Transparency From Private Companies is Essential: SEC

If the pandemic has changed the way people interact socially, it has led to a more significant transformation in business. Private capital markets have become an increasingly popular way for companies to raise money in the US, allowing firms to acquire funding from institutions and wealthy individuals without the regulatory burdens of going public. Termed ‘Unicorn’ firms, they have a considerable impact and ‘absolutely no visibility for regulators such as the SEC. The number of unicorns – private companies valued at $1 billion or more has continued to grow even amid the recent boom in initial public offerings.

Disclosure Transparency From Private Companies is Key – SEC

Now, these unicorns are getting haircuts, meaning high-flying start-ups are seeing their valuations shrink when they go public. The Securities and Exchange Commission is preparing to force more transparency from big private companies as regulators grow concerned about the lack of oversight of the private fundraising that has fueled their rise.

In a reaction to this, the SEC is working on a plan to ensure large private companies and private equity firms are disclosing enough information to stakeholders.

The SEC’s plan in summary:

 Require more private companies to regularly disclose information about their finances and operations

• More demanding qualifications for investors seeking to access private markets
• Increasing the amount of information some private companies have to file with the SEC
• Implementing the SEC’s Regulation Best Interest (Reg BI), which establishes a “best interest” standard of conduct for broker-dealers and associated persons when they make a recommendation to a retail customer of any securities transaction or investment strategy involving securities, including recommendations of types of accounts.
• Re-defining the qualifications and disclosures of an accredited investor.
• Make sure investors in Special Purpose Acquisition Companies (SPACs) receive the same protections as investors in a regular listing.

What We Think

It is apparent from SEC’s plan that they are concerned about the increase in the number of pension plans and mutual funds that are investing in private equity. They may be worried about the way in which everyday Americans’ savings are exposed to play.

It is also good to note the trend of private companies staying private much longer, which used to be three to five years but has now extended to 10 to 15 years. 

In the light of this, it is justified for the SEC to ensure that all investors are getting fair scrutiny and that there is no advantage for large investment firms who have leveraged an early investment on unicorn companies due to the availability of significant financial and operational disclosures.

How can DataTracks Help?

We believe in been taking a pre-emptive approach, so our clients get the best solution at the minimal operational and financial impact. We are already working on modifying our cutting-edge cloud-based technology platform to facilitate compliant transactions that have the green light of the law. Flexible, cost-effective, and agile, our solutions can react to any changes in the regulatory landscape in any part of the compliance cycle during the course of the law.

In the years to come, the regulatory landscape is likely to take a very measured approach in dealing with the rapidly evolving private markets. The step taken to provide more transparency and trust is a small and iterative process. 

But are you and your organization equipped to handle the changes that the SEC is likely to introduce periodically? We suggest scheduling some time with our XBRL expert to help you simplify the shifting regulatory landscape.