The Washington PostDemocracy Dies in Darkness

For Silicon Valley, the SEC has become an unwelcome neighbor

After nearly two decades in San Francisco, Jina Choi recently received an invitation to speak at one of Silicon Valley’s most popular gatherings, TechCrunch.

The September appearance by the longtime head of the Securities and Exchange Commission’s local office was a recognition by the country’s growing technology sector that Choi’s office had become ground zero for some of the tech industry’s biggest regulatory headaches.

At the time of her appearance, the SEC had launched an investigation into a dubious tweet by Tesla CEO Elon Musk claiming that he had secured funding to take the electric car company private at $420 a share. Seven months earlier, it had accused the upstart blood-testing start-up Theranos of a breathtaking scale of deception. Choi’s office had also fined the company formerly known as Yahoo for failing to tell investors about a massive cyber breach for two years, the first time a company had been punished for such conduct.

“Regulation is not necessarily top of mind for a lot of these disruptive entrepreneurial companies,” Choi said in an interview. So “the idea that they are kind of looking to regulators … and wanting to hear our views on things I think is really important.”

For the SEC, the country’s top financial regulator, Silicon Valley poses a unique challenge. Most of the companies are privately held and thrive on a grow-at-any-cost, break-it-now-fix-it-later culture. And its leaders can sometimes appear dismissive of the SEC, including when Musk called it the “Shortseller Enrichment Commission” days after reaching a $20 million settlement. Even after the SEC laid out evidence of massive fraud at Silicon Valley darling Theranos, some wondered what had taken the agency so long.

There were signs, many uncovered by the Wall Street Journal, that the blood-testing company was troubled, said Jay Ritter, a finance professor at the University of Florida.

“A fraud like Theranos is good to have every once in a while,” he said. “It has reminded some investors that they need to do due diligence. In retrospect, there were all sorts of warning signs, with or without SEC rules.”

The SEC acknowledges that it is often outnumbered. Choi’s office of 130 people is relatively small and must follow companies not just in San Francisco but also in Portland, Seattle, Idaho, Montana and Alaska.

“We’ve always approached it as we’re never going to have the resources to cover everything. So a lot of what we do in order to be impactful is to make sure that we’re covering what matters to people,” Choi said.

The agency’s interest in Silicon Valley has intensified in recent years as money has poured in. The area is home to more than 100 of the world’s “unicorns,” private firms valued at more than $1 billion that have largely refused, so far, to go public. In 2016, then SEC-Chair Mary Jo White warned that these firms were missing out on the market discipline that comes with being accountable to public shareholders as part of a “Silicon Valley Initiative.”

The speech sent a message “that the SEC is paying attention and that companies need to be complying,” said Michael Dicke, who led the office’s enforcement staff until 2014 and is now a partner at Fenwick & West.

But the pace of private money pouring into Silicon Valley has accelerated in recent years. Venture capital firms have invested $84.3 billion in start-ups and other private companies so far this year — a record, according to data from the National Venture Capital Association and Pitchbook, a research company.

Some privately held firms mistakenly think the SEC’s reach doesn’t extend into their world, Choi said. “Boards and stakeholders, sometimes they’re a little surprised that we’re there,” she said.

One consequence of the billions flowing into Silicon Valley, Choi said, is that the size and complexity of some of the frauds detected by the SEC has also grown. When she started in the SEC’s San Francisco office nearly two decades ago, Choi said one of her first cases involved a $6 million fraud.

“I thought it was very important case,” she said. But now, “we’re talking nine-figure fraud. We’re talking about the ability of people in this [technology] space to raise a lot of money very quickly and then to move that money around very quickly.”

Billions are also pouring into another tech creation that has rankled the SEC — cryptocurrencies. Concerned that the market is teeming with scams, the SEC has repeatedly targeted initial coin offerings, in which a company creates a new cryptocurrency and sells it to investors to raise money. Earlier this year, the SEC named its first-ever senior adviser for digital assets, Valerie Szczepanik, a 20-year veteran of the agency.

But Silicon Valley backers of cryptocurrencies, including Andreessen Horowitz and other large, influential venture capital firms, have questioned whether the SEC’s enforcement-heavy strategy is effective or should be paired with policies to allow for legitimate cryptocurrencies to flourish, according to people familiar with the companies' thinking. The firms met with the SEC in March and conversations have continued, said these people, who asked not to be named so they could discuss private conversations.