Trouble ahead for unicorns?
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Storm clouds may be gathering. Unicorns, startups worth more than $1 billion, raised… more[1]
Securities regulators are looking into whether hedge funds and other investors are illegally selling private technology stocks for hot companies, especially unicorns.
A probe by the Securities and Exchange Commission is in its early stages and is focused on people selling pre-IPO shares of private companies as valuations soar, according to the Wall Street Journal.[2]
The investigation is tied to the increasing hunger in the private market for shares of established tech companies. Unicorns, startups worth more than $1 billion, raised about $15.5 billion in additional funds through the first half of this year, according to Dow Jones.
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So why is the SEC concerned?
Sand Hill ExchangeThe SEC filed a case in June against Menlo Park-based Sand Hill Exchange. The firm allowed people to buy and sell contracts related to the value of private companies and their securities on its website, per the Journal.
Sand Hill settled the charges and agreed to pay a $20,000 penalty.
Dodd-Frank ActThe SEC’s case against Sand Hill was based on findings that the company’s business allegedly violated the Dodd-Frank Act.
In some cases, the sale of employee shares through derivative transactions is prohibited. The Dodd-Frank legislation makes it illegal in most cases to make trade swaps unless the transaction occurs on a national securities exchange with a SEC registration statement.
Following the Sand Hill Exchange case, the SEC sent letters to other firms offering derivative transactions to employees of private tech companies looking to sell their shares.
More troubling news for unicornsAlmost 50 percent of venture-backed companies with valuations of more than $1 billion have been financed by public market investors such as T. Rowe Price Group, Wellington Management Co. and Fidelity Investments, according to the Wall Street Journal[4] citing a study from Industry Ventures[5].
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References
- ^ more (www.bizjournals.com)
- ^ according to the Wall Street Journal. (www.wsj.com)
- ^ Subscribe to SVBJ's free morning email newsletter. (www.bizjournals.com)
- ^ according to the Wall Street Journal (blogs.wsj.com)
- ^ study from Industry Ventures (go.industryventures.com)