Private Company Fraud

Abstract

Fewer companies are going public in the United States, but public companies are still the focus of securities law and enforcement. A major exception is that anti-fraud provisions apply to all companies, public or private. Theranos is a prominent example. The Securities and Exchange Commission (SEC) sued this private company for securities fraud. This article examines one societal cost of the decline of public companies: the loss of information needed to detect and punish fraud. It analyzes the SEC’s securities fraud enforcements against private companies and assesses the information costs of moving to an anti-fraud-only regime. It concludes by identifying ways to incentivize information disclosure in the newly private universe of corporations, including a proposal to expand whistleblower protection for employees of private companies.

Keywords: startups, securities regulation, fraud, white collar crime, securities enforcement, SEC, Theranos, whistleblowers, securities and exchange commission, unicorns, private companies

JEL Classification: K1, K22, K2