Making Disclosure Work for Start-up Employees


The securities regulation regime has traditionally focused almost exclusively on financial capital investments. However, the widespread and growing practice of providing equity compensation has transformed high-skilled labor from a pure employment relationship into one that involves a significant investment component. I argue that it is therefore time for securities regulators to catch up with market dynamics and address the challenges of human capital investments by start-up employees. The article establishes, both on theoretical and empirical grounds, that, similarly to financial capital investments, human capital investments are susceptible to agency problems and information asymmetry. It argues that the current framework—namely, Rule 701, adopted by the SEC in 1988—fails to address these concerns. The article offers an outline for better regulation of the relationship between private issuers and their equity-compensated employees by tailoring the disclosure requirements under Rule 701 to the distinct attributes of venture capital-backed firms.

Columbia Business Law Review