Mythical Unicorns and How to Find Them: The Disclosure Revolution

Abstract

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. At the same time, new ways of investing in these spaces have been opened for retail investors. The result has been 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.

For founders of large private tech companies and their sophisticated investors, this structure remains advantageous. They are capable of raising large sums of capital, something normally only done by public companies, while avoiding the costs associated with our disclosure regime. They care little about the corporate governance responsibilities of running large companies and protect their interests above that of the company as a whole. Minority investors, primarily employees and, in increasing numbers, retail investors, are left in the dark without an ability to diversify and mitigate risk.

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.