Professor: SEC wants to regulate 'unicorns,' but law stands in its way
LAWRENCE — For the second time in two years, the United States’ top corporate regulator has proposed a sweeping overhaul to crack down on large private startup companies, commonly known as “unicorns.” And for the second time in two years, the proposed overhaul falls outside of the agency’s legal authority – according to a new analysis by a University of Kansas law professor.
In a widely covered January speech, U.S. Securities and Exchange Commissioner Caroline Crenshaw called on the agency to require these private companies to make the same regular detailed financial disclosures as public companies. In a new article, forthcoming in the New York University Law Review Online, Alexander Platt, associate professor of law at KU, shows why such an action would be outside of the agency’s legal authority.
“It’s just Civics 101,” Platt said. “Only Congress has the power to write laws. Agencies like the SEC can do a lot of things. Rewriting the laws is not one of them.”
The “laws” involved here are a pair of statutes passed by Congress 90 years ago to rein in Wall Street after the stock market crash of 1929: the Securities Act of 1933 and the Securities Exchange Act of 1934. As Platt said, those two laws together created a fundamental rule at the heart of the government’s system of corporate regulation.
“Public companies have to make comprehensive ongoing disclosures; private companies don’t,” Platt said. “That’s the essential line drawn by the federal securities laws. Commissioner Crenshaw would like to change that. But she can’t. Only Congress can rewrite the laws.”
Given the recent rise of unicorns – and the scandals involving companies like Theranos, WeWork, and FTX – Platt acknowledged that it is appropriate to revisit that fundamental distinction. But a fundamental change like the one Crenshaw proposed would have to be authorized by Congress. If the agency proceeds on its own with Crenshaw’s plan, a court would likely block it, he said.
For Platt, there is some déjà vu here. Two years ago, a different SEC commissioner proposed a regulatory overhaul that would force most unicorns to go public, and Platt published a legal analysis in the University of Michigan Law Review Online showing why that proposal was outside the agency’s authority. After Platt’s analysis was posted, the agency seems to have shelved that earlier plan.
“Policymakers can make an important contribution to public debate by offering up bold reform ideas,” Platt said. “Perhaps the public debate would be even better served if these proposals for bold agency action were limited to items the agency actually had authority to implement.”
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