SEC Is Going To Make Private Markets More Transparent
The private capital market has become a increasingly popular way for companies to raise money in the U.S. in recent decades, allowing companies to obtain funding from wealthy institutions and individuals without the regulatory burden of going public they. The number of so-called unicorns — privately held companies valued at $1 billion or more — has continued to grow even in recent times. boom in initial public offerings.
Unicorns — As of January 2022, there are more than 900 unicorns around the world. Popular former unicorns include Airbnb, Facebook and Google. Variants include a decacorn, valued at over $10 billion, and a hectocorn, valued at over $100 billion.
The SEC has begun work on a plan to require more private companies to regularly disclose information about their finances and operations, under a regulatory-setting program. semi-annual switch and people familiar with the matter. It is also considering tightening the standards that investors must meet private market access sand increase the amount of information that some non-public companies must submit to the agency.
“When they are big companies, they can have a huge impact on the lives of thousands of people with absolutely no visibility to investors, employees and unions, regulators. or their public,” said Democratic SEC Commissioner Allison Lee, who has called for transformation. “I am not interested in forcing small and medium sized companies to follow the reporting regime.”
The SEC’s push is in its early stages, but it is likely to garner stiff resistance from Silicon Valley and other sectors, such as oil and natural gas infrastructure, which rely heavily on resources. capital from private markets. The information that public companies must disclose — about managers’ earnings, business prospects, risks, and salaries — is closely guarded by private companies.
“We warn the SEC against placing an additional and unnecessary burden on private companies that could have unintended consequences,” said Bobby Franklin, chief executive officer of the National Venture Capital Association. desire”. “This segment of the US economy has driven innovation and provided new products and services that have been very beneficial during the pandemic.”
Promising young companies often get most of the money they need to grow from venture capital funds, private equity firms, and wealthy individuals. Retail retail investors must wait until a company conducts an initial public offering to participate.
Regulators and investor advocates have worried for years that the public stock and bond markets, where companies must meet the SEC’s strict disclosure requirements, are losing gradually attractive to start-ups.
They also say that an abundance of private capital has allowed many of the best startups to delay listing for years, turning the traditional IPO into little more than an opportunity for rich insiders. make money. Highlighting these concerns, two-thirds of companies have listed shares in the US by 2021 are trading below their IPO price at the end of the year.
And despite last year’s record IPO volume, private markets continue to grow. According to research firm CB Insights, there are now 959 privately held companies worth more than $1 billion, up from 513 at the end of 2020.
Federal regulation requires companies with more than 2,000 “supplied” shareholders to register their securities with the SEC and periodically disclose material information, whether or not they have conducted an IPO. But that threshold is rarely crossed because SEC rules allow an unlimited number of people to own shares in “street names” — through the same broker-dealer or investment vehicle — and be counted as a shareholder.
“The SEC has deliberately undervalued shareholders for decades,” said Tyler Gellasch, chief executive officer of the Healthy Markets Association, an investment trade group. Now, the agency is working on a proposal that would allow regulators to review such entities for a more complete shareholder tally. Its goal is to push large, private companies into the same disclosure regime that their publicly traded counterparts face.
It is unclear how many private companies may be forced to register with the SEC under the plan. In large part, that’s because regulators see little of the shareholder base of private companies.
According to data provider PitchBook, the largest US unicorn is financial services company Stripe Inc., which was most recently valued at $152 billion. It has 79 active investors. Some of them are individuals, such as billionaires Peter Thiel and Elon Musk. But others are venture capital funds, mutual funds, and private equity firms, which can pool the investments of multiple shareholders.
A recent analysis by the consulting firm Other Funds, part of Assure Services Inc., found that the average number of venture capital fund investors — known as limited partners — more than doubled in five last year to 63 in 2021. But even that number can be misleading, because a limited partner can represent a group of investors.
“For a private company that gets funding from a venture capital fund or private equity… you could get 2,000 homes,” said Marc Ponchione, partner at the investment management team of Debevoise & Plimpton LLP. investment quite quickly.
The impact of the SEC’s planned changes will likely depend on the types of entities the agency decides to consider. One option would be to count each investor into a feeder fund — a vehicle set up by a broker-dealer to pool assets from multiple clients for private market transactions — as a separate shareholders. A more aggressive route would be to count the number of people investing through a venture capital fund or private equity fund.
As the plan is in the early stages, such decisions have yet to be made, according to a person familiar with the matter. But Ms. Lee, Democratic commissioner Caroline Crenshaw and key members of SEC Chairman Gary Gensler’s staff have all expressed a desire to attract more companies to the public market.
Industry lawyers say the transparency the SEC seeks will cost companies a public listing — often creating a ton of paperwork — without any benefits. Republican SEC Commissioners Elad Roisman and Hester Peirce said the plan would hurt growing companies in need of capital. They added that the JOBS Act 2012 increased the number of shareholders a private company can have without registering with the SEC from 500 to 2,000, to allow companies more flexibility.
“Lowering these thresholds could contradict the express will of Congress and potentially undermine our mission to facilitate capital formation,” Peirce and Roisman said in a statement. 13, after the SEC updated its rule-making agenda.
Unicorns are getting a haircut, meaning that high-flying startups are seeing their valuations shrink as they go public.
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Mr. Koch — a serial entrepreneur and late-stage investor specializing in secondary shares.
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