For the first time, a federal court has held that the whistleblower protection rules of the US Securities and Exchange Commission (SEC or Commission) extend to a company's outside investors. In Securities and Exchange Commission v. Collector's Coffee, Inc. (d/b/a Collectors Café), 19-cv-04355, the US District Court for the Southern District of New York recently found that a company and its founder violated Rule 21F-17 of the Securities Exchange Act of 1934 (Exchange Act) by requiring investors to adhere to provisions in certain agreements that limited the investors' ability to share information with regulators or other third-parties. While this is the first time a federal court has issued a ruling on this topic, the SEC has previously brought similar charges for attempting to impede an investor from communicating possible securities violations to regulators in Securities and Exchange Commission v. Vaccarelli et al., 17-cv-1471 (D. Conn., filed Aug. 31, 2017), though that action was stayed pending the outcome of a parallel criminal proceeding and the parties are now in settlement discussions.

While it remains to be seen whether the court's decision in Collector's Coffee will be reviewed by the United States Court of Appeals for the Second Circuit, Collector's Coffee should serve as a cautionary note concerning the terms of agreements with outside investors, including the relevant confidentiality obligations therein and the scope of any included "carve outs" to those...

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