“unicorn” Businesses can lose their Safe Harbor protections

Image: Maura Losch/Axios

America’s safe haven could be closed to “unicorn” companies, which are currently not required to provide investors with audited financial statements.

Driving the news: SEC Commissioner Caroline Crenshaw, a Democrat nominee for former President Trump, said in a speech that regulators have not kept pace with the dizzying growth in private markets.

• She pointed out that Rule 506 of Regulation D, which exempts private issuers from most disclosures required of publicly traded issuers, was drafted more than 40 years ago when such companies were so small that the public benefit of such a Disclosure would be “too little”. In addition, “experienced” investors in such deals have access to this information.
• Apparently these conditions have changed. Some startups raise billions of dollars from a variety of investors, often with the safe haven acting as a distracting shield. FTX is the most obvious example, but it’s hardly alone.
• Crenshaw’s proposal is to revise Reg D to look more like Reg A, a tiered system in which reporting requirements increase with the size of an offering.

What she says: “Through decades of legal, regulatory and market developments, private companies now have access to ever-increasing amounts of private capital, inflating their size and importance to investors and our economy, all without the accompanying safeguards built into public markets.”

• Crenshaw also compared private markets to the title character in the children’s book The Very Hungry Caterpillar.

look ahead: The SEC has previously announced that it will consider changes to Reg D as part of its rulemaking agenda.

The bottom line: Venture capital has changed significantly in the last five years after decades of funding innovation without doing much innovation itself. Industry regulators didn’t do that.

• This is not an endorsement or rejection of Crenshaw’s specific proposal. But it’s an admission that startups and their investors operate under outdated safe harbor rules.

Source: www.axios.com