• SEC has begun work on a plan to require more private companies to routinely disclose information about their finances and operations

• The SEC is considering tightening regulations as many companies are attaining the unicorn status through private funding

Lack of supervision over increasing instances of private fundraising in big companies has prompted the Securities and Exchange Commission (SEC) to force more transparency from the former. 

The SEC has begun work on a plan to require more private companies to routinely disclose information about their finances and operations, according to a semiannual rule-making agenda, reported the Wall Street Journal. The regulator will make stringent qualifications for investors to attain access to private markets, and increase the amount of information that some nonpublic companies must file with the agency.

Also read: SEC finalizes rule to delist Chinese firms for not complying audit disclosure requirements

With an increasing number of companies attaining the unicorn status, i.e. valuation of more than $1 billion, through private funding, the SEC is considering tightening regulations.

Private funding scare

The SEC’s strict disclosure requirements for public stock and bond markets and the abundance of private capital have led to a waning interest among startups to go public, leaving investors and regulators worried.

Two-thirds of the companies that went public in the U.S. in 2021 were trading below their IPO prices at the end of the year, while private markets continue to grow. WSJ reported that, according to research firm CB Insights, there are currently 959 private companies valued at more than $1 billion, up from 513 at the end of 2020.

Read more: SEC Chair Gensler targets SPACs as regulators mull tougher rules

Democratic SEC Commissioner Allison Lee has called for the change, “When they’re big firms, they can have a huge impact on thousands of people’s lives with absolutely no visibility for investors, employees and their unions, regulators, or the public. I’m not interested in forcing medium- and small-sized companies into the reporting regime.”

WSJ reported that the transparency sought by the market regulator would hit companies with the cost of going public—regularly producing reams of paperwork—without any of the benefits. 

The SEC’s new plans will face resistance from companies that rely on private funding which closely guard information about their earnings, business outlooks, risks and manager pay.

Picture Credits: CNBC