U.S. SEC's Piwowar Warns That 'SAFE' Investments May Not Be So SafeU.S. SEC's Piwowar Warns That 'SAFE' Investments May Not Be So Safe

By Sarah N. Lynch

WASHINGTON, May 9 (Reuters) - A U.S. securities regulator iswarning retail investors to tread carefully before putting moneyinto a risky new type of start-up financing vehicle that maynever provide a return on their investment.

In a speech to state securities regulators on Tuesday,Securities and Exchange Commission member Mike Piwowar, aRepublican, said the SEC plans to release a new bulletin warningabout the risks of investing in "simple agreement for futureequity" instruments, also known as "SAFE" deals.

SAFEs were developed in Silicon Valley and are targetedtoward venture capitalists. The instruments let them purchasethe opportunity to become future equity holders in a company, ifcertain events are triggered such as the company goes public orraises a substantial amount of funds.

According to an academic paper published in the Virginia LawReview Online late last year, SAFEs have a number of riskyfeatures. While they resemble convertible notes, they do notaccrue interest. They also do not pay dividends and theirshareholders are not granted voting rights.

Although SAFEs are designed for sophisticated investors,they are increasingly being sold to retail investors throughcrowdfunding offers, which help small companies raise up to $1million from average investors.

"They are not securities with which many retail investorsare well acquainted," Piwowar said in prepared remarks."Securities marketed as 'safe' or 'simple' ought to be justthat."

It is unclear what the SEC may do to police potentiallymisleading disclosures surrounding SAFEs, besides issuingwarnings.

Last week, Piwowar stepped aside as acting SEC chair afterJay Clayton was sworn in as the new head of the agency. Aschairman, Clayton will set the SEC's agenda and priorities.

In addition to warning about SAFEs, Piwowar also revealedthat prior to stepping down as acting chairman, he also askedstaff to craft new rules targeting auditor independence andlending.

Accounting firms currently cannot audit the books ofcorporate clients that are at least 10 percent owned by a bankor firm that lent money to the auditors.

The rule is designed to prevent conflicts and keep auditorsobjective. But Piwowar said it makes no sense for mutual funds,whose shares are owned by many individual investors.

Piwowar said he asked for reforms to "address unnecessarycompliance issues" for asset managers.

Whether or not Clayton will continue that work remains to beseen.(Reporting by Sarah N. Lynch; Editing by Dan Grebler)