In “Private Company Lies,” published in the Georgetown Law Journal, University of Pennsylvania Carey Law School Professor of Law Elizabeth Pollman argues that the time has come to examine and address securities fraud in private companies. She writes that although federal anti-fraud catch-all Rule 10b-5 applies to both public and private company securities, the vast majority of case law and scholarship on the issue has focused on public corporations and markets.
Pollman explains that“[t]his state of the world, with Rule 10b-5 actions aimed at public corporations and little regard given to private corporations, sufficed for a time.” Most corporations of significant size were public, and exposed to the threat of class action lawsuits and regulators’ scrutiny. This twentieth-century model of a dominant public market has changed, however. “Companies have stayed private longer on average and those that go public tend to be larger in size,” writes Pollman. “This means that a significant part of the lifecycle of a growth company typically occurs on the private rather than the public market.”
“Some of the largest private companies by valuation grow in an environment of extreme information asymmetry and with the pressure, opportunity, and rationalizing culture that can foster misconduct and deception,” writes Pollman.
And while many private market investors may be “sophisticated” and able to “bear high levels of risk and significant losses from securities fraud,” Pollman maintains, “private company lies can harm a broader range of shareholders and stakeholders as well as the efficiency of allocating billions of dollars for innovation and new business.”
In her pathbreaking article, Pollman argues for greater regulatory oversight and enforcement “to protect the integrity of the private market and those affected by securities fraud, while carefully avoiding chilling the flow of funding” to startups and other private companies.
The article explores several mechanisms that Pollman argues could achieve this balance, including increased SEC enforcement aided by federal prosecutors and state regulators, giving startup employees additional information, and empowering gatekeepers to play a stronger role in monitoring.
Pollman is a Professor of Law and Co-Director of the Institute for Law & Economics. She teaches and writes on a wide variety of topics in business law, with a particular focus on corporate governance, purpose, and personhood, as well as startups, entrepreneurship, and law and technology. Her recent work has examined the distinctive governance of venture-backed startups, director oversight liability, corporate disobedience, companies that have business models aimed at changing the law, the trading of private company stock, corporate privacy, and the history of corporate constitutional rights.
Pollman serves on the Corporate Laws Committee of the American Bar Association and is a research member of the European Corporate Governance Institute. She has served on the National Business Law Scholars Conference Board and the AALS Business Associations Executive Committee.
Pollman practiced law at Latham & Watkins in Silicon Valley and Los Angeles, and served as a clerk for Judge Raymond C. Fisher of the Ninth Circuit Court of Appeals. She earned both her BA and JD, with distinction, from Stanford University.
Read more Law School faculty papers and publications.