By: Lewitas Hyman PC
On Wednesday, at the annual Securities Regulation Institute conference in Coronado, California, Securities and Exchange Commission Chair Mary Jo White shared the agency’s growing concern about the aggressive promotion of private tech startup companies to investors. The SEC’s concern centers around investors unable to receive sufficient or accurate information when choosing to make investments.
Many tech startups are choosing to stay private longer than in previous capital booms. According to Renaissance Capital, last year only 23 tech IPOs occurred, compared to 55 in 2014. In addition, several tech startup companies that went public have found that their valuation on Wall Street is often lower than in the private space. According to Business Insider, “unicorn” startups (private tech startups with valuations north of $1 billion) like Box (BOX), Pure Storage (PSTG), and Zynga (ZNGA) went public well below their last round of private valuations. For example, Square (SQ) which went public in November 2015 is only valued at $3.2 billion – a big downgrade from its $6 billion valuation following a round of private financing in 2014. By staying private, tech startups do not face the obligations of public companies in issuing quarterly earnings reports and holding investor calls. Accordingly, the stock of these companies doesn’t sell off immediately after a negative quarterly call, and such companies face far less market volatility.
It is under this backdrop that shares of private startup tech companies are being marketed to eager investors less sophisticated than venture capitalists in startup valuation. Investors “may get very excited from an article or a blog and invest their money … You worry about them not getting sufficient or accurate information” explained Ms. White. The SEC wants to make sure that aggressive promoters are not taking advantage of investors in this current climate. If you have any questions in regards to the foregoing, please contact Lewitas Hyman PC at (312) 291-4600.