Emtrain Blog

Why the SEC is Keeping an Eye on Silicon Valley Unicorns

Posted by Janine Yancey

April 28, 2016

The SEC is Watching You, Silicon Valley

In the late 1990s, there was massive investor confidence in companies with little or no earnings, no profits, short track records, and sometimes, no product. As a result, company valuations skyrocketed and a small percentage of people made millions.

Inevitably, the wind started to blow in the other direction and companies were directed to get cash flow positive quickly. That’s when fantasy company valuations plummeted and both employees and investors were left with little to show for their investment of time and money.

The rise of the unicorn

Today’s “unicorn” may be the newest iteration of unchecked exuberance. Today there are purportedly upward of 150 unicorns, meaning companies valued at over a billion dollars. However, the way company leadership and investors are determining valuation seems to be based more on greed than objective financial and business numbers.

A wakeup call for Silicon Valley

Last month, the Chair of the SEC, Mary Jo White, delivered what will hopefully be viewed as a wakeup call to Silicon Valley investors, board members and company leaders.

At her Stanford keynote speech for the SEC’s and Rock Center’s Silicon Valley Initiative, she said it is axiomatic that “[A]ll private and public securities transactions, no matter the sophistication of the parties, must be free from fraud. Exchange Act Section 10(b) and Rule 10b­5 apply to all companies...”

Significantly, White pondered whether the publicity and pressure to achieve the unicorn benchmark is analogous to the pressure on public companies to meet projections they make to the market with the attendant risk of financial reporting problems.

Safeguarding from SEC scrutiny

Chairman White made clear that, even if startups choose to delay IPOs, it is incumbent upon all companies – and especially Silicon Valley unicorns ­­– to ramp up their internal controls and safeguards.

She advised such companies to form audit committees, establish procedures and controls on disclosure, and implement internal controls over financial reporting.

Chairman White stated, “[w]hile internal controls over financial reporting, and the regulations and certifications applicable to them, do not apply to private companies, all companies should consider enhanced structures and controls for conducting their operations, especially in anticipation of going public.”

Time for change

Unlike Silicon Valley companies and their investors, the SEC and DOJ are more likely to recall the harm caused by irrational company valuations in the 1990s, the lack of financial controls and internal compliance procedures and the resulting shortcuts taken to puff up company valuation.

In fact, it was this type of business environment that led to some monumental ethical lapses (Enron, World Comm) and ultimately triggered Congress to pass Sarbanes Oxley in 2002.

It’s likely the SEC is looking to make an example of a current unicorn with sloppy (or no) internal controls and sloppy (or unethical) business practices.


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Topics: Compliance, Business Compliance, Code of Conduct, Ethics, ethical workplace culture, Silicon Valley