In a memorandum released on April 18, 2016, the private blood-testing company Theranos – once valued at over $9 billion – announced that it is under investigation by the U.S. Securities and Exchange Commission (“SEC”) and the U.S. Attorney’s Office for the Northern District of California, among other government agencies. The memorandum did not disclose the focus of the government investigations. Theranos’ announcement about the investigations comes on the heels of a series of October 2015 Wall Street Journal (“WSJ”) articles critical of the accuracy of the company’s blood-testing methods. The government investigations into Theranos are not surprising, particularly in light of recent remarks by SEC Chair Mary Jo White (“White”) at a March 31, 2016 address at Stanford University’s Rock Center for Corporate Governance, where White revealed the SEC’s focus on Silicon Valley’s privately held unicorns – private start-up companies with valuations exceeding $1 billion.

According to White, part of the SEC’s current challenge is to examine the implications of the recent trend for companies – even those with large valuations – to remain privately held. According to White, there are now nearly 150 unicorns worldwide, many of which are based in the Silicon Valley. While private companies such as unicorns are exempt from certain requirements of public issuers, as White cautioned, “being a private company comes with serious obligations to investors and the markets.” Indeed, the anti-fraud provisions of Exchange Act Section 10(b) and Rule 10b-5 apply to public and private companies alike. Nonetheless, White noted that the prestige associated with a “sky high valuation” might encourage privately held companies to make inaccurate disclosures in order to appear more valuable. White also opined that private company distortion and inaccuracy in financial results and company disclosures may be more of a risk, as privately held start-up companies often have fewer internal controls and corporate governance procedures.

Whether the government investigations into Theranos mark the start of a trend to investigate more privately held Silicon Valley unicorns remains to be see, but legal experts predict that government focus on privately held unicorns will create a sea change. As Orrick, Herrington & Sutcliffe LLP Partner Andrew Thorpe, previously special counsel in the SEC’s Division of Corporation Finance, told Law360, “I do think we will see a blockbuster case and it’s going to change the culture to make everyone more cautious.” Privately held unicorns would thus be wise to take a lesson from Theranos and make internal controls and disclosure efforts robust before the government comes calling.