Underwriters of directors and officers (D&O) liability insurance should keep an eye on the increased scrutiny of “unicorn” technology firms by the U.S. Securities and Exchange Commission (SEC) for potentially inflated valuations and misleading statements, both of which pose a risk to investors, according to a lawyer who specializes in professional liability insurance claims.
Kim Melvin, a partner with national law firm Wiley Rein, suggests underwriters may need to treat some of the highly-valued private technology companies like they are public companies when it comes to assessing risk for federal securities law violations.
Melvin expanded on her thoughts on unicorns and D&O in an interview with Claims Journal.
Melvin noted that Mary Jo White, chair of the SEC, announced in March that the SEC was moving to “fully engage with Silicon Valley, and participants in this important market across the country” in order to better understand its investors and financings.
The focus of the SEC’s Silicon Valley initiative are so-called unicorns, defined as private companies with a valuation of $1 billion or more.
Valuation marks the difference between unicorns and already-established private companies, with startup companies relying heavily on the venture capital markets to raise funds and to operate their companies, Melvin said.
She said the willingness to buy into startup companies has caused a market disruption that needs additional scrutiny.
“Any private company can be held liable under the federal securities laws for false or misleading statements in connection with the sale of their stock to venture capital firms or other private investment companies. It just has not been a historical focus of the SEC,” Melvin said.
Because of the potential for inflated valuations, the SEC wants to assess the unicorns’ communications with private investors about their fundraising and stock investments, Melvin said. The agency wants to ensure the companies are not overstating their value and that their internal compliance matches that of public companies with similar valuations.
“The SEC has suggested that these startup companies may not have the internal compliance…the robust practices expected of a publicly held company, for example, perhaps not unexpectedly given that a start-up is largely focused on getting its business off the ground more so than…compliance issues around its fundraising,” Melvin said.