re eligible to earn interest. Any balance on their account, including returns from sales of securities or cryptocurrencies, is swept into the FDIC-insured partner banks via Promontory’s debit suite system. Those banks include Wells Fargo, HSBC, Goldman Sachs, Citibank, U.S. Bank and Bank of Baroda. If one of those banks folds, the FDIC will make customers whole for up to $250,000, equaling $1.25 million across all six working with Robinhood. Users are able to opt out of specific banks.
There the cash earns a variable annual percentage yield (APY) that may fluctuate based on market factors like the Fed fund’s rate. Currently Robinhood offers a 2.05% APY, but refused to compare it to competitors. However, it ranks relatively high amongst popular banking options like these, according to Bankrate, especially given it has no minimum balance:
- BMO Harris – 2.20% APY, $5,000 Minimum Balance
- BBVA – 2.15% APY, $10,000 Minimum Balance
- UFB Direct – 2.15% APY, $25,000 Minimum Balance
- Sallie Mae – 2.00% APY, No Minimum Balance
- State Farm Bank – 2.00% APY, No Minimum Balance
- TIAA Bank – 2.00% APY, $500 Minimum Balance
- Wells Fargo – 1.95% APY, $25,000 Minimum Balance
- Investors eAccess – 1.90% APY, No Minimum Balance
Robinhood Cash Management will also compete directly with Wealthfront Cash that launched in February and now offers 2.07% APY interest, but lacks a debit card or ATMs. Betterment Checking & Savings does provide a Visa debit card, but its current APY is 1.79%.
Cash Management users can select from the four debit card styles that are accepted anywhere that takes Mastercard, plus 75,000 ATMs. It also works with Apple Pay, Google Pay and Samsung Pay. There are no foreign transaction fees, maintenance fees or account minimum.
A variety of new Cash Management features are being added to the Robinhood app. You can get notifications and emails for all your transactions, and lock the card from your phone if you suspect fraud. You also can opt for location protection, which alerts you if your card is used too far away from your phone. An in-app ATM finder shows users where they can get cash without a fee.
“Partially we want this to be a good business but we also want this to be a big part of customer’s lives,” says Robinhood VP of product Josh Elman. Instead of nickel and diming Cash Management users, the startup monetizes by charging its partners. But the bigger strategy is to get more users on Robinhood in hopes some will subscribe to Robinhood Gold. There users pay a variable monthly fee depending on how much they want to borrow from the startup to trade on margin.
Robinhood co-CEO Baiju Bhatt speaks with TechCrunch’s Josh Constine at Disrupt SF 2018
“I think the main takeaway over the last year has been that since last December, our company has been very committed to building an organization that has a really strong culture [of compliance]” Bhatt concludes. “We’ve grown the leadership team over the last year with experience from risk and finance backgrounds. We think that’s reflected pretty clearly in how Robinhood operates and the diligence that went into building this new program.”
No longer a scrappy startup, the budding fintech giant must now grapple with much greater regulatory scrutiny. With more than 6 million users, the SEC won’t stand for it putting people’s finances in in jeopardy.
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IEX’s Katsuyama is no flash in the pan
When you watch a commercial for one of the major stock exchanges, you are welcomed into a world of fast-moving, slick images full of glistening buildings, lush crops and happy people. They are typically interspersed with shots of intrepid executives veering out over the horizon as if to say, “I’ve got a long-term vision, and the exchange where my stock is listed is a valuable partner in achieving my goals.” It’s all very reassuring and stylish. But there’s another side to the story.
I have been educated about the realities of today’s stock exchange universe through recent visits with Brad Katsuyama, co-founder and CEO of IEX (a.k.a. The Investors Exchange). If Katsuyama’s name rings a bell, and you don’t work on Wall Street, it’s likely because you remember him as the protagonist of Michael Lewis’s 2014 best-seller, Flash Boys: A Wall Street Revolt, which explored high-frequency trading (HFT) and made the case that the stock market was rigged, really badly.
