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Implications for “Unicorn” Startups of the SEC’s Investigation of Theranos

Elizabeth Holmes aimed to revolutionize the blood test industry and was once regarded as a wunderkind that would become the Steve Jobs of the biotech industry. The company she founded, Theranos, was seen as one of the “unicorn” startups in Silicon Valley, a term given to startups that are privately-held and valued at $1 billion or more.1 Unfortunately, Theranos’ unicorn status was short-lived. After a series of scandals which erupted at the end of 2015, Theranos’ has been subjected to investigations by various agencies, including the U.S. Food and Drug Administration Agency (FDA), Centers for Medicare and Medicaid Services (CMC), the Justice Department, and the Securities and Exchange Commission (SEC).2

The SEC investigation is especially notable, as it will not only affect Theranos’ investors, whom have recently filed lawsuits against Theranos for misrepresenting Theranos’ technology3, but will have further implications regarding the independence unicorn startups have thus far enjoyed without being subjected to much scrutiny by the SEC.

From Inception to SEC Investigation

Holmes dropped out of Stanford to create Theranos in 2003.4 Holmes’ vision was to develop a blood testing method that would require less blood per sample than that required by traditional testing methods, thus cutting down the cost of blood testing and making it more accessible to consumers.5 Since its inception, Theranos has not only gained significant financial support but was also able to recruit high profile individuals to join its board.6 Theranos reached the height of its fame when it closed a deal with Walgreens in 2013, in which Walgreens invested $50 million into Theranos in return for Theranos’ pledge to develop a blood testing method that would use 1/1000 of the amount of blood needed for traditional testing with the company.7 During its funding round in 2014, Theranos was valued as high as $9 billion.8

The empire Holmes built started to tumble in 2015 when the Wall Street Journal reported that Theranos did the majority of more than 200 tests it offered to consumers on traditional lab machines purchased from other companies.9 In the same article, the Journal also reported that employees at the lab had doubts to the accuracy of the small number of tests run on the Edison machine, the machine Theranos has self-developed.10 After the publication of this article, the FDA and CMC started investigating Theranos’ lab facilities.11 Following the FDA and CMC investigation, the Department of Justice and the SEC initiated criminal and civil investigations on Theranos relating to whether Theranos had misrepresented its technology to consumers and investors.12 Soon after the commencement of various investigations, Walgreens, who had been its biggest partner, terminated its relationship with Theranos.13 The last blow to the company came when regulators banned Holmes from “owning or operating a medical laboratory for at least two years” and “revoke[d] certification of [Theranos’] laboratories and prohibit[ed] it from taking Medicare and Medicaid payments for its services.”14

Why is the SEC’s Interest in Theranos Notable?

Since its founding, Theranos has remained a private company, which exempted it from certain requirements to which public issuers are subjected under SEC regulations. Historically, the SEC has focused on investigating public companies; one legal expert even goes so far as to say that “this is the first time I can think of it ever happening.”15 However, as there is a growing trend where private companies with high valuations are remaining private for longer, the SEC has expressed interest in turning its focus on the private securities market.16

In a speech to Stanford Law School in May 2016, Mary Jo White, the SEC Chair, has expressed concerns about SEC’s concern with the lack of accounting controls, good governance, and transparency with investors.17 It is unlikely that the investigation initiated by the SEC will result in an indictment, as venture capitalists are sophisticated investors who have policies and procedures in place requiring performance of their own detailed due diligence.18 However, in the event that the SEC determines that Theranos had misrepresented the information it disclosed to investors, the SEC has the power to issue a variety of enforcement mechanisms, including asking Theranos to “pay back investors, issue penalties, negotiate settlements, [and] even bar Theranos’ leadership from serving as officer or director of a public company.”19 Additionally, if the SEC were to secure an injunction against Theranos, this action would automatically disqualify Theranos from raising private capital under Regulation D.20 As a venture-backed company facing costly investigations, this disqualification could starve Theranos’ of desperately needed capital even further.

Further Implications for Venture-backed Startups

The primary implication of the current move by the SEC is that private companies will need to consider the adequacy of its disclosures to investors and employees and will need scale their control and governance practices as they face rapid growth.21 After the speech given by Mary Jo White, one law firm issued a statement advising its clients to “develop written, enforceable compliance policies over financial reporting, disclosure and compensation, including the granting of equity-based compensation, among other things.” ((Id.)) Further, Director and Officer liability coverage for private companies might become narrower than before.22 Prior to the Theranos case, private companies had minimal exposure to securities law claims as compared to public companies.23 With the SEC’s recent action, it is clear that it is now possible for privately held unicorns to face securities law claims.24 In the past, D&O coverage for private companies provided broad coverage, but now that private companies like Theranos are receiving intensified scrutiny, insurers may now place unicorns in the same category as public companies when evaluating the terms of D&O coverage.25 Thus, while traditional D&O insurance only excluded coverage of public offerings, sales, or trading of securities, insurers may now take steps to expand exclusions to include pre-IPO activities as well.26 Going forward, startups aiming to become a unicorn will need to make sure to acquire appropriate level of D&O coverage to minimize the impact of potential securities law claims.27

  1. Jeff Sistrunk, Theranos’ Woes May Reshape Private D&O Coverage, Law360 (Oct. 19, 2016, 6:00 PM),

  2. Reed Abelson and Andrew Pollack, Theranos Under Federal Criminal Investigation, Adding to its Woes, The New York Times (Apr. 18, 2016),

  3. Joel Rosenblatt and Caroline Chen, Theranos Investor Accuses Holmes of Lying About Blood Tests, Bloomberg (Nov. 29, 2016, 5:57 AM),

  4. Nick Stockton, Everything You Need to Know About the Theranos Saga So Far, WIRED (May 4, 2016, 8:00 AM),

  5. See Id

  6. See Id

  7. See Id

  8. See Id

  9. John Carreyrou, Hot Startup Theranos Has Struggled with Its Blood-test Technology, The Wall Street Journal (Oct. 16, 2015, 3:20 PM),

  10. Id

  11. Andrew Pollack, F.D.A. Cites Unapproved Device in Theranos Review, and Faults Handling of Complaints, The New York Times (Oct. 27, 2015),

  12. Abelson & Pollack, supra note 2. 

  13. Michael Siconolfi, Christopher Weaver, & John Carreyrou, Walgreen Terminates Partnership with Blood-testing Firm Theranos, The Wall Street Journal (June 13, 2016, 10:19 AM),

  14. A Theranos Timeline, The New York Times (July 8, 2016),

  15. Nick Stockton, Theranos is Under Investigation for Fraud Which is Weird for a Private Company, WIRED (Apr. 19, 2016, 7:01 PM),

  16. Tom Zanki, SEC Eyes Tougher Stance on Silicon Valley, Pre-IPO Market, Law360 (Apr. 7, 2016, 10:07 PM),

  17. Ed Beason, SEC’s Theranos Probe Shows Unicorn Hunt Not a Myth, Law360 (Apr. 19, 2016, 10:11 PM),

  18. Stockton, supra note 15. 

  19. Id

  20. Beason, supra note 17. 

  21. Zanki, supra note 16. 

  22. Sistrunk, supra note 1. 

  23. See Id. 

  24. See Id

  25. Id

  26. Id

  27. See Id