The Securities and Exchange Commission (SEC) is bombarded with requests to regulate the finance industry, including a recent proposal to regulate private companies. Why? Asks the devil on my shoulder.
Why do we need regulations in a “free market?” As I warned you almost ten years ago, is it because freedom without paradoxical rules does not yield freedom? Is it because a so-called free country needs policing to protect the trust in freedom? You got it.
The SEC is in a tough spot and the source of many attacks. Elon Musk frequently lambasts them. Like the police, you can never win when you are responsible for establishing rules of constructs that are not systems, and the theory of humanity that ought to drive the purpose of finance is sorely missing. There are not enough rules in the universe to contain the players who do not know what game they should play.
I know a bit about private companies, as I ran and ignited a few Silicon Valley startups that produced exits of over $100M. I wondered how one could make money from solving inherent performance problems in Oracle databases. Essentially, we made a lot of money from putting a bandaid on the double-edged sword of technology. I did not feel as accomplished as is fashionable, cashing a big fat check while less than three miles away, people in East Palo Alto were starving. I thought I had cheated.
I bring that up to paint the balance between making money and doing good; doing good is described as serving the collective interests of humanity. Regulations, as deployed by the SEC, should strike a balance between the pursuit of personal and collective interests. Not quite the same, by the way, as private sector interests vis-a-vis public sector interests, a topic for some other time.
When time proves the pump-and-dump scheme of excessive valuations sold to a chain of greater fools amounts to little renewable value post-IPO, the public is the innocent and undeserving loser. Over the years, plenty of well-known examples exist Peleton, WeWork, Casper, eToys, Pets.com, Jawbone, Theranos, etc. The list is long. Too long. Innovation is not a crapshoot. Unless you do not know what the purpose of innovation is.
To protect the public, we must institute preemptive measures to minimize the risk posed by pump-and-dump schemes, especially since cunning new constructs like SPACs and Direct Listings have been conjured up to hide the responsibility of who ignites these schemes.
Private companies are called private because only private investors can invest in them, and their shares are unavailable on public exchanges. That does not mean the performance of those companies should be held in the dark. An investment post-IPO would be much more informed when the public has insight into pre-IPO data. Another benefit is that private companies’ valuations are based on realistic performance values, not greater-fool valuations.
Just because a private company is not publicly investable does not mean it should be allowed to operate in the dark. No right-minded investor would invest money in an entrepreneur they do not know the credit history of. No right-minded public investor should invest in a company they do not know its history.
A private company, especially a startup company, is like a Formula 1 racecar. It has four wheels, like a regular vehicle we drive every day, but that is where the similarities in risk profile end. The track is different to achieve the speed, making it enjoyable to watch. To ensure every driver and member of the audience is safe, Formula 1 is known for strict regulations commensurate with the degree of danger involved.