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Tennessee Law Review

Anat Alon-Beck

Document Type

Article

Abstract

The U.S. Securities and Exchange Commission has promulgated new rules designed to harmonize and improve the "patchwork" exempt offering framework, protect investors and facilitate capital formation. Additionally, the U.S. Department of Labor announced that the fiduciary responsibility provisions of the Employee Retirement Income Security Act of 1974 do not prohibit fiduciaries of 401(k) and other individual account plans from investing in, and undertaking exposure to, private equity investments. These policies address the concern that retail investors are missing out on investment opportunities, due to fewer listed firms and initial public offerings, the greater role of the private market in raising money, and the rise in the number of unicorn firms.

This Article details these concerns, assesses the policy changes within the broader context of private capital formation, and argues that some of them not only fail to provide a remedy, but may also induce greater harm and should not have been undertaken. Most importantly, policymakers must consider the rise of alternative venture capital ("AVC") investors, and the ways in which those investors affect a unicorn firm, its capital needs, and the lack of disclosure of information, all of which affect future investors. Finally, this Article argues that to adequately protect retail investors, AVC investors ought to be considered when formulating policy decisions relating to investor protection and the capital formation needs of private companies.

"Increasingly seems like we are entering a new reality in Unicorn land. If you have raised more than $250mm & are NOT public, the presumption is you are losing WAY too much money, and you probably have sh[***]y unit economics."

"There was a theory that the public and private markets for tech company shares had become disconnected, that venture capitalists and (particularly) non-traditional venture investors like mutual funds and (most particularly) SoftBank were now willing to pay higher prices than the public markets were, and that when those private investors eventually tried to sell to the public markets they'd run into trouble."

Publication Date

2020

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