It’s been pretty obvious for a while that Silicon Valley’s tech “Unicorns” have been based on a largely corrupt model, in which venture capitalists buy into a company, and then inflate the value of the initial investment through follow-up funding rounds.
The theory is twofold: That the large amounts of money will push competitors out of nascent markets, and that the mania will generate huge profits for the VCs when they go public, and gullible retail investors flood in.

It has been apparent for a while, Uber, Lyft, Peleton, Endeavor, Slack, and (of course) WeWork have all shown that they have no path to justify their valuations.

But inspector Cluseau, aka the Securities and Exchange Commission, is now on the case, and they are investigating the initial listings of these companies on the New York Stock Exchange.

I hope that it leads to something, if the string is aggressively pulled, it is