BC Law professor’s new book charts how private tech companies got out of control

Before the current AI boom, earlier investment bubbles formed for crypto, internet, and mobile startups. Those hype cycles crashed amid questions of alleged fraud and poor oversight at companies such as FTX, Theranos, and WeWork.

Now, Boston College Law School professor and corporate finance expert Renée Jones is worried history is repeating.

Her new book, “Untamed Unicorns: Why Startup Finance is Broken and How to Fix It,” catalogs how decades of relaxing securities rules have allowed private companies to become so big and unregulated that they could threaten to tank the economy and the retirement savings of ordinary people.

Just consider Elon Musk’s SpaceX, which recently went public in the largest IPO ever, raising $75 billion, only to see its stock price drop almost 30 percent since it debuted on June 12. The 24-year-old company, valued at more than $2 trillion right after its debut, likely would have had to list its shares many years ago under the old rules. Apple and Amazon were worth less than $2 billion when they went public, Jones notes in the book.

Now companies are 14 years old on average when they go public, almost double the average in the 1990s, and private companies without SEC oversight raise more than three times as much money per year as public companies. (See OpenAI and Anthropic.)

“Startups are supposed to be lean and mean and they’re supposed to grow quickly,” Jones said in an interview. “They’re supposed to go public, and this isn’t happening anymore. So I wanted to find out why.”

Unlike public companies, private companies don’t have to report audited quarterly earnings or disclose when something important happens that affects their business, like a takeover bid or loss of a major customer. And they aren’t subject to pressure from outside investors or activists. Jones’s book includes a three-page list of requirements on public companies that don’t apply to private companies.

She got a firsthand view of the best and worst company fundraising and management practices during the Biden administration, when she headed the Securities and Exchange Commission’s Division of Corporation Finance.

Under securities rules originating after the 1929 stock market crash and the Great Depression, Jones explains in her book, companies could not raise money from private investors after they grew beyond a certain size. And stock in private companies could not be easily traded. More recent reforms have eased or eliminated those limits.

“That oversight regulatory system for large companies is missing for a lot of the most significant companies in our economy,” Jones said. “All of those features that we depend on in the public markets just aren’t present in the private markets, and so it’s more or less of a free-for-all.”

Deregulation also allowed venture capital funds to expand. The Department of Labor cleared pension funds to invest in startups and private equity in the late ’70s and early ’80s, while a 1996 law allowed VC funds to remain exempt from mutual fund rules no matter how many investors they attracted. That let VC funds grow much larger, providing money for startups to stay private longer.

The problem is coming to a head as such funds pour hundreds of billions of dollars into AI startups, she said.

“In AI, all bets are off and there’s just really insane investment and due diligence processes, because nobody knows which company is going to succeed,” Jones said. “They’re just throwing money at these companies.”

What’s needed to prevent future fraud and harm to investors and the economy, Jones said, is tougher rules on trading of private shares, public financial disclosures by larger private companies, and restored requirements for companies to go public after reaching certain thresholds.

Entrepreneurs and startup investors likely have a different view of the situation. After all, they can point to the growth and jobs created by many larger private companies, despite the lack of regulation. They’ll have an opportunity to hear Jones firsthand and maybe provide some pushback at a panel at BC Law School on September 17.

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👋 Thanks for reading. We’ll be will be back next Wednesday.

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Aaron Pressman can be reached at aaron.pressman@globe.com. Follow him @ampressman.