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Screwed: are Unicorns making themselves an endangered species?


via Flickr © Harlequeen (CC BY 2.0)

  • SEC concerned about overvaluation of billion dollar start-ups
  • Worries mount over a new tech bubble
  • Hype cycle at its most strident since 2000
  • Commission also keeping a beady eye on crowdfunding and other alternative means of raising capital

The high tech companies of Silicon Valley are in-your-face, brass-necked and brass-lunged things that like nothing more than to blow their own horns as loudly and for as long as possible before stopping briefly to take a deep breath and then repeating the exercise until the world reverberates with their unholy cacophony. It helps to keep them in the public eye and the share price high - perhaps artificially so.

That at least is the view of the Chairperson of the US Securities and Exchange Commission (SEC), Mary Jo White, who has taken the so-called "unicorns' (aka billion-dollar plus start-ups) of Northern California to task  for fostering what she regards as the rampant over-valuation of technology stocks.

No shrinking wallflower, Ms. White, meted out her chastisement from a podium at Stanford University, slap-bang in the middle of the beating heart of Silicon Valley and a place of worship and protection wherein, under all normal circumstances, unicorns may gambol freely across the verdant turf to the "ooh's" and "aah's" of the undergraduate population, all of whom want to be unicorns themselves when they grow up - a bit like that nice young Mr. Zuckerberg.

Mary Jo White however, is not in awe of these beasts, whether mythical or not, and so took a big sheet of Unicorn-grade emery paper to the shy, retiring creatures and proceeded to strip the gleaming gilt back to the steel-grey base metal that lies beneath.

She said, "A current feature of the pre-IPO financing market that puts these questions in sharp relief is one that has gathered considerable attention recently – unicorns ... By one count, there are nearly 150 unicorns worldwide, many based here in Silicon Valley. This issue had become a topic of concern. Beyond the hype and the headlines, our collective challenge is to look past the eye-popping valuations and carefully examine the implications of this trend for investors, including employees of these companies, who are typically paid, in part, in stock and options."

Ms. White added, "At the SEC, the questions we are asking do not fundamentally differ from the questions we ask about all transactions. They include whether the information supplied to investors is accurate and complete – that is, whether it accurately reflects the performance and prospects of the company."

She then rubbed salt into the bleeding stumps when she added, "Don't imagine you get to ignore the laws of the land just because Marc Andreessen says you're disrupting things."  Oh, unicorns. if you have tears to shed, prepare to shed them now.

Marc Andreessen is a US entrepreneur, investor and software engineer and a darling of Silicon Valley. He co-authored Mosaic, one of the first truly popular Web browsers, was a co-founder of Netscape and is co-founder and general partner. of the Silicon Valley venture capital firm Andreessen Horowitz. He founded and then sold the software company Opsware to Hewlett-Packard. He is a board director of eBay, Facebook, Hewlett Packard Enterprise and Oculus VR (among others) and supported HP's sometime CEO, Carly Fiorina, in her failed attempt to gain the Republican nomination for the 2016 US presidential election. He also holds a big interest in BitCoin, the Internet crypto-currency.

Unicorns in the cross-hairs of a buffalo rifle

Mary Jo White is not the first to question the rationale behind the evolution of unicorns, whose outrageous valuations have been hyped by investors who then make huge profits when they sell over-inflated stock causing the price to plunge and leaving the 'little people' nursing a loss, but she is one of the most influential, not least because she has made it very plain that the SEC will go after companies, and individuals within them, deemed to have been or found to have been involved in blowing great big unicorn bubbles while being "economical with the actualité."

She told her stunned Stanford audience, "To those involved in advising, investing and nurturing unicorns, there is an important related question: how do $1 billion valuations affect all of the relevant investors – both those investing in the unicorn round, and those that came before and after, whether in private or public transactions? And, being a private company obviously does not mean that you can disregard the interests of investors. Indeed, being a private company comes with serious obligations to investors and the markets. It is axiomatic that all private and public securities transactions, no matter the sophistication of the parties, must be free from fraud."

Then ranging farther and wider in her critique she added, to the gnashing of teeth, the rending of loincloths and cries of "woe, woe and thrice woe", "There are several governance implications for the longer pre-IPO lifecycle. The IPO process is not just about raising capital. A public company commits to shed light on its operations and strengthen its controls and governance in ways not required of private companies. The securities laws and relevant listing standards, for example, require a company to form an audit committee; it must establish disclosure controls and procedures and create internal controls over financial reporting; the CEO and CFO must certify to the adequacy of those controls; and the company must be audited by a PCAOB-registered firm."

Ms. White then turned her attention to the comparatively new phenomenon of 'crowdfunding' commenting, "While we have our eye on unicorns because of their outsized impact on our markets and investors, our focus is obviously much broader. One key and current area of focus for us at the SEC is on the three new methods that have recently been created by our rules for capital raising under the JOBS Act." (which permits the 'general solicitation' of investment money).

She continued, "In contrast to the institutional investors that have typically been involved in the capital raising that has created unicorns, these capital formation tools can be used to, and in certain cases are expected to, raise money from retail investors. So it should come as no surprise that we are closely looking at not only how well these tools are working for companies seeking to raise capital, but also how well they are protecting investors. "The SEC evaluates these platforms through the lens of the federal securities laws – that is, are they offering securities and, if they are, are the offerings registered or made using an exemption. We are also concerned about the adequacy of the information received by investors in registered offerings."

Well, they can't say they haven't been warned.

Meanwhile, Benchmark magazine has predicted that the rapid and continuing increase in the number of unicorns is prima facie evidence that a "risk bubble" is forming and will eventually burst, probably sooner rather than later. In that case Silicon Valley might become more like the La Brea tarpits, filled with the preserved corpses of dead unicorns that will be excavated by archeologists of the future who will marvel that such beasts one roamed the earth.

And as for those that are left? Well, myth has it that when they grow old (or get to twenty or so in the febrile atmosphere and environment of Silicon Valley) unicorns get fat, change  colour from white to grey and become past-it, irrelevant,lumbering and myopic rhinoceri.

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