Mythical Unicorns and How to Find Them: The Disclosure Revolution

Our federal and state securities laws are centered around two vital requirements for economic growth: capital formation and investor protection. Section 12(g) sits in the middle of these two concepts by attempting to ensure the latter without jeopardizing the former. However, since the passage of the Jumpstart Our Business Startups (“JOBS”) Act in 2012, exempt capital formation in the unregulated private market has increased dramatically. Companies raise nearly limitless capital from a wide range of sources while remaining outside of the public reporting regime. The overall shift has led to worse corporate governance outcomes, a decline in IPO volume and quality, and has major implications for employees in both their investing and employment decisions. Accompanying these changes is the exposure of an increasing amount of the public’s capital to riskier investments in a sphere where information is unavailable in the best of times and deliberately hidden in the worst. Based on a hand selected data set compiled from public filings, we have found that these companies have an increasing number of shareholders prior to their IPOs and that a number of these companies have used investment structures to artificially reduce this number to take advantage of a JOBS Act-created loophole. The U.S. Securities and Exchange Commission (“SEC”) indicated its intention to narrow the disclosure gap between publicly-listed and privately-held companies. It recently embarked upon a formative rulemaking process that would require more disclosures from large private companies that are valued at over $1 billion – “unicorns.” The SEC’s initiative is likely to meet with a mixed reaction from the investor community. Despite this latent opposition, regulatory action in this area is gaining momentum worldwide. This Article gives recommendations on reforms to Section 12(g) in order to bring more companies into the public reporting sphere without jeopardizing the capital formation process