Securities laws are speed bumps that prevent Uber-sized wrecks
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It cannot be denied that Uber has transformed how we move around cities and disrupted the century-old taxi industry with remarkable speed. Yet, following the young ride-hailing company in recent months has felt like watching a car crash in slow motion.

Last week’s ouster of its mercurial CEO was the culmination of a series of scandals that included allegedly harassing employees, mistreating drivers, spying on customers, playing rough with competitors and deceiving authorities worldwide.

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Uber’s troubles have been blamed on the edgy start-up culture that is common and often celebrated in Silicon Valley. But Uber is no ordinary start-up. With a staggering $69 billion valuation, it outranks many of America’s largest public companies. Yet, Uber remains privately held and beyond the reach of Securities and Exchange Commission (SEC) regulations mandating transparency and good corporate governance. 

 

Could it be that Uber’s private status contributed to its problems? 

To answer this, we need to take a step back. Until recently, it was virtually impossible for tech companies to get as big as Uber and remain private. The securities laws required companies to start following SEC regulations once they had more than 500 investors. This is what prompted Google and Facebook’s initial public offerings.

But as part of a major deregulatory move in the name of capital formation, Congress increased the threshold to 2,000 investors in 2012. This is the loophole exploited by numerous “unicorns” (private start-ups valued at over $1 billion) and even “decacorns” (those valued over $10 billion) to raise major funding from investors while remaining outside the reach of the federal securities laws.

So what about Uber? It’s true that requiring the company to go public once it got big would have served as a regulatory speed bump. But would it have led to a meaningful course correction?

There is reason to think so. Consider the changes recommended by former Attorney General Eric HolderEric Himpton HolderComey's book tour is all about 'truth' — but his FBI tenure, not so much James Comey and Andrew McCabe: You read, you decide Eric Holder headed to New Hampshire for high-profile event MORE and his law firm following an internal investigation into Uber’s culture: strengthening the independence of the board of directors; enhancing Uber’s audit committee, internal controls and record-keeping procedures; and setting up a robust internal complaint process.

Remarkably, these remedial actions mirror the SEC’s corporate governance requirements and best practices for public companies. In other words, for Uber to reform itself, the private company needs to behave like a public one. Reaching this conclusion before the latest string of scandals might have been good for everyone involved.

Of course, going public is no panacea. Public companies still get in trouble. Just think back to Wells Fargo’s trilogy of scandals since September 2016. Nor is corporate transparency always guaranteed, particularly at the largest companies where existing disclosure requirements may fall short

But Uber’s seemingly endless travails suggest that we can’t count on investors alone to offer a corrective solution when big private companies engage in shoddy corporate governance and poor compliance. Regulatory constraints may also have a role to play. They need not stymie start-up development.

Indeed, recent empirical studies challenge the long-held belief that securities laws undermine capital formation. Far from being a brake on corporate growth, for fast-moving companies, the securities laws may be just the speed bump that’s needed to prevent an Uber-sized wreck.

George S. Georgiev is an assistant professor at Emory University School of Law where he teaches corporate governance and securities regulation.


The views expressed by contributors are their own and not the views of The Hill.