University of Miami Business Law Review

Document Type



America’s securities laws and regulations, most of which were created in the early twentieth century, are increasingly irrelevant to the most dynamic emerging companies. Today, companies with sufficient investor interest can raise ample capital through private and exempt offerings, all while eschewing the public exchanges and the associated burdens of the initial public offering, public disclosures, and regulatory scrutiny. Airbnb, Inc., for example, quickly tapped private investors for $1 billion in April of 2020, adding to the estimated $4.4 billion the company had previouslyraised.2 The fundamental shift from public to private companies is evidenced by the so-called “unicorns,” the more than 400 private companies valued at more than $1 billion. unicorns like Uber, Airbnb, SpaceX, and WeWork have raised billions of dollars without the need to tap retail investors through the public exchanges. The unicorn phenomenon is emblematic of the shift away from public markets, with more and more companies choosing to stay private and raise capital through private placements. Despite a fast-evolving capital market, America’s securities regulations are still largely based on the 1930s-era laws passed in the aftermath of the Great Depression. Scholars and regulators have voiced concerns about the lack of regulation in the private markets and the potential harms posed by large, unregulated private companies.

At its peak, blood-testing company Theranos was a unicorn, valued at $9 billion. The valuation reflected intense investor enthusiasm for a company with significant potential to shake up the biotechnology and healthcare industries. Far from realizing its financial and business goals, Theranos perpetrated a fraud on investors, customers, and business partners. Executives misled current and prospective investors with inflated financial projections. The company’s founder and employees deceived business partners with falsified product tests. The company continued to tout its “revolutionary” blood testing technology, but, behind the scenes, employees consistently failed to achieve the necessary technological breakthroughs. Rather than admit the setbacks, Theranos deviated from established medical and scientific methods by altering tests and, when that did not work, Theranos ran the tests on its rivals’ status quo blood testing machines. Eventually, intrepid reporters, regulators, and prosecutors uncovered the fraud, culminating in a series of lawsuits brought by investors, business partners, and the Securities and Exchange Commission (“SEC”).

In the aftermath, many commentators wondered how a critically flawed company could raise so much money from prominent investors at such a high valuation. Theranos was able to perpetrate its fraud, in part, because it operated as a private company and therefore did not have to submit to the same onerous disclosures that public companies must provide to the SEC and the investing public. A public company, unlike Theranos, must register with state and federal regulators, submit periodic filings, and, importantly, certify its financials under Sarbanes-Oxley. Theranos was able to raise $700 million without providing those disclosures to its investors—disclosures that were designed to protect and inform investors. The Theranos story provides a lens through which we see the tension between private capital formation and protection of investors.

In this Note, I closely examine the Theranos collapse and the litigation that continues in its aftermath. This Note will argue that Theranos should be viewed as an example of regulatory failure. Current securities regulations allow private companies to operate in the shadows, even while these companies raise large sums from sophisticated and (increasingly) unsophisticated investors alike with little oversight and minimal transparency. This Note examines Theranos as a cautionary tale exemplifying the risks of failing to regulate private companies despite the dramatic decline in IPOs and the corresponding expansion of private companies, particularly unicorns.