Cardozo Legal Studies Research Paper No. 635
63 Pages Posted: 11 Mar 2021 Last revised: 4 Jan 2022
Date Written: March 9, 2021
Until recently, most startups that grew to become valuable businesses chose to become public companies. In the last decade, the number of unicorns—private, venture-backed startups valued over one billion dollars—has increased more than tenfold. Some of these unicorns committed misconduct that they successfully concealed for years. The difficulty of trading private company securities facilitates the concealment of misconduct. The opportunity to profit from trading a company’s securities gives short sellers, analysts, and financial journalists incentives to uncover and reveal information about misconduct the company commits. Securities regulation and standard contract provisions restrict the trading of private company securities, which undermines the deterrence of private company misconduct.
This Article proposes a three-pronged plan to encourage trading in private company securities, without compromising investor protection. First, eliminate Rule 144’s holding period for resales to accredited investors and reform section 12(g), so that companies are no longer forced to go public when they acquire 2,000 accredited investor shareholders. Second, attach a regulatory most favored nation clause to private company securities so that companies may not grant the right to resell selectively. Third, require that private companies with tradable securities make limited public disclosures. These reforms would create a market for robust trading in unicorn securities among accredited investors—and thereby strengthen deterrence of unicorn misconduct—while protecting retail investors and companies that wish to retain concentrated ownership.
Keywords: securities regulation, venture capital, corporate misconduct
JEL Classification: K22
Suggested Citation: Suggested Citation