SEC Pushes for More Transparency From Private Companies

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SEC commissioner Alison Lee says ‘unicorn’ firms have huge implications for regulators and have ‘absolutely no visibility’

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Wall Street’s top regulator, the SEC, has begun work on a semiannual rule-making agenda and plans to have more private companies regularly disclose information about their finances and operations, according to people familiar with the matter. It is also considering tightening the qualifications that investors must meet to access private markets, and increasing the amount of information some non-public companies file with the agency.

“While they are large firms, they can have a huge impact on the lives of thousands of people, with absolutely no visibility to investors, employees and their unions, regulators or the public,” said Democratic SEC Commissioner Alison Lee. Change. “I’m not interested in forcing medium and small-sized companies into a reporting regime.”

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The SEC’s push is in its early stages, but is likely to meet stiff resistance from Silicon Valley and other regions, such as oil and natural-gas infrastructure, that rely heavily on funding from private markets. The information that public companies have to disclose – about their earnings, business outlook, risks and manager salaries – is closely guarded by private companies.

Promising young companies typically source more of the money needed to grow than venture-capital funds, private-equity firms, and wealthy individuals. Small individual investors have to wait until a company makes an initial public offering to get in on the action.

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 their attractiveness to startups.

They also say that the abundance of private capital has enabled many of the best startups to delay going public for years, turning traditional IPOs into little more than an opportunity to capitalize on wealthy insiders. Highlighting these concerns, two-thirds of US companies that went public in 2021 were trading below their year-end IPO prices.

And despite last year’s record IPO volumes, private markets continue to grow. According to research firm CB Insights, there are currently 959 private companies worth over $1 billion, up from 513 at the end of 2020.

Federal statute requires that companies with more than 2,000 shareholder “of record” register their securities with the SEC and periodically disclose important information, whether they have conducted an IPO or not. But that limit is rarely exceeded because SEC rules allow an unlimited number of people to own shares in “street names” — through the same broker-dealer or investment vehicle — and as a shareholder. is counted as.

“The SEC has been deliberately undercutting shareholders for decades,” said Tyler Gelash, executive director of the Healthy Markets Association, an investor trade group.

Now, the agency is working on a proposal that would enable regulators to look under the hood of 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, this is because regulators have little visibility into the shareholder base of private companies.

The largest American unicorn financial-services company is Stripe Inc., which was recently valued at $152 billion. It has 79 active investors, according to data provider PitchBook. Some of them are individuals, such as billionaires Peter Thiel and Elon Musk. But there are other venture-capital funds, mutual funds, and private-equity firms, which can pool the investments of multiple shareholders.

A Stripe spokesperson declined to quantify the company’s shareholder base.

a recent analysis by advisory firm Different Funds, part of Assure Services Inc., found that the average number of investors in venture-capital funds—known as limited partners—more than doubled over the past five years to 63 in 2021. But it could also be a figure. be misleading, as a limited partner may also represent a group of investors.

“For a private company that has received funding from venture-capital or private-equity funds … you can probably get 2,000 investors very quickly,” said Marc Ponchione, a partner in the investment-management group at DeBevois & Plimpton LLP. he said.

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 in a feeder fund — a vehicle established by broker-dealers to pool assets from multiple clients for private-market deals — as distinct shareholders of record. A more aggressive approach would be to count the number of people investing through venture-capital funds or private-equity funds.

Since the plan is still in the initial stages, such decisions are yet to be taken, according to a person familiar with the matter. But Ms. Lee, fellow Democratic Commissioner Carolyn Crenshaw, and key members of the staff of SEC Chair Gary Gensler have expressed a desire to attract more companies to the public markets.

Proponents say doing so would also increase the impact of Gensler’s plan to increase disclosure requirements for public companies around climate change and other issues.

Industry lawyers say the transparency sought by the SEC would smother companies with the cost of routine production without publicly flaunting paperwork without any benefit.

Republican SEC commissioners Elad Roisman and Hester Pearce said the plan would hurt companies growing in need of capital. He said the Jobs Act of 2012 raised the number of shareholders of a private company from 500 to 2,000 without having to register with the SEC to allow more flexibility to companies.

“Lowering these limits could be contrary to the will of Congress and potentially undermine our mission to facilitate capital formation,” Ms. Peirce and Mr. Roisman said in a joint statement on 13 December, by the SEC. After updating your rule making agenda.

Write Paul Kiernan [email protected] . Feather

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