AP Photo/Jeff Chiu/File
FILE – In this Nov. 2, 2016, file photo, Elizabeth Holmes, founder and CEO of Theranos, speaks at the Fortune Global Forum in San Francisco. Theranos was hit with a rare pre-IPO securities class action lawsuit Monday. (AP Photo/Jeff Chiu, File)
By MARISA KENDALL|mkendall@bayareanewsgroup.com
PUBLISHED
ecember 8, 2016 at 12:00 am| UPDATEDecember 8, 2016 at 10:30 amPALO ALTO — Removed from the volatile world of the public stock markets, private startups are usually safe from the investor lawsuits that plague Silicon Valley companies every time their shares plunge.
But in a rare case, embattled blood-testing startup Theranos was sued last week by investors claiming that the Palo Alto company conned them out of hundreds of millions of dollars.
The securities class action, filed before Theranos has even hinted at plans for an initial public offering, highlights the increasingly risky legal environment private companies must navigate and showcases the dangers investors face when dealing in private securities. Theranos is an egregious example — shareholders accuse the company of lying and knowingly peddling a product that didn’t work — but experts say more startups could face these types of suits as the market for private securities continues to expand.
“What you’ve seen over the last four or five years — particularly around the unicorn phenomenon — is people buying shares in these companies with little to no information, largely driven by hype and hope,” said Robert Ackerman Jr., founder of Allegis Capital, a venture capital firm with offices in San Francisco and Palo Alto. “And then, when the facts reveal themselves, or when they get more information, they’re surprised.”
Buoyed by floods of venture capital money that have poured in over the past few years, startups such as Uber and Airbnb are putting off IPOs while simultaneously tempting investors with valuations reaching tens of billions of dollars. Meanwhile, employees at these companies have bills to pay, so they’re cashing out by selling their shares on largely unregulated private markets. And investors, excited by the “unicorn” hype — the glowing aura that seems to surround private companies with valuations of $1 billion or higher — are snapping up those shares.
http://www.mercurynews.com/2016/12/...s-scary-about-buying-stock-private-companies/
