The National Venture Capital Association (NVCA) has continued its commitment to standardizing venture financing documents by incorporating new language into its form confidential disclosure agreement (CDA) aimed at addressing the emerging “shadow trading” issue in light of the SEC v. Panuwat case. This update should help to standardize shadow trading carveouts in CDAs, which have initially varied in their adoption and have sometimes been met with resistance by counterparties based on a misunderstanding of the Panuwat holding.
Understanding Shadow Trading
The term “shadow trading” gained prominence following the SEC’s successful insider trading case against Matthew Panuwat. In SEC v. Panuwat, the SEC alleged that Panuwat, a business development executive at Medivation, Inc., used confidential information about Medivation’s impending acquisition by Pfizer to purchase call options in Incyte Corporation, another biopharmaceutical company. Panuwat made these trades shortly after learning of the impending Pfizer acquisition. Following the public announcement of the Medivation acquisition, Incyte’s stock price increased, generating over $100,000 in profits for Panuwat.
This case was significant because it expanded the scope of insider trading liability beyond traditional scenarios where an individual trades in the securities of their own company (Medivation) or a direct counterparty to a transaction (Pfizer, in this instance). The SEC argued, and a jury agreed, that Panuwat breached a duty to his employer by misusing confidential information to trade in a different company’s securities, based on a “market connection” between the two firms. Despite the fact that Medivation and Incyte were not direct competitors and their pharmaceutical treatments did not share a mechanism of action or biological pathway, the SEC alleged that the two were considered “peer companies” by the investment banks advising Medivation about its strategic options. This ruling has created uncertainty for investors who routinely receive material non-public information (MNPI) about one company that could foreseeably impact the stock of another company. Notably, the District Court’s verdict in Panuwat is currently on appeal to the U.S. Court of Appeals for the Ninth Circuit, and its outcome will further shape the evolving legal landscape around this issue.
Disclaiming a Duty Not to Trade
In an effort to mitigate the risks posed by the Panuwat decision for investment funds, the NVCA has introduced new language into its model CDA. The intent of this language is to preemptively disclaim a duty for the recipient of confidential information to refrain from trading in the securities of other companies. There is no attempt to allow for trading in securities of the counterparty to the CDA. The NVCA language, which is drawn from similar language introduced by biotech investment funds after Panuwat unsuccessfully sought to dismiss the SEC’s lawsuit, reads as follows:
Investment Management Acknowledgement. Notwithstanding anything to the contrary in this Agreement, the Company recognizes that Recipient provides management services for investment funds engaged in public market and private equity investing (collectively, the “Funds”). The Company recognizes that a primary activity of certain of the Funds involves trading securities, and the Company acknowledges that, notwithstanding any other provision of this Agreement, the Recipient, its Representatives and the Funds owe no duty to the Company to refrain from the purchase or sale of securities (public or private) while aware, or on the basis, of Confidential Information, other than in securities of the Company.
This provision is intended to allow investment funds to continue their regular trading activities in other portfolio companies without fear of inadvertently violating insider trading laws under an expanded “shadow trading” theory where a duty not to trade would otherwise arise from the non-use covenant in the CDA. By explicitly acknowledging that the recipient’s primary activity involves trading and disclaiming a duty not to trade in other companies’ securities, the NVCA language aims to provide greater legal certainty and reduce potential liability for investors navigating complex information flows. However, it is important to note that this is only a disclaimer of duties arising from the CDA itself; there may be other sources of duties (e.g., if one is also a director and owes fiduciary duties to a given company) that should be considered before trading while in possession of MNPI.
NVCA Model PIPE Documents
Additionally, a working group comprised of leading venture funds and law firms, including Gibson Dunn, met recently to update the NVCA model form PIPE documents. These forms were first introduced in 2024 in an effort to standardize PIPE documentation in a manner similar to the NVCA’s very successful initiative to standardize venture financing documentation. The updated PIPE documents include the following forms:
While many funds and law firms have developed their own form of PIPE documents over the years, the highly compressed timelines for PIPE execution (often overnight) make the use of standard PIPE documents much more efficient. It allows for issuers to start with standard forms and customize as needed and for investors to quickly compare the draft documents to a known starting point and provide faster feedback. Since the forms were first introduced in 2024, we have seen rapid adoption across the industry.
To the extent that issuers or investors have comments to the NVCA CDA or PIPE forms that they would like to be addressed in future updates, please feel free to provide these comments to your Gibson Dunn contact or another member of the NVCA working group.