Despite being a private company, WeWork has attracted the attention of the U.S. Securities and Exchange Commission over possible financial rules violations leading up to its failed initial public offering, Bloomberg reported.
The SEC’s enforcement division is reviewing WeWork’s business and disclosures to investors amid media reports of potential conflicts of interest and aggressive fundraising, people familiar with the matter told Bloomberg. WeWork has hired Andrew Ceresney, a Wall Street lawyer who once headed the SEC enforcement unit.
“WeWork’s former CEO Adam Neumann clearly wasn’t subject to strong expense reporting requirements or conflicts of interest processes,” Erica Salmon Byrne wrote on The FCPA Blog, a blog about white-collar crime, enforcement, and compliance. “He threw extravagant parties, routinely hired his family members and close friends, and engaged in numerous related-party transactions.”
Lax standards, often common for privately held companies, can bring disaster for companies hoping to go public, said Byrne, who is vice president for The Ethisphere Institute.
The SEC’s inquiry is preliminary and nothing may come of it, Bloomberg reported. It has been a bad year for WeWork.
Its $47 billion valuation failed to materialize. The company fired Neumann in September and withdrew its IPO after investors started getting cold feet over bad governance. A bailout from Tokyo-based SoftBank, which will give SoftBank up to 70 percent control of WeWork — valued the co-working space giant between $7.5 billion and $8 billion. Without mentioning names, Boston Federal Reserve President Eric Rosengren warned in September that co-working could pose “a new type of financial stability risk” for commercial real estate markets.
Many investors have their own requirements and have just as much incentive as public shareholders to make sure they’re putting their money into a company they believe is somewhat inoculated against ethical challenges, Salmon Byrne wrote. “Softbank is tightening its governance requirements, having learned its lesson from the WeWork meltdown.”
Investors said they were concerned about conflicts of interest and heavy losses — sometimes growing faster than sales — that were disclosed when WeWork issued its S-1 regulatory filing that precedes an IPO.
“By relying on its vision and mission to carry it to success while neglecting strong governance, WeWork disregarded the more practical realities of operating a responsible company,” Salmon Byrne wrote. “When its IPO fell apart, there were significant consequences not just for the company’s early backers but for the thousands of employees now wondering if they’ll have a job tomorrow.”
The company had accelerated spending earlier in the year to try and show potential IPO investors that it was strong and growing, people with knowledge of the matter told Bloomberg.
Neumann leased space to WeWork in buildings he owned privately. When the company changed its name to We Co., it bought a related trademark for “we” for $5.9 million from an entity that Neumann controlled. And WeWork’s succession plan listed Neumann’s wife, Rebekah as one of three people on a committee with the power to pick a replacement CEO.
“Private companies can be hit with the same penalties as public companies for legal and regulatory lapses,” according to Salmon Byrne. “And for ethical rather than legal problems, they can face the same powerful backlash from the public, investors, customers, partners, and other stakeholders.”
Rapid growth can exacerbate many of the risks related to conflicts of interest and governance, she added.
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“Going public is about more than just selling stock, as WeWork and many other private companies have discovered. It’s about becoming accountable in ways that may be unfamiliar. A private company with IPO ambitions can expect to be put under a microscope — financially, organizationally, culturally, and legally. Being prepared for that scrutiny by having a strong ethics and compliance program already in place reduces the possibility that issues will emerge that could threaten the IPO and even the company’s future wellbeing and existence.”
With the emergence of several Silicon Valley unicorns, the SEC has increased scrutiny of unlisted firms in recent years, according to Bloomberg.
In 2018, former Theranos CEO Elizabeth Holmes paid $500,000 to settle SEC allegations that she raised hundreds of millions of dollars and lied about the blood-testing company’s technology. She did not admit or deny the claims.