89 Pages Posted: 3 Sep 2021 Last revised: 8 Sep 2022
Date Written: September 2022
The largest companies in the United States are now subject to two alternative sets of rules. One set of companies makes extensive periodic disclosures about their business, finances, and corporate governance arrangements; faces market discipline from short-sellers, financial analysts, and hedge fund activists; and faces a realistic threat of SEC investigation and private securities litigation. The others don’t.
Legal scholars are worried. The proliferation of “unicorns” – startup companies that reach a valuation of $1 billion or more without going public – has generated a wave of academic articles asserting that these companies pose a distinct danger to society and that new securities regulations are needed to rein them in. These calls are now resonating at the SEC, which is undertaking a review of private company regulation as of this writing.
This paper aims to open a debate in a conversation that so far has been one-sided. I present three main objections to the suddenly dominant account that Unicorns are especially dangerous and need to be reined in by new securities regulations. First, I show that pushing Unicorns towards public company status may not improve their proclivity to risky and harmful conduct and may actually make things worse. Second, while these articles rely most heavily on Uber and Theranos to demonstrate the dangers posed by Unicorns, there is little or no attempt to show how their proposed reforms would have mitigated any significant harm caused by either company – and, in fact, it is highly questionable that they would have done so. Third, I show that important social benefits provided by Unicorns are contingent on the current securities regulation regime, such that altering the regime would jeopardize these benefits.
To fight fire with fire, I back up this last point with a detailed case study of the “corporate adolescence” of a company that all will agree has recently generated an enormous social benefit: Moderna, Inc. Had the proposed new securities regulations been in place during Moderna’s “corporate adolescence,” it’s quite plausible that they would have significantly disrupted the company’s development and that Moderna might not have been in a position to develop the highly effective Covid-19 vaccine in the rapid time that it did. Our survival and recovery from the global coronavirus pandemic hinged, in part, on our current approach to securities regulation of Unicorns.
Keywords: Securities Regulation, Corporate Governance, Unicorns, Uber, Theranos, Disclosure
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