Five years later, some of the worst practices Lewis highlighted are things of the past, and there are several attributes of the American equity markets that are widely admired around the world. In many ways, though, the realities of stock trading have gotten more unseemly, thanks to sophisticated trading technologies (e.g., microwave radio transmissions that can carry information at almost the speed of light), and pitched battles among the exchanges, investors and regulators over issues including the rebates stock exchanges pay to attract investors’ orders and the price of market data charged by the exchanges.
I don’t claim to be an expert on the inner workings of the stock market, but I do know this: Likening the life cycle of a trade to sausage-making is an insult to kielbasa. More than ever, trading is an arcane, highly technical and bewildering part of our broader economic infrastructure, which is just the way many industry participants like it: Nothing to see here, folks.
Meanwhile, Katsuyama, company president Ronan Ryan and the IEX team have turned IEX into the eighth largest stock exchange company, globally, by notional value traded, and have transformed the concept of a “speed bump” into a mainstream exchange feature.
Brad Katsuyama. Image by Joshua Blackburn via IEX Trading
Despite these and other accomplishments, IEX finds itself in the middle of a vicious battle with powerful incumbents that seem increasingly emboldened to use their muscle in Washington, D.C. What’s more, new entrants, such as The Long-Term Stock Exchange and Members Exchange, are gearing up to enter the fray in US equities, while global exchanges such as the Hong Kong Stock Exchange seek to bulk up by making audacious moves like attempting to acquire the venerable London Stock Exchange.
But when you sell such distinct advantages to one group that really can only benefit from that, it leads to the question of why anyone would want to trade on that market. It’s like walking into a playing field where you know that the deck is stacked against you.
As my discussion with Katsuyama reveals, IEX may have taken some punches in carving out a position for itself in this high-stakes war characterized by cutting-edge technology and size. However, the IEX team remains girded for battle and confident that it can continue to make headway in offering a fair and transparent option for market participants over the long term.
Gregg Schoenberg: Given Flash Boys and the attention it generated for you on Main Street, I’d like to establish something upfront. Does IEX exist for the asset manager, the individual, or both?
Brad Katsuyama: We exist primarily for the asset manager, and helping them helps the individual. We’re one step removed from the individual, and part of that is due to regulation. Only brokers can connect to exchanges, and the asset manager connects to the broker.
Schoenberg: To put a finer point on it, you believe in fairness and being the good guy. But you are not Robinhood. You are a capitalist.
Katsuyama: Yes, but we want to make money fairly. Actually, we thought initially about starting the business as a nonprofit, But once we laid out all the people we would need to convince to work for us, we realized it would’ve been hard for us to attract the skill sets needed as a nonprofit.
Schoenberg: Do you believe that the US equity market today primarily serves investors or traders?
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How to delay your Form Ds (or not file them at all)
Building a startup is incredibly tough. There are the constant ups and downs, the moments of sheer ambiguity and terror. And so, few moments in a startup’s life are as triumphant — and crystal clear — as closing a round of funding. Yes, yes, raising venture capital shouldn’t be celebrated as a milestone, and the focus should always be on product and users … but it just feels so damn good sometimes just to feel that sense of euphoria: I built something, and now others are giving me potentially millions of dollars to shoot for the stars.
Unfortunately, that clarity is increasingly vanishing. First, “closing a round” is rarely as sharp a distinction as it used to be. Seed rounds (and even later-stage rounds) are often raised over extended periods of time, with many partial closings conducted as new angels and seed funds come to the (cap) table.
Then there is also the growing disconnect between raising capital and the actual announcement of that fundraise. Founders are trying to remain under stealth for longer periods of time to hide from competitors, and they want to message their news in a careful manner.
All of which means that the Form D filed with the Securities and Exchange Commission when closing an exempt fundraise (aka venture rounds) is no longer as simple a process as it once was.
Lawyers will state publicly that startups should always file their legally mandatory paperwork (that’s probably also a good rule for life). The reality, though, is pretty much the opposite when you talk to startup attorneys in private.
Here’s the secret about Form D filings today: the norms in Silicon Valley have changed, and Form D filings are often filed late, not at all, and many startups are advised to lie low in the hopes of avoiding stricter SEC scrutiny. What was once a fait accompli is now a deliberative process, with important decision points for founders.
