The Securities and Exchange Commission (SEC) is getting bombarded with requests to regulate the finance industry, including a recent request to regulate private companies. Why? Asks the devil on my shoulder.
Why do we need regulations in a “free market?” Is it because freedom without paradoxical rules does not yield freedom, as I warned almost ten years ago? 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 are supposed to play.
I know a bit about private companies, as I ran and ignited a few in Silicon Valley startups that produced exits of over $100M. Already then, I started to wonder how one could make a lot of 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 felt I had cheated.
I bring that up to paint the balance between making money and doing good, doing good described as serving the collective interests of humanity. Regulations, as deployed by the SEC, should serve that purpose to strike a balance between the pursuit of personal interests 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.
The public is the innocent and undeserving loser 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. 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.
The solution to this problem is straightforward: force private companies to provide special quarterly earnings reports to the SEC in a new filing type for public display.
Private companies are called private because only private investors can invest in them, and their shares are not available on public exchanges. That does not mean the performance of those companies should be held in the dark. An investment post-IPO would be a lot more informed when the public has had insight into pre-IPO data. Another benefit is that private companies’ valuations are established 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 the history of.
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.