WASHINGTON — The Securities and Exchange Commission is preparing to impose more transparency on large private companies, as regulators worry about the lack of oversight of private fundraising that has fueled their rise.

Private capital markets have become an increasingly popular way for companies to raise funds in the United States over the past decades, allowing companies to obtain financing from institutions and high net worth individuals without the constraints. regulatory requirements for the IPO. The number of so-called unicorns – private companies valued at $ 1 billion or more – has continued to grow despite the recent boom in initial public offerings.

The SEC, Wall Street’s main regulator, has started work on a plan to force more private companies to systematically disclose information about their finances and operations, according to a biannual rule-making program and regulations. people familiar with the subject. It also plans to strengthen the qualifications that investors must meet to access private markets and increase the amount of information that some non-public companies must file with the agency.

“When they’re big companies, they can have a huge impact on the lives of thousands of people with no visibility to investors, employees and their unions, regulators or the public,” said Democratic SEC Commissioner Allison Lee, who called for change. “I am not interested in forcing medium and small businesses to go through the reporting regime. “


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The SEC push is still in its early stages, but it is expected to meet strong resistance from Silicon Valley and other sectors, such as oil and gas infrastructure, which rely heavily on private market funding. The information that SOEs must disclose – about their profits, business prospects, risks, and executive compensation – are closely watched by private companies.

“We advise against the SEC imposing additional and unnecessary burdens on private companies that could have unintended consequences,” said Bobby Franklin, chief executive of the National Venture Capital Association, on Monday. “This segment of the US economy has spurred innovation and provided new products and services that have been of great benefit during the pandemic.”

Promising start-ups typically get a lot of the money they need to grow from venture capital funds, private equity firms, and high net worth individuals. Small individual investors must wait until a company makes an initial public offering to participate in the action.

Regulators and investor advocates have feared for years that the public stock and bond markets, where companies must meet stringent SEC disclosure requirements, will lose their appeal to startups.

They also say that the abundance of private capital has allowed many of the best startups to delay their IPOs for years, turning the traditional IPO into little more than an opportunity for wealthy insiders to pull out. money. Highlighting these concerns, two-thirds of the companies that went public in the United States in 2021 were trading below their IPO prices at the end of the year.

And despite the record volume of IPOs last year, private markets have continued to grow. According to research firm CB Insights, there are currently 959 private companies valued at over $ 1 billion, up from 513 at the end of 2020.

Progressives say the shift in capital raising activities from public to private markets reflects a growing set of exemptions from federal securities laws that the SEC and Congress have enacted over several decades. Republicans and industry officials say this is a consequence of the SEC’s increasingly onerous requirements on state-owned companies.

“Instead of using the heavy hand of big government to force companies into public procurement, we should revisit the current disclosure and regulatory regime to make the publication more attractive to emerging, growing companies,” said Rep. Patrick McHenry of North Carolina, the top Republican. member of the House Financial Services Committee.

Federal law requires companies with more than 2,000 “registered” shareholders to register their securities with the SEC and periodically disclose key information, whether or not they have gone public. But this threshold is rarely crossed because SEC rules allow an unlimited number of people to hold shares “in the name of the street” – through the same broker or investment vehicle – and to be counted as a single shareholder.

“The SEC has intentionally underestimated shareholders for decades,” said Tyler Gellasch, executive director of the Healthy Markets Association, an investor group.

Now, the agency is working on a proposal that would allow regulators to search under the hood of these entities for a more comprehensive tally of shareholders. Its aim is to push large private companies towards the same disclosure regime as their publicly traded counterparts.

It’s unclear how many private companies may be required to register with the SEC as part of the plan. This is largely explained by the fact that regulators have little visibility on the shareholding of private companies.

America’s biggest unicorn, according to data provider PitchBook, is financial services company Stripe Inc., which was recently valued at $ 152 billion. It has 79 active investors. Some of them are individuals, like billionaires Peter Thiel and Elon Musk. But others are venture capital funds, mutual funds, and private equity firms, which can pool the investments of many shareholders.

A Stripe spokesperson declined to quantify the company’s shareholder base.

A recent analysis by consultancy firm Different Funds, part of Assure Services Inc., found that the median number of investors in venture capital funds, known as limited partners, has more than doubled in the past five years. years to reach 63 in 2021. But even that figure can be misleading, as a limited partner can also represent a pool of investors.

“For a private company that received funding from venture capital or private equity funds… you could probably reach 2,000 investors pretty quickly,” said Marc Ponchione, partner at Debevoise & Plimpton LLP.

The impact of the changes planned by the SEC will likely depend on the types of entities the agency decides to examine. One option would be to count each investor in a feeder fund – a vehicle set up by brokers to pool the assets of multiple clients for private market transactions – as separate shareholders. A more aggressive route would be to count the number of people investing through a venture capital fund or private equity fund.

As the plan is still in its infancy, such decisions have yet to be made, according to a person familiar with the matter. But Ms Lee, fellow Democratic Commissioner Caroline Crenshaw and key staff members of SEC Chairman Gary Gensler have all expressed a desire to attract more companies to public markets.

It would also increase the impact of Mr Gensler’s plans to step up disclosure requirements for public companies regarding climate change and other issues, supporters say.

Industry lawyers say the transparency the SEC seeks would hit companies with the cost of the IPO – regularly producing reams of paperwork – without any of the benefits.

Republican SEC commissioners Elad Roisman and Hester Peirce said the plan would hurt growing companies in need of capital. They added that the Jobs Act of 2012 increased the number of shareholders a private company can have without registering with the SEC from 500 to 2,000, to allow companies more flexibility.

“Lowering these thresholds can both contradict the express intention of Congress and potentially undermine our mission to facilitate capital formation,” Ms. Peirce and Mr. Roisman said in a joint statement Dec. 13, after the SEC updated its rule-making program.

Unicorns get their hair cut, which means high-flying startups see their valuations drop when they go public. WSJ explains why the differences between private and public markets inflate the real value of these companies.

Write to Paul Kiernan at paul.kiernan@wsj.com

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