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Comment by criddell | Hacker News Reader

I wonder how good it is for companies to be allowed to grow so big and still be private? Would it makes sense to require any company with more than a billion dollar valuation to be subject to all the same SEC requirements that public companies are? Could companies be blocked from raising money once the reach a crazy valuation like $1 billion?

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That doesn’t make sense at all. The raison d’être of SEC is to protect regular mom-and-pop investors. A private company just doesn’t allow anyone to invest in them. Why should SEC rules apply? On what legal basis can you force a private company to divulge its financial details? Would you be happy if you, as an individual, have to divulge your account statements if your own net wealth reaches one million?

yeah it's a slippery slope forcing companies to go public at X valuation. who decides that? what number makes sense? etc. but i do think we need to somehow fix massively overpriced companies going public and dumping on retail

Nobody said anything about forcing them to go public, just to force them to adhere to reporting regulations.

It's a corporation, it exists at society's leisure.

It might be necessary to create a legal basis, but it's just a matter of doing it. If the owners don't like it they can dissolve it.

Exactly, let’s raise the regulatory burden on corporations to the equivalence point at which the producer of the most valuable product of the last 10 years considers dissolution. For society.

I was responding to general the "how can you possibly regulate a corporation" attitude expressed in the comment, not the specific instance here.

> It might be necessary to create a legal basis, but it's just a matter of doing it

Tell me you don't know anything about the law without telling me

> The raison d’être of SEC is to protect regular mom-and-pop investors

That's not the sole reason. They (should) also enforce a fair even playing field by preventing market manipulation (e.g. how Elon was tweeting about stock prices) and a few other things to "facilitate efficient markets and the formation of capital".

> Why should SEC rules apply?

Because private companies still fall under the jurisdiction of the SEC? See e.g. Theranos.

> On what legal basis can you force a private company to divulge its financial details?

On the to-be-created legal basis that aims to prevent bubble formation and the resulting fallout to the wider society?

> Would you be happy if you, as an individual, have to divulge your account statements if your own net wealth reaches one million?

Sure, why not? It's not a totally unheard of idea. In Norway everyones salary can be looked up.

SEC rules apply to private investment for the same reason they do to public investment: the world is full of scammers. In any case, you usually can't invest in a private company without being a "qualified" investor (already rich)

Having public investors forces companies to try their best to make a profit with the threat that you could get sued if you don’t. Sacrificing short term gains for long term goals is something public companies aren’t really good at. One good example where not having public investors has drastically helped a company is spacex. Almost every one of their programs has had really bad failures that public investors could’ve investigated and shut down. As someone who worked for them I really don’t want them to become public, forcing a company to do that seems crazy.

It’s a major issue in VC. Main Street doesn’t get access until it’s time to offload. Prevents capital recycling for early stage as well.

there used to be rules that companies must be public if they have other 1000 investors. is this no longer the case?

it's still the case, but there are never 1,000 investors, there's a couple dozen VC firms, SPVs, and individuals

if you're smart.

I don't think this is an SEC problem, they are fully aware that people subject to their jurisdiction can jump through many hoops to circumvent them. This shows consent on the investor's part well enough, and capital formation regulations do not burden the investor at all, they are only constitutional because they burden the organization raising capital, who simply needs to do a cursory check - not an in-depth one. (level of depth is based on which regulatory exemption is chosen)

So as long as you separate concerns the SEC is satisfied.

If employees get stock options and decide to exercise on exit, they count against the 500 unaccredited investor limit that would trigger reporting requirements. So companies that issue stock options do have an outside risk that enough employees will exit, exercise their stock options, and trigger a reporting requirement.

yeah, that's why those companies tend to offer liquidity strategically to lower their employee investor count

if an employee exercise options (but stays at the company) does that still count as one of 1000?

yes, the company has to manage it and hope certain things happen if they want to stay private

tbh that 1000 investors limit sounds like it was trying to address a similar problem? i.e. if a company is big enough it is important to reel it in a bit or else shenanigans happen. And just like all rules, the people at the top can easily work around it.

sort of... the 1000 investor limit was actually doubling the prior limit

the friction that the whole industry and the SEC pushes and pulls on is that nobody wants to go public because it's needlessly expensive to be a public company, companies would otherwise go public

basically, one publicly traded company does something egregiously bad, the SEC mandates a new expensive disclosure that requires a completely new operating style, less companies go public

the SEC's mission statement is a dual mandate: provide for fairer securities markets (via transparency mandates), and the second one is facilitate capital formation

so when the goal of providing for fairer markets is hampering people raising and accessing capital at all, then they help on that front

in this case, as people avoided going public, they would run into the number of investor limits and do suboptimal things because they couldn't raise more capital. so the limit went up to what it is

now, with that foundation in mind, your main point isn't close to what's happening "if a company is big enough it is important to reel it in a bit or else shenanigans happen", the SEC doesn't "reel in big companies". it mandates transparency in public companies, number of investors in private companies, and regulates details of certain transactions, that's it. you can be any size. they don't judge the merit of an investment (outside of some ETFs, since they also regulate fund advisors and ETFs just happen to be publicly traded funds), the SEC's focus is that there's enough information for an investor to judge the merit of a publicly traded investment

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