Unicorns are huge companies, often with many shareholders, whose securities are not registered with the SEC. They have been privately financed by sophisticated investors, have never done an IPO, and do not have over 2000 shareholders (which would require them to registered under the Securities Exchange Act of 1934 and provide periodic reporting.)
We are told there are 986 of these Billion dollar plus entities so their total unregulated market value is well in excess of a trillion dollars.
Nothing annoys the current Democratic SEC more than anything unregulated– unless it is something that is large and unregulated.
The current SEC agenda includes a study of how shareholders “of record” are counted for the purposes of falling into the mandatory reporting category of 2000. (The number was upped in 2012 from 500 to reduce regulation and fuel private financing of larger enterprises.) At present, the following investors count as “1” in such calculation: VC and other funds; a brokerage’s street-name holdings. Each of these could have dozens, indeed hundreds of ultimate “stockholders” but they are not “of record” so the count is only one for each. The SEC current agenda seems to be considering requiring the disclosure and counting of underlying investors in each category, no doubt greatly increasing the number of shareholders — likely in some cases over 2000.
Can the SEC change the method of counting? Current legal commentary seems to think that they can, as there is no law fixing a method. Perhaps the reference to stockholders “of record” is deemed within the power of the SEC to interpret (although one could imagine a challenge to that power if the SEC takes action).
What will the effect be if such a change is promulgated? Large companies now private will become public, their shares freely tradeable, their information knowable in detail (and subject to lawyer scrutiny for misrepresentation suits). Will this threat cause future would-be unicorns to in fact register up front? Will such action slow down capital formation by subjecting large investment needs to SEC delays and investor reticence (do some people invest because they think they have an inside track on a private deal?)? Will management, which may not want to be public for whatever benign or non-benign purpose, limit the nature and number of early investors, thus shutting off the wider investment community from the investment opportunity (not an SEC goal, presumably)? Will present unicorns do reverse stock splits or redemptions to reduce the number of investors to below 2000?
Trite but true: you had best stay tuned….