Should Large Private Companies Be Required to Register with the SEC?

A bill has been proposed in the U.S. Senate that would establish new Securities and Exchange Commission (SEC) registration triggers for certain large private companies. The Private Markets Transparency and Accountability Act was introduced by Sen. Jack Reed (D-R.I.) and is cosponsored by Sens. Catherine Cortez Masto (D-Nev.) and Elizabeth Warren (D-Mass.) It reflects ongoing unease among Democratic lawmakers and investor protection advocates about the number of large companies opting to remain privately held.

Basics

Under the proposed changes to the Securities Exchange Act of 1934, a privately held company would be required to register with the SEC within 18 months after the end of the first fiscal year in which it exceeds:

  • $700 million in market value, excluding the value of shares held by affiliates, or
  • $5 billion in revenue with at least 5,000 employees.

The bill would allow registration of the security to be terminated if the company’s valuation subsequently falls below $250 million.

As of September 2022, capital markets data firm PitchBook tallied 653 active “unicorns” in the United States. This term refers to private companies with a valuation of $1 billion or more. It was coined in 2013, according to now-former SEC Commissioner Allison Herren Lee, when “their existence and number was more fittingly associated with fairy tales.” Unicorns have since grown dramatically in number and size, some reaching valuations exceeding $100 billion.

Gatekeeping

Sen. Reed introduced the measure on September 15, 2022. That day, the Senate Banking Committee also held a hearing on SEC oversight with Chair Gary Gensler. Reed believes his bill is necessary “because we’re seeing the decline in public registrations and extraordinary increase in private companies that are controlling some public companies, some other companies.” He then asked Gensler to describe the investor protection differences between public markets and private markets.

Gensler noted differences in the disclosure requirements between public and private companies. He also highlighted the role the SEC plays in protecting investors from fraud and financial manipulation. Reed said that at the SEC’s origin, “most of the private companies were relatively small family owned, and that is not the case today.”

Wait and see

Staying private allows companies to avoid complex, expensive financial reporting requirements that accompany SEC registration. However, without SEC oversight, private companies may expose stakeholders to various risks.

As of this writing, the bill has been referred to the Senate Banking Committee, but Congress is in recess until mid-November. The bill’s success (or failure) may hinge on the outcome of the midterm elections in November. Contact your CPA for the latest developments on this issue.