Many readers undoubtedly saw the news last week of the enforcement action the SEC filed against Theranos, Inc., its founder, Chairman, and CEO Elizabeth Holmes, and its President and COO Ramesh “Sunny” Balwani. Theranos and Holmes have settled with the agency, although the complaint against Balwani apparently will be going forward. The SEC’s action is interesting at many levels, and it has several important implications that should not be overlooked. The SEC’s March 14, 2018 press release about the charges can be found here. The SEC’s complaint against Thernos and Holmes can be found here. The SEC’s separately complaint against Balwani can be found here.
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Hedge Fund Investor Launches Fraud Lawsuit Against Theranos
Earlier this year, the SEC announced a “Silicon Valley Initiative,” reflecting the agency’s concerns about private and pre-IPO companies that were scoring sky-high valuations in private offerings. The agency said that it is particularly focused on so-called “unicorns” – that is, private companies with valuations greater than $1 billion. Although the agency did not name any of the specific companies in which it was interested, it soon became clear that one of the companies the agency was investigating was Theranos, the start-up company whose blood-testing technology and practices have recently gained media and regulatory scrutiny. The SEC’s scrutiny of a private company’s fund-raising practices was itself noteworthy; now, in yet another notable development, the privately-held company has drawn an investor lawsuit alleging securities fraud.
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Theranos, the SEC, and the Enforcement of the Securities Laws Against Private Companies
In a speech last month, SEC Chair Mary Jo White signaled that the agency was going to be paying closer attention to private companies, particularly so-called “unicorns” – that is, the private venture-backed start-ups with valuations over $1 billion (as I discussed in a recent post). In her speech, White highlighted the concerns that can surround companies with these kinds of lofty valuations, noting that “the concern is whether the prestige associated with reaching a sky-high valuation fast drives companies to appear more valuable than they actually are.” It wasn’t clear at the time exactly what the agency’s scrutiny of these private companies might mean, but recent news involving the high-flying start-up company Theranos shows what White had in mind. The developments involving Theranos, in turn, raise the question of whether other high-flying privately held companies might also face scrutiny, as well.
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