The SEC's Concern About Unicorns Misses the Point

The U.S. Securities and Exchange Commission is worried about a lack of oversight in how large, private companies raise capital. To be clear, pushing for more transparency is simply an effort to correct the unintended consequences from the passage of the Sarbanes-Oxley Act in 2002. Indeed, investing in these firms has become so easily accessible, and private markets so deep and liquid, that there is little incentive for startups to ever go public, hurting small investors while big institutions reap the rewards.

The idea behind Sarbanes-Oxley was that public companies require an extra layer of accounting checks and internal controls that private companies do not in order to protect average investors in the wake of a number of high-profile accounting scandals in the early 2000s, including Enron Corp. and WorldCom Inc. But it made operating as a public company too onerous and expensive for many small firms. The result has been the decline in IPOs, denying individuals the potentially lucrative investment opportunities from getting in early on companies that have the potential to change whole industries. The number of initial public offerings since 2001 has plummeted 61% to 2,567 from 6,517 in the prior 20 years, according to data compiled by University of Florida finance professor Jay Ritter. Worldwide, there are more than 900 unicorns, or start-ups worth $1 billion or more, about twice as many as two years ago.

There are advantages to remaining private, not the least of which is the lack of scrutiny on things like revenue and earnings every three months, and dealing with the Wall Street analyst community. Also, there are no requirements to reveal executive compensation for the whole world to see. And don’t forget that the primary benefit to going public, accessing liquidity for insiders, has diminished over the years as the equity of private companies has become somewhat tradeable. Going public is a giant hassle that most unicorns avoid at all costs until they exceed the threshold of 2,000 investors set by the SEC.