Extra Crunch contacted about two dozen startup attorneys, from the biggest firms in the industry to the one-person shops with a shingle out front. Getting straight answers here has been tough, if only because no lawyer really wants to say out loud that they actively recommend their clients violate government regulations (there is that whole law license thing, which apparently lawyers care about).
Practically all of these conversations were done off-the-record and not for attribution, since as one lawyer said, “the last thing I need is the damn SEC sending our firm a nastygram.” Other firms wholly swore us off from even discussing their Form D cultures.
Full disclosure: I am not an attorney, and while I had attorneys read over this draft, this does not constitute legal advice, particularly specific legal advice for your specific startup and situation. Get inspiration from this analysis, but always (really, truly, always) consult qualified legal counsel to answer legal questions about your startup.
With that said, here is our guide to the new world of venture capital securities filings.
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Jina Choi, SF Regional Director of the SEC, is coming to Disrupt to talk ICOs and more
The Securities and Exchange Commission, the federal agency responsible for protecting investors and maintaining fair and orderly functioning of our securities markets, has 11 regional offices, including in Miami, New York, Boston and Chicago.
None has quite the workload as the SEC’s San Francisco regional office, where a major area of focus in recent years has been investor fraud in pre-IPO companies, particularly the many startups that in an earlier era would have either have gone public or else out of business, but which today linger as privately held outfits because there’s so much money sloshing around.
Among the companies to find themselves in the SEC’s sights in recent years is HR software outfit Zenefits and its founder, Parker Conrad; they were fined $1 million last October as part of a settlement over charges that they’d misled investors. In March, the online personal finance company Credit Karma also settled SEC charges; it had been accused of unlawfully offering securities to its employees — then failing to provide them with timely financial statements and risk disclosures.
Of course, the best-known SEC case to date has centered on the blood-testing company Theranos, which was charged with massive fraud in March, along with the company’s founder, Elizabeth Holmes, and its former president, Sunny Balwani.
Leading the charge in each of these cases and many more: Jina Choi, a graduate of Oberlin and Yale Law School who worked as a lawyer for the Justice Department in Washington before heading to San Francisco and the SEC’s enforcement division in 2000.
Five years ago, Choi was promoted to director of that office, where she has since overseen enforcement and examinations in Northern California and the Pacific Northwest, despite critics who believe the SEC should keep its eye on public companies alone. (“If no one is policing private markets, that’s a problem,” Choi said at a public forum in May.)
In an age of initial coin offerings, cryptocurrencies and mushrooming numbers of blockchain-related projects, Choi and her colleagues have their hands particularly full, so you can imagine how excited we are that Choi is coming to Disrupt to discuss some of those challenges, as well as the agency’s victories. We’re also looking forward to learning more about how decisions are made in Choi’s office and back in Washington.
If you’re interested in learning more about the SEC’s ever-evolving approach to Silicon Valley startups — and why you shouldn’t expect its interest to dissipate any time soon — you really won’t want to miss this conversation.
You can buy tickets to the show, taking place in San Francisco September 5th through September 7th, right here.
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Dear Floyd Mayweather, you’re why the SEC exists
Dear Floyd Mayweather: While perusing Facebook, I chanced across your post drumming up interest in the upcoming Stox initial coin offering (ICO). I understand your motivations in wanting to diversify your portfolio of investments, but I caution that your actions are reckless and potentially financially damaging to you and your fans. Read More
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Tesla under investigation for possible breach of securities law, WSJ reports
Tesla is under investigation by the U.S. Securities and Exchange Commission, The Wall Street Journal reported, for a possible securities law breach. What’s at issue is whether the electric vehicle company should have notified shareholders immediately following a fatal accident on May 7 that killed a Tesla Model S owner who was using Autopilot at the time of the crash. A spokesperson… Read More
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Legislation allowing ordinary American investors to invest in the shares of startups and small businesses was first introduced in the U.S. Congress in 2011. Despite bipartisan support and the approval of President Obama, it is only now becoming a reality.