At some point, a successful startup that has reached a certain maturity will be “revealed” – selling securities to ordinary investors, perhaps listing on a national stock exchange, and taking on the privileges and responsibilities of a “public company” under federal securities regulations.
Times have changed. Successful startups today can grow very large without public capital markets. Not long ago, a private company worth more than $ 1 billion was rare to guarantee the nickname “Unicorn”. Now, more than 800 companies qualify.
Legal scholars are concerned. The recent wave of academic papers makes it clear that because unicorns are not banned by the institutional and regulatory forces that keep public companies in line, they are particularly susceptible to risky and illegal activities that harm investors, employees, consumers and society at large. .
The proposed solution is, naturally, to tolerate these forces on the unicorn. Significantly, scholars are proposing a mandatory IPO, significantly expanding Advertising responsibilities, regulatory changes designed to dramatically increase the secondary-market trading of unicorn shares, extended whistle blower protection for unicorn employees, and increased implementation of securities and exchange commissions against large private companies.
This position is also gaining traction outside the ivory tower. One of the leaders of this intellectual movement was recently appointed as the Director of Corporation Finance of the SEC. Big changes may come soon.
In a new paper entitled “Unicorniphobia” (forthcoming at the Harvard Business Law Review), I challenge this suddenly dominant view that unicorn is particularly dangerous and should be “under control” with bold new securities rules. I present three main objections.
First, pushing the unicorn into a public company position won’t help and can actually make the problems worse. According to the vast academic literature on “market myopia” or “stock-market short-termism”, it is Public company Managers with particularly risky incentives to take excessive advantage and risk; Investing less in compliance; Sacrificing product quality and safety; Reducing R&D and other forms of corporate investment; Spoiling the environment; And involvement in accounting fraud and other corporate misconduct, among many other things.
The dangerous incentives that this parade of horrific results produce allegedly flow from a constellation of market, institutional, cultural and regulatory characteristics that clearly function. Public Companies, not Unicorn, include short-term stock returns, executive returns, pressure to meet quarterly earnings estimates (aka “quarterly capitalism”), and the constant fear (and occasional reality) of hedge fund worker attacks. No matter how true this literature is, the proposed unicorn improvements are tantamount to forcing companies to abandon one set of allegedly dangerous incentives for another.
Second, proponents of the new unicorn rule rely on the rhetorical slit of the hand. To demonstrate the unique dangers that unicorns pose, these advocates rely heavily on the cases of the well-known “bad” unicorns in their papers, and in particular the cases of Uber and Therano. Although the authors make little or no effort to show how their proposed improvements can reduce the significant damage caused to any of these companies – a highly dubious proposal, as I show in great detail in my paper.
Theranos Law, whose founder and CEO Elizabeth Holmes is currently facing trial on criminal fraud charges and, if convicted, faces a potential sentence of up to 20 years in federal prison. Has any of the proposed securities regulation amendments made a positive difference in this case? Allegations that Holmes and others lied extensively to the media, doctors, patients, regulators, investors, business partners and their own board of directors make it hard to believe that they would have been more truthful if they had been forced to disclose additional securities. .
If we talk about the proposal to increase the trading of unicorn stocks to encourage short sellers and market analysts to face potential fraud, the fact is that the players in this market Already He had the ability and motivation to create these plays indirectly against Theranos by gaining a short position among public company partners such as Public Loggreens or by gaining a long position among his public company competitors such as Labcorp and Quest Diagnostics. They failed to do so. Proposals to expand whistleblower protection and SEC implementation in this area are unlikely to make a difference.
After all, the proposed amendment risks doing more harm than good. Successful unicorns today benefit not only their investors and managers, but also their employees, customers and society at large. And they do so precisely because of the features of the current rules that are now on the regulatory chopping block. Changing this regime, as these papers suggest, would jeopardize these benefits and thus do more harm than good.
Think of a company that has recently made a huge social gain. Prior to going public in December 2018, Morden’s secret, controversial, overhype biotech unicorn was on the market without a single product (or even in Phase 3 clinical trials), hardly any scientific peer-reviewed publications, a history of turnover between high-level staff scientists. , CEO with a passion for over-the-top claims about company potential and toxic work culture.
If these proposed new securities rules had been applied during Moderna’s “corporate adolescence”, it is quite plausible that they would have significantly disrupted the company’s growth. In fact, Mord’s would not be in a position to develop its highly effective Covid-19 vaccine as quickly. Our response to the coronavirus epidemic has, in part, benefited from our current approach to regulating unicorn securities.
Moderna’s lessons also endure attempts to use the Securities Regulation to combat climate change. According to a recent report, 43 Unicorns are working in “Climate Tech” to develop products and services designed to mitigate or adapt to global climate change. These companies are risky. Their techniques can fail; Most likely will. Some are challenging dominant authorities with powerful incentives to do what is needed to counter a competitive threat. Some are trying to change well-established customer preferences and behaviors. And they all face an uncertain regulatory environment, which varies widely within and within the jurisdiction.
Like other unicorns, they may have high-powered founding CEOs who are demanding, irresponsible or mesic. They may also have major investors who do not fully understand the underlying science of their products, who are denied denied access to basic information, and who are forced to take risks to achieve astronomical results.
And yet, one or more of these companies could represent an important resource for our society in tackling the disruptions of climate change. As policymakers and scholars work on how securities regulation can be used to address climate change, they should not overlook the potentially important role of unicorn regulation.