SECOn March 31, 2016, SEC Chair Mary Jo White delivered the keynote address at the Silicon Valley Initiative hosted by the SEC-Rock Center for Corporate Governance at Stanford University.  A substantial portion of Chair White’s remarks focused on “unicorns,” or private start-up companies with valuations exceeding $1 billion.  Chair White’s comments reflect the SEC’s apparent focus on, and concerns with, unicorn companies.  Specifically, Chair White voiced concern over the accuracy of the financial information used to secure financing prior to an initial public offering (IPO), as well as the enterprise valuations which are calculated at or near unicorn levels.

Chair White’s decision to highlight unicorns during a speech in Silicon Valley should not go unnoticed, and suggests that the SEC is sharpening its focus on investment-backed private companies and the venture capital and private equity firms that invest in them.  Chair White emphasized the duties of candor and fair dealing owed by companies seeking pre-IPO financing and stated that SEC staff would seek to ensure that the information supplied to potential investors in private offerings is complete and “accurately reflects the performance and prospects” of the company.  In this regard, Chair White encouraged the venture industry to assess whether companies’ boards of directors included outside individuals with (i) public-company experience, (ii) regulatory and financial expertise, and (iii) industry-specific knowledge.  Perhaps sensing the perceived limitations of the SEC’s regulatory powers over private companies, Chair White emphasized that securities transactions in all companies, both public and private, are subject to SEC scrutiny under the anti-fraud provisions of the federal securities laws.

Concerning pre-IPO company valuations, Chair White noted that the prestige that accompanies valuations that reach the unicorn-level creates the potential risk for inaccuracies in financial reporting and valuations, resulting in companies “appearing more valuable than they actually are.”  In connection with the speculative nature of venture-backed valuations, Chair White noted concern with start-up companies having generally weaker internal controls and governance procedures than publicly-traded issuers, which elevates the risk of distortion and inaccuracy in enterprise valuations.

Chair White also offered comments on the regulation of the secondary market for pre-IPO investments, the impending effectiveness of Regulation Crowdfunding, and regulatory concerns in the developing area of financial technology.  We recommend that all private investment funds review her speech in its entirety.  Private, investment-backed companies and their investors must make every effort to ensure that valuations are supported by available data and reasonable assumptions and also potentially seek independent third party valuation opinions where feasible.