A Wells notice is not a final determination of guilt or wrongdoing, meaning that the recipient has the chance to respond and make a case before any administrative action is initiated. The Wells notice procedure, though, is a clue that the SEC is considering taking action, and how it turns out might have a big impact on the recipient and any linked investors.
Consider the case where the SEC is looking into possible insider trading offenses at a publicly traded business. The SEC suspects that one of the company’s officials may have engaged in prohibited stock trading before a significant announcement was made based on non-public information.
The SEC would issue a Wells notice to the suspected employee in this situation, alerting the person to the inquiry against trading violations and giving the individual a chance to refute the charges before deciding whether to take enforcement action. So, what happens after a Wells notice is issued? Normally, the Wells notice would list the precise charges against the person and provide a deadline to reply to the SEC, as stated in the steps below.
Here’s how the Wells notice process typically works:
Investigation
To ascertain whether there is sufficient justification for taking enforcement action, the SEC looks into potential violations of securities laws.
Notification
The SEC will issue a Wells notice to the person or business in question if it decides that there is enough proof of potential misconduct. The Wells notice will normally list the particular accusations and provide the addressee a chance to reply, known as a “Wells response.”
For instance, Coinbase received a Wells notice in March 2023 from the SEC, who identified potential securities law violations in relation to some of its listed digital assets, the Coinbase Earn staking service, Coinbase Prime and Coinbase Wallet. The SEC issued the Wells notice after conducting a preliminary investigation.
Response
The Wells notice receiver may reply in writing or ask the SEC for a meeting in person to discuss the charges and give a defense. This response could contain arguments or supporting data to back up the defense, as well as any pertinent mitigating circumstances.
Decision
The SEC will decide whether to move further with enforcement action based on the response and any other data gathered. The SEC may file a complaint in federal court seeking fines or other remedies if it decides to pursue legal action or charges of securities fraud.