TDCI Encourages Investors to Know the Risks of Financial “Unicorns”

(Nashville, TN – Insurance News 360) – On March 14, the Tennessee Department of Commerce and Insurance’s Securities Division cautioned investors to be sure they do their research before investing in “unicorn” start up companies. The warning came after the North American Securities Administrators Association (NASAA) issued an advisory on the topic.

When it comes to financing businesses and start up companies, a “unicorn”  is a privately held company that is estimated to be valued at more than $1 billion. Privately held companies cannot sell shares to the public and has a limited number of investors. They can raise capital to fund business endeavors, and recent changes in securities laws have given them more options to do so. The investors in these types of companies are typically private funds, like private equity, hedge funds, or venture capital; they may also include wealthy individuals, owners and employees of the company itself.  SEC-registered mutual funds, exchange-traded funds (ETFs) and business development companies (BDCs) also may invest in unicorns.

Putting your money into this type of company carries big risk, especially when there is a direct investment. Because they are privately held, there is no public market to trade the securities, and these securities are not easily sold or exchanged for cash. This is why the market valuations may not accurately reflect the actual value of the company. Also, public disclosures may not be up to the level of what is required of publicly traded companies.

“Rushing into an investment that you don’t fully understand can be bad for your bottom line,” said TDCI Assistant Commissioner Frank Borger-Gilligan. “We encourage Tennesseans to always conduct thorough research to learn the risks associated with the investments they are considering.”


What are Some Risks of Investing in pre-IPO Shares?

Fraud: weak internal controls and corporate governance infrastructure may lead to fraudulent practices by a unicorn. For example, a company could create false sales and shipping documents to artificially increase sales numbers.

Disclosure: since the securities of unicorns will not be registered at the state or federal level, investors may lack important information to make an investment decision.

Liquidity: there is no guarantee shares can be resold after purchase.

Valuation: the valuation on a unicorn pre-IPO may not reflect the intrinsic value of the enterprise. In addition, even if the unicorn eventually holds an IPO, there is no guarantee the stock price will rise. Some IPOs are unsuccessful, and shares fall after the company goes public.

Remember, before making any decisions with your money, ask questions, make sure you understand the risks, and contact the Tennessee Securities Division for detailed background information about those who sell securities or give investment advice, as well as about the products being offered.

The Tennessee Securities Division can be reached at 615-741-2947.

Source: Tennessee Department of Commerce & Insurance (TDCI).

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