Once upon a time, a successful startup that reached a certain maturity would "go public" — selling securities to ordinary investors, perhaps listing on a national stock exchange and taking on the privileges and obligations of a "public company" under federal securities regulations. Times have changed.
The Rise of Unicorns
Successful startups today are now able to grow quite large without public capital markets. Not so long ago, a private company valued at more than $1 billion was rare enough to warrant the nickname ‘unicorn.’ Today, these privately held companies, often referred to as unicorns, have become increasingly common.
The Regulatory Conundrum
As unicorns continue to grow and innovate, policymakers and regulators are grappling with how to balance the benefits of private company growth with the need for transparency and accountability. The debate centers on whether existing securities regulations, designed for public companies, are adequate to address the unique challenges posed by unicorns.
The Case Against Enhanced Regulation
Proponents of enhanced regulation argue that unicorns pose a significant risk to investors and the broader financial system. They contend that private company valuations can be misleading, and that investors may be unaware of potential risks and conflicts of interest. To address these concerns, some advocates propose stricter disclosure requirements, increased transparency, and more stringent governance standards.
The Counterargument: Unicorns Can Be a Force for Good
Critics argue that enhanced regulation could stifle innovation and hinder the growth of unicorns, which often bring new ideas and technologies to market. They contend that existing regulations are adequate and that over-regulation could lead to unintended consequences, such as:
- Increased costs and bureaucratic hurdles
- Reduced access to capital for small businesses and startups
- Potential for regulatory arbitrage, where companies exploit loopholes in the system
A Different Perspective: The Moderna Example
Consider the case of Moderna, a biotech unicorn that developed a highly effective COVID-19 vaccine. Before going public, Moderna was a secretive company with limited transparency and accountability. Had proposed new securities regulations been in place during its "corporate adolescence," it’s plausible that they would have significantly disrupted the company’s development.
Climate Change and Unicorns
Unicorns are increasingly playing a critical role in addressing climate change, developing innovative technologies to mitigate or adapt to global warming. Policymakers must balance the need for regulation with the potential benefits of unicorn innovation. One or more of these companies may represent an important resource for our society in dealing with disruptions from climate change.
Conclusion
The relationship between private companies and securities regulation is complex and multifaceted. While enhanced regulation may seem appealing, it’s essential to consider the potential consequences on innovation and growth. Policymakers must carefully weigh the benefits of transparency and accountability against the risks of over-regulation, striking a balance that promotes both public confidence and private company success.
Recommendations for Policymakers
- Improve disclosure requirements: Enhance transparency by requiring unicorns to disclose more information about their financials, governance structures, and potential risks.
- Increase investor education: Provide investors with better tools and resources to understand the complexities of unicorn investments and make informed decisions.
- Foster a culture of accountability: Encourage unicorns to adopt best practices in governance, ethics, and corporate social responsibility.
By adopting a nuanced approach to regulation, policymakers can help ensure that unicorns continue to drive innovation while maintaining public confidence in the financial system.
