Former SEC Official on FTX, Crypto & Silicon Valley’s Fraud Problem

Eric Newcomer (0:00)

If they were a public company, would FTX have been found out or you think it's the same problem?

Renee Jones (0:05)

You can sell securities, an unlimited number of securities to an unlimited number of investors without providing any disclosure as long as they're all accredited. Well, what I hear you saying is that public company managers or spokespeople, their representatives are more disciplined than private company managers and their representatives.

Eric Newcomer (0:22)

Do you see a path to regulated markets? Renee Jones, thank you so much for joining the Newcomer Podcast.

Renee Jones (0:30)

Thank you for having me.

Eric Newcomer (0:31)

Untamed Unicorns, a title that gripped me as soon as I saw it. You're a professor at Boston College Law School, and we're at the SEC governing startups and companies from 2021 to 2023 So a lot to talk about both the argument about what we should do with startups, how they should be governed, and then what's happening in the Trump era, almost going the opposite direction. I want to start off just with the core intuition of the book. Why should startups be tamed? I think some in Silicon Valley would see this and be like, Untamed Unicorns, that's exactly what I want. They're strong, running free.

I don't know, why tame them?

Renee Jones (1:17)

Okay, so basically my book really focuses on how the startup financing system has changed in the past 20, 30 years, from a system of basically investor control, where VC investors had a lot of power and a lot of authority and ability to guide startups as they grew, from a beginning new company that's starting off with a new product to the point where they're ready to sell their products to the public and then if the company succeeds to do a public offering, become a public reported company, where then the SEC rules, analysts, journalists, and everybody else has an opportunity to see what's going on and to provide some discipline and accountability.

That's now shifted to what I call a system of founder control, where founders have the power in many of these large startups to control who sits on the board of directors, essentially choosing their bosses, and that gives them a lot of freedom. And in this situation, we've seen a lot of bad behavior, illegal conduct, and a lot of harms imposed, not just on the startup investors, but also on their employees, on their customers, and broader society.

Eric Newcomer (2:24)

Certainly, I think Silicon Valley investors would agree with you that founders have a lot of control now. Yeah, that's sort of, I guess they would say, sort of a market dynamic, that founders have the sort of appealing thing that they want, and so they've sort of contorted to give founders the control. I'd say, you know, correct me if I'm wrong, but like an overarching argument in the book is like, all right, maybe you could believe that private markets should be this sort of unregulated, chaotic thing, and it'll just sort itself out and people get burned or whatever.

But there's also this element that these are the companies that then decide how society works, and sort of extracting them from sort of any sort of government oversight is creating problems that all of society has to bear.

Renee Jones (3:08)

So, startups today, we call them unicorns because they used to be very rare, multi-billion dollar startups, but now, of course, they're ubiquitous, and we have 1,500, some people say 1,600 startups that are valued at a billion dollars or more, and that used to be unheard of, and again, that's why they're called unicorns. But they're as big or bigger than many public companies, but they're not subject to the same accountability mechanisms that we depend on to ensure that they're working in the interests of the investors but also in the public.

So a lot of the problems that I write about in the book, I try to trace the changes in the startup financing model to changes that have occurred in the legal system. So show that changes in the law have really enabled these startups to grow so large, right? And that's what's led to the changes in the startup financing system, the changes in startup oversight and governance, and that's what's led to some of the problems that we've seen at companies, of course, FTX, Theranos, WeWork, you know the drill.

Eric Newcomer (4:07)

Part of the problem is just that they were allowed to raise so much capital before they had to disclose anything that might have cued regulators that there was something going on.

Renee Jones (4:16)

Right. They're operating in secrecy. That gives them a chance to grow large, to accumulate market power, and then they use the money that they raise from their investors and the popularity of their services to evade the law, skirt the law, or actually change the law in their favor, and so, and then again, we at the public, the customers, don't really know exactly what's going on under the hood because they disclose what they want to disclose about their finances and their operations, but things that they don't want us to know, they're able to keep quiet.