(Bloomberg) -- Billionaire and Aon Plc Founder Patrick Ryan sold his stake in Mu Sigma Inc. after learning the founder said the data-analytics startup’s prospects were dimming. Eleven months later, Mu Sigma raised millions in fresh capital at a much higher valuation. Ryan wasn’t happy and sued, arguing Mu Sigma’s founder bought back the stake for an artificially low price and set himself up for a bigger payday.

Expect a lot more lawsuits like this. Listed companies must give all investors the same important information at the same time. Private companies have more leeway. But an explosion of "unicorn" startups valued over $1 billion and more opportunities for smaller investors to buy and sell stakes has made the market for pre-IPO companies more like the public equity market. As a result, investors are pushing for startups to behave like their publicly listed counterparts.

Even the Securities and Exchange Commission is starting to poke around.

"Most of these unicorns do not practice best practices. I think they violate some of the core securities laws," said Ken Sawyer, co-founder of investment firm Saints Capital, which oversees more than $1 billion.

Saints has purchased shares in more than 200 private, late-stage startups from hedge funds, mutual funds, venture capital firms, executives and employees. Lacking a standard procedure, Sawyer and the sellers custom design each transaction.

"Different information comes with different sellers," he said, adding that most private company transactions violate the spirit of securities laws, if not the letter as regulations are scant. Mu Sigma said Ryan’s suit has no merit and is fighting it. Ryan declined to comment, as did Sequoia Capital, a leading venture capital firm, and General Atlantic, a large private-equity growth investor, which both invested after Ryan sold.

Moving Slowly

Over a decade ago, public companies from Compaq Computer Corp. to Abercrombie & Fitch Stores Inc. were criticized for selectively disclosing sensitive information. That brought Regulation Fair Disclosure, or Reg FD, into the world, which requires listed companies to give all investors the same important information at the same time.

The closest thing to Reg FD for startups is last year’s RAISE Act, which calls for standardized private company disclosure for all shareholders. But it’s optional: Companies are invited to disclose things like their most recent balance sheet in exchange for some legal protection if investors sue later.

Bill Siegel, head of Nasdaq Private Market, which handles trading in startup stock, thinks the response to RAISE has been muted with few companies using it. "It’s going to take time," he said. "Private markets move slowly."

No Good

So far most litigation, involving Mu Sigma and other startups like OrderUp Inc. and Stiefel Laboratories Inc., focuses on problems created by a booming market for late-stage startup financing and secondary trading of already-issued private tech shares flowing from that. In each case, investors complain they missed out on bigger gains because they weren’t told about good news that other shareholders, typically corporate insiders and bigger backers, knew.

However, late-stage private tech valuations have begun to fall back to Earth and financing is harder, so future disputes may revolve around the opposite scenario: Investors weren’t told about bad news that other shareholders knew and lost money by not selling before prices fell.

Good Technology Corp. employees sued management in October following BlackBerry Ltd.’s acquisition of the mobile security startup for $425 million, less than half the private market valuation in 2014. At a June company meeting, management told staff Good was thriving and still IPO-bound. Based on those comments, some employees purchased additional stock for $3.34 a share in August, only to discover when the BlackBerry deal was announced a few weeks later that the common stock was actually worth 88 cents a share and had been since June, according to the complaint.

Money = Information

As it stands now, the more money you have, the more information you get in private markets. Sven Weber launched the SharesPost 100 index fund in 2012 to let unaccredited investors (with a net worth below $1 million) own shares in late-stage startups, including DocuSign Inc., Spotify AB and Social Finance Inc., with a minimum investment of $2,500. He could only write $500,000 checks at first and it was hard to get information to gauge if he was getting a fair price. As the SharesPost 100 grew to 34 startup positions and $71 million under management, he got more access.

Weber said one Silicon Valley unicorn provided virtually no information when he was trying to purchase shares last year. Based on historical statements and publicly available documents like articles of incorporation, he invested anyway. During the past year, he increased his stake, got to know company executives and eventually convinced them to share quarterly revenue updates and forward-looking statements. He declined to name the company because he wants to maintain a good relationship and access.

