Photographer: Thomas Barwick/Stone Sub

When Will the Cold Hand of Regulation Come for Startups?

A master of the universe-type figure graced Bloomberg’s offices recently, chatting about some of the day’s big business themes, particularly as it relates to Silicon Valley. There was some soothsaying about the regulatory backlash that big companies like Inc., Facebook Inc. and Alphabet Inc. might face for their increasingly anti-competitive postures. There was a discussion of whether the stock market has overestimated the chances of tax reform.

But I thought the most interesting point of discussion was: Will the federal government more tightly regulate private companies?

The argument went as follows: Private tech deals were once limited to sophisticated investors, mostly venture capitalists. Then endowments joined the party, then pension funds, and now sovereign wealth funds. At this point, the money in companies like Uber Technologies Inc., WeWork Cos, and Airbnb Inc.—it’s not just rich people investing in these startups. Your retirement savings might be mixed in there, if you have a Fidelity 401(k). Or if you live in Saudi Arabia, $3.5 billion of your government’s ability to thrive post-oil is on the line.

So now we have a lot of money tied up in private companies. Yes, it is managed by sophisticated stewards of capital (sometimes), but they’re playing with money that some people can’t afford to lose.

And giving private companies all that money creates its own problems. It allows them to stay private longer, so they might have to figure out how to let early employees and investors sell their shares before the company is public. More money means the stakes are higher.

The current regulatory regime effectively creates an incentive for companies to stay private. Why go public when you can raise cash like a public company without the scrutiny? Why go public when you can avoid handing over information to your competitors?

And if your business is doing poorly, or you’re keeping some big secrets, the answer to that question becomes even easier. Public companies must disclose material events—like Justice Department probes. Public companies are obligated to provide audited financials that adhere to generally accepted accounting principles. Public companies often need independent directors.

Not everyone seems to think reform is on the horizon. Technology news site the Information wrote Thursday that the Securities and Exchange Commission is making it easier, not harder, to be a secretive private company. The SEC is relaxing the rules (that are already rarely enforced) around when companies need to share their financials with their employees. The SEC under President Donald Trump has also expanded the number of companies that are allowed to file privately for an initial public offering to include those with more than $1 billion in revenue.

But I find it hard to believe Silicon Valley could play much faster and looser than it already is. These are minor changes around the edges. I think the biggest factor is a single company—Uber.

I’ve been wondering over the years when the SEC would step in and make reforms: After Theranos faced myriad issues and had to pull out of pharmacies, it drew an SEC investigation. Increasing the required disclosures of material facts at the company would certainly have put pressure on Theranos to own up to its problems sooner. Zenefits, another troubled company, ousted its chief executive officer after the company failed to properly license insurance brokers. An independent board member probably would have helped bring some much-needed scrutiny to the company’s practices sooner. Though, obviously, no single solution fixes everything: Theranos had an abundance of non-executive directors.

At $69 billion, after raising more than $15 billion, I think Uber is big enough to warrant scrutiny. Shareholders who buy in at one price are typically left with no option to sell, or if they do, it’s limited to whatever price the company picks. Executives and board members are at a substantial advantage when it comes to information driving investing decisions. The question is just how bad things get.

Possible reforms are simple because they already exist for public companies: Require more standardized disclosures, stronger board controls and more transparency. As far as things go, there’s a pretty good system in place for publicly traded companies. Some of the regulations are too onerous for a small company, but if a business has raised more than $1 billion in outside capital, it might be time to treat it more like a public company in some ways.

These reforms would have an added bonus. It might encourage companies to go public. If you’re already doing some of the hard work of being a public company, why not get the benefits of a liquid stock?

Change has happened before, but it takes a big, embarrassing disaster. It took Enron and Worldcom for Sarbanes-Oxley. The financial crisis brought about Dodd-Frank. Subprime mortgage bonds—well, change doesn’t always come. If you want to see reform in the private markets, I think you have to hope the situation at Uber gets much worse.

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And here’s what you need to know in global technology news

Read to the end. This Businessweek story provides some of the best insight into Mark Zuckerberg. I can’t promise you’ll understand the billionaire fully, but you’ll understand him more than you do now. (Here’s the news on Facebook’s political ad overhaul.)

Meg Whitman is stuck at HPE, cutting 5,000 jobs

Amazon’s $5 billion bet on India: That’s the budget allocation for the country where Amazon has 41 warehouses.

Apple’s reviews haven’t been so hot. The Verge panned the Apple TV. The Wall Street Journal dissed the iPhone 8. As our own Mark Gurman put it, “Major publications saying ‘can’t recommend’ to a major new Apple product isn’t a fake problem. Not a lot of precedent there.”

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