Regulator with power for regulating public companies warns of the grave danger in companies not being public. They could be escaping their benevolent oversight!
"White echoed the concerns of some industry insiders that these tech start-ups are missing out on the market discipline public companies receive by being accountable to the whims of public shareholder."
Really? Being accountable to whims is a good thing?!!
It puts the fear of the markets and investors in the mind of the CEO and makes him or her work like a dog. As it should. There is definitely something to that. Don't meet analyst expectations and get burned. Yes that keeps you performing rather than doing your thing. At least in the short term it does some thing. In the long run we don't know how it rolls.
Let's start by assuming that the SEC think that capitalism is a good idea, and that the property rights of owners should be respected. I'm not saying that _I_ think that, or think the converse, but I think it's a reasonable bound for the present conversation.
The CEO, and the company in general, are already accountable to investors (i.e. the collective owners of the company), to exactly the same degree that (s)he'd be accountable after an IPO, modulo only the fact that presumably the CEO's ownership share would decrease. The owners of a private company can require as much or as little transparency or accountability as they choose, with the added benefit that they can require that the transparency only extend to themselves (the owners), and not be made public to the benefit of the company's competition. In constrast, the owners of a public company cannot choose to require less transparency than the SEC demands. So the current owners stand to gain nothing from this additional restriction. In short, whether or not the company (and its owners) benefits from the access to additional capital that hopefully comes with going public, it's hard to understand how any of the other features of going public could possibly be superior to staying private.
I understand why the SEC exists, and without having an opinion of whether the actual SEC actually does their job well, I think that having such an agency promotes the public good, by making investment in public companies safer, and thus in turn giving companies better access to another form of capital, and thus in turn allowing greater economic collaboration between strangers. That's a pretty cool thing! But when the SEC says "Hey, companies that don't need public capital, you should voluntarily put yourselves under our control. It'll help your 'discipline'", I just cannot fathom how that makes sense, except through the cynical lens sarcastically expressed by @fiatmoney.
How can anyone take this argument seriously?
There may be some public good promoted by forcing companies to go public. I don't hear anyone making that argument, though. And besides, what of the property rights of investors?
Mark Cuban points out that the SEC should be issuing clear guidelines instead of vague threats[1].
>Cuban argued the SEC should make clear rules so private companies and investors know where they stand with regulators ... "The one thing that could make the whole thing go backwards instead of forward is uncertainty," he said.
But "clear guidelines" would mean that some would clearly be within the rules while some would be clearly breaking them.
It's a much stronger negotiating position for regulators to use a vague "well, we're not sure..." and leave themselves room to maneuver and potentially punish any of the 'unicorns' at any time.
Enron's accounting fraud was only discovered because they're a public company and forced to disclose those records. Once someone actually looked at what Enron was up to, the shorts took over and hammered them until they folded. Only then did regulators actually take a look.
By being a public company, Enron couldn't hide its fraud. I have concerns about the lack of similar checks on unicorns.
Haha. This reminds me of the Simpsons where Homer takes Mr. Burns's boat out to international waters (to circumvent local drinking laws) and the coast guard tells them to come back so they can be under their jurisdiction.
Bart: [through a bullhorn] Hey, Coast Guard! Try to stop us now, you lousy Americans.
Coast Guard: [through a loudspeaker] We can't hear you! Come three hundred feet closer!
Bart: Nice try. You're not going to nail us.
Coast Guard: But we just want to party.
Bart: Oh, really? Then play some rock music.
[Man on cutter mimics the guitar riff from "China Grove"]
Homer: [joins in] Come on, Bart! The Coast Guard's covering the Doobs!
Except that even if you're private you're still under the federal government's jurisdiction.
This is more a case of "We are worried about shenanigans going on behind the scenes. We'd like you to go public so your valuation is market determined and hopefully not a result of said shenanigans."
Whether you think that's good advice probably depends on how good you think Wall St is at valuations compared to private investors. I don't have a lot of faith that either is particularly clear eyed, but I'd probably trust the public valuation more than a private one.
It goes both ways. The episode ends with Burn's boat "... boarded by Chinese pirates who take the ship, rob the crew put them in a net and toss them overboard."
This was a predictable effect of increased regulation of public companies, (SOX) etc, and awareness that a founder can move more strategically without being concerned with quarterlies and accountability to shared owners.
Politically it's unsustainable. If we see a half dozen more unicorns with household names people will tie completely private ownership to concerns about inequality: no way for the average person to buy a share and participate in growth.
You could buy shares in GS or any other public company investing in private companies and/or underwriting IPOs, so there's that. That said, the idea that public capital markets are widely considered to be a way to increase equality, of all things, is stunning to me. I thought/think that people supporting capital markets view them as a method for companies to raise capital in exchange for a share of future profits, and that people opposing capital markets view them as casinos, pyramid schemes, etc., and that the point of extra regulation for public companies is to protect investors, while the point of having less-regulated private companies is to lower the cost of raising capital for those ventures that can make do with a small number of rich investors.
Even if people widely consider the stock market to be an "equalizer", it doesn't seem obvious that adding more early-stage small-cap stocks to the market serves that purpose, because these companies are more likely to go bust, with a small fraction of them capturing most of the growth, and an index with a share in all those companies is not unlikely to underperform a large-cap index. (Incidentally, this is related to the reason that widespread stock ownership seems to me more likely to increase rather than decrease inequality - the prices of these things have a high variance; taxing and redistributing wealth and/or capital gains sounds like a surer path to equality, if that's what you want.)
> That said, the idea that public capital markets are widely considered to be a way to increase equality, of all things, is stunning to me.
Never underestimate the power of spin. Private just has to look worse than public on equality, and it does. I wouldn't be surprised to see an article about this in the next few weeks as journalists compete for eyeballs.
I've already seen such an article, but I still can't imagine hordes of protesters fighting for the privilege to invest in unicorns, especially now that much of the bubble has popped.
> I thought/think that people supporting capital markets view them as a method for companies to raise capital
You are correct, people supporting capital markets do view/promote them as a method for companies to raise capital. If you look at the data though, this turns out to be misleading. The amount of money companies raise in initial or subsequent stock offerings through the public capital markets are a fraction of what they raise through other methods. Less than 7% of corporate investment capital is raised through stock offerings. Also, this is not just the case nowadays, it has been like this since the 1940s, and even before that.
VCs may be less concerned with the next quarter than public shareholders, but at some point there will be accountability, since they will want to get their money. That requires an IPO, generally, does it not? Or at least an acquisition by an even larger company.
Some, probably most, "unicorns" aren't really private. They have shares held by "qualified investors", which can include mutual funds. Fidelity and T. Rowe Price funds own sizable chunks of Uber and Space-X. Fidelity Contrafund owns Uber stock, and anybody can buy shares in Fidelity Contrafund. So, in a sense, ownership in the company is already publicly traded. The SEC allows a mutual fund to put up to 15% of its capital in illiquid securities such as Uber. This was intended as an exception to provide capital to small companies, not a way for a company with a $60 billion market cap to avoid disclosure.
That's what concerns the SEC. When a "private" company gets big enough to be a significant part of mutual fund portfolios, should it have to start reporting as a public company?
Be at the whims of activist shareholders who demand short-term profits over long-term strategy, and in exchange you get "discipline and oversight." Oooh where do I sign up?
These unicorns are in a unique position to tell the shareholders -- whom are, let's face it, increasingly acting like a cartel across wide swathes of the economy because there are fewer and fewer of them each fiscal year -- to tell them to fuck off.
And that scares the regulators because they're paid to keep "everybody in the fold" by extolling the virtues of being publicly owned.
Here's a useful tidbit: the mysterious market forces -- the "shareholders" as they're known -- are actually a small group of individuals or groups that pull the levers of the economy. The regulators rely on these lever-pullers to play ball when need be.
Frankly I think these unicorns are right to fear buying into the US economy by going public, the overt assertions of power by the US government are definitely something to avoid.
Surely you're joking? The "shareholders" OWN the companies in question. Of course it is their right to demand whatever they want from the company - they own the thing. No company can tell its shareholders to fuck off, because it is subservient to them.
This depends on the structure of control in the companies. Anyone familiar with Facebook and Google knows that Zuckerberg pulled some fantastic manipulation of board seats and Brin and Page created a new class of voting shares that are 10x more powerful than regular shares. In such set-ups, the co-founders have permanent control of their companies without having to hold too many shares.
I imagine that many of the co-founders of the "unicorns" were smart enough to replicate Zuckerberg and Brin/Page and are subservient to no one.
To some extent, yes. But if the company is private, a minority shareholder can only sue a majority holder under the terms of the sale. In a public company they can sue under the terms of the SEC. If the company is private, the majority shareholder can act against financial interests if they like.
Public companies are trying to box out specific areas where they might legally do that: C-corps, mission-based exemptions during public sale, etc
But—and this is full on opinion now—I suspect when the chips are down, the courts will rule that Google can't just burn a pile of value because "we like Science" or somesuch thing. They'll get away with it as long as the pile of money is growing. And hopefully that's "forever". But maybe forever isn't as long as we think it is. The world is changing. Snapchat cometh.
I suspect when the chips are down, the courts will rule that Google can't just burn a pile of value because "we like Science" or some such thing.
That's when stockholders file lawsuits alleging violation of director fiduciary responsibility. This can happen with a startup if the management proposes a funding round that's a significant lose for existing shareholders. The directors have the obligation to act in the best interest of the stockholders, not the management.
It also comes up when a company has assets and is losing money, and the stockholders want to liquidate and get some money out, while management wants to burn all the cash out to the bitter end.
1. Well they used to be for when society recognized that once a large societal and social phenomenon that is a large corporation (really just lots of people agreeing to work together to do something), that at some point that abstract group had some kind of obligation to the public, given, at some point, it becomes hard to separate the public from the corporations (given who staffs 95% of the roles at such mega-corps).
So basically, public markets were for allowing the public to invest in what had essentially become public phenomenon.
Also, once a company becomes public, it's fucking naive to call it "enjoyable" and assume that's as nuanced as you get when thinking about that decision.
Also, you're an idiot. "A company going public wants to take on some debt."
No, they want to sell equity, specifically because they would rather do that than sell bonds ie raise debt.
I'm not sure what's wrong with this. In the article the only issue I could find was that when companies are subject to the whims of public investors they get "market discipline" whatever that means.
If they are profitable (most aren't) I don't see why that discipline is necessary.
If I ran a business (or invested in one) that was already successful and had a promising future then I wouldn't make it public. I can understand Uber and Airbnb staying private, less so for Snapchat.
The whole situation is a bit confusing to me. A bunch of people have given a disproportionate amount of money to a few companies and those companies now have massive valuations. If the people giving them money shared the regulators concern, it seems simple enough to just, well, stop giving them money. And yet Slack gets $200 mil just a few days ago.
So what is happening exactly? Is there unrealistic optimism happening here or are people being suckered out of their money. Is the government concerned about the eventual pop and so is telling the very people who would benefit the most to quit it? Seems like they should be telling the _investors_ to stop, no?
"Public pension funds—the state-run investment pools responsible for the retirement benefits of nearly 20 million Americans—have quietly been funding the recent boom in venture capital."
Then when it eventually turns out the unicorns aren't worth all those billions it will be your pension money burnt. At least when things float you get a reasonable estimate of their actual value.
The federal government wants Silicon Valley's largest private companies to go public. The official reasoning is that this will allow these giant companies to build better governance models, and become more transparent. But what's wrong with private companies, and do they need to be public to have more reporting requirements?
Uhhh doesn't a VC need to close out their position eventually? And mark a return on their fund? If you take VC money you can't be private forever, you need to be acquired or go public.
Not entirely true, the other option is that other people buy the VCs out of their stake in the private market. In sharply profitable companies, a company could in theory buy itself back from its own investors without needing to be either acquired (it acquires itself, essentially) or doing an IPO.
Of course, your company actually has to be making money to do this. Which for most unicorns is something of a problem.
All investment is essentially debt. At some point either someone else chooses to hold it at a value that is mutually agreed on, or the company buys itself back.
For starters, make the rules for the first 365 days after the IPO the same as being private; which would include limiting the first year of the IPO to qualified investors.
The real problem with these unicorn technopolies is they centralize too much power and control over various aspects of our society. They take on pseudo-governmental roles. Whether they are on the stock market or not is mostly a concern for rich traders.
The solution is going to be moving away from proprietary platforms created by technopolies to decentralized open platforms.
What natural right do these regulatory agencies (or group of thugs known as government) have to regulate free people who choose to associate freely? What they are doing is deeply immoral.
So, there is really no objective justification for the existence of US government, because its supposed purpose it to protect 'basic rights', such as life, liberty and pursuit of haaapineeess(i.e. ensure that subset of homo sapiens species can release endorphins, dopamine, anandamide...). Since rights don't exist, there is nothing to protect. It's kinda like paying security staff to protect non-existing house. BTW, contingent rights flow from natural rights and if those are illusory, then all rights and laws are not justifiable.