Difficult by Design

Getting information from a startup is difficult by design. Private companies relish that they aren’t required to disclose financial, product or other information. Keeping such details under wraps is the main advantage they have over public rivals.

EquityZen Inc., a marketplace that pairs buyers and sellers of startup stock and helps execute transactions on their behalf, provides information about companies to potential buyers. But the depth and breadth of that data "depends on the size of the deal, how recently the company has raised a round of financing and what information they (the sellers) are willing to offer," said EquityZen CEO Atish Davda.

Nasdaq Private Market relies on companies and investors to present already-agreed deals which it then executes. Potential investors gain access to an online data room which can include historical investments, a breakdown of company ownership by shareholder and two years of financial statements -- items also required by the RAISE Act.

Nasdaq Private Market caters to VC firms, mutual funds and sovereign wealth funds, while EquityZen -- and rivals like Equidate, DreamFunded and Founders Circle -- typically serve smaller, non-institutional investors.

"We are leveling the playing for people who wouldn’t otherwise be able to invest," said Davda, referring to startups’ preference for institutional backers over individuals.

One banker who works on private tech stock transactions said the market is too risky for individuals and only institutions should play. "Doctors in Boca (Raton, Florida) should not be making opaque investments," he said, adding he declines to serve such clients.

Levitt Badgers

When then SEC Chairman Arthur Levitt introduced Reg FD in 2000, he wanted all public market investors -- whether a sovereign wealth fund or a doctor -- to get corporate information at the same time.

Now a director at Bloomberg LP who has backed more than six startups, Levitt said creating similar rules for private companies is "impractical." Bloomberg LP owns Bloomberg News. He has to "badger" companies to provide regular earnings and balance sheets. "They certainly feel no compulsion" to provide financial updates, he said. "They are almost by definition opaque." He’s not concerned that other shareholders of those startups may not get the same information as him because not all investors are equally engaged -- some want detailed information, others don’t, he said.

White Worries

The SEC’s new boss, Chairwoman Mary Jo White, is more concerned. In a March speech to Silicon Valley venture investors, attorneys and founders she highlighted problems, including conflicts of interest and undisclosed compensation, that characterized private market trades ahead of Facebook Inc.’s 2012 IPO.

"Secondary market investors did not have access to accurate information concerning the value of the companies in which they were investing," she said. "Care should be taken" not to repeat those mistakes.

"The SEC is looking at late-stage companies with the same lens that it has been using to look at public companies from an internal controls and disclosure standpoint," said Susan Resley, who worked in the SEC’s Division of Enforcement and is now a partner at law firm Morgan Lewis & Bockius LLP.

OrderUp ’Shock’

During the early stages of a startup, founders often provide updates as requested, not wanting to alienate their first backers. If the startup grows, it forms a board of directors who get most important information. Early shareholders can retain access if they reserved a board seat as a term of their first investment.

But being early doesn’t guarantee information flows, as Mu Sigma and a more recent lawsuit involving OrderUp show. Some of the earliest backers of OrderUp sued the company and its founder Christopher Jeffery in May saying they didn’t have full access and were intentionally misled into believing the online restaurant delivery company was in trouble.

Plaintiff Charles Lipson said he and other investors were in "shock" following a "sudden dire forecast" that differed significantly from updates the previous month. Based on those details, and mounting pressure from Jeffrey, the group sold back their shares to the company in April 2014, four months before Steve Case’s Revolution Ventures invested $7 million.

Had they had accurate financial, M&A disclosures and other information, Lipson and the other investors would have held onto to the stock and made millions when Groupon Inc. acquired OrderUp for at least $69 million a year later, according to the suit.

"Had the investors known the true facts, which Jeffrey deliberately concealed from them, they would never have tendered their notes," the suit stated. Jeffrey did not respond to a request for comment.

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