Sen. Jack Reed of Rhode Island and two other Senate Democrats have filed legislation that would establish new SEC registration triggers for certain large private companies.
S. 4857, the Private Markets Transparency and Accountability Act, is cosponsored by Sens. Catherine Cortez Masto of Nevada and Elizabeth Warren of Massachusetts. Under the measure, a privately held company would be required to register with the commission within 18 months after the end of the first fiscal year in which it surpasses a $700 million valuation, excluding the value of shares held by affiliates, or exceeds $5 billion in revenue with at least 5,000 employees.
The bill reflects ongoing unease among Democratic lawmakers and investor protection advocates around the number of large companies opting to remain private and avoid the complex and expensive requirements around disclosure and accounting, especially, that accompanies SEC registration. Capital markets data firm PitchBook tallied 653 active “unicorns,” or private companies with a $1 billion or more valuation, in the United States as of Sept. 8.
In October 2021, now-former SEC Commissioner Allison Herren Lee in a speech noted that, since the term was coined in 2013 “when their existence and number was more fittingly associated with fairy tales,” unicorns have since grown dramatically in both number and, importantly, in size, reaching dizzying valuations nearing and even exceeding $100 billion.” Around the time of Lee’s speech, Elon Musk’s company SpaceX had just surpassed a $100 billion valuation following a secondary stock sale.
“In today’s markets, companies can and do stay private far longer than ever before, despite the fact that they often dwarf their public counterparts in size and influence,” she said.
Reed introduced the measure on Sept. 15, 2022, the same day the Senate Banking Committee held a hearing on SEC oversight with Chair Gary Gensler as the lone witness. Reed said he believes his bill is necessary “because we’re seeing the decline in public registrations and extraordinary increase in private companies that are controlling some public companies, some other companies.” He then asked Gensler to describe the investor protection differences between public markets and private markets.
“We benefit in this country [from] vibrant capital markets, both public markets and private markets…but there is a difference in disclosure and a difference in, as you said, investor protection, because Congress gave this agency a remit about those public companies and to protect against, that disclosure’s there, that it’s truthful, and we protect against fraud and manipulation, that’s of course different if it’s a private company,” he said.
Reed said that at the SEC’s origin, “most of the private companies were relatively small family owned, and that is not the case today.”
This article originally appeared in the September 21, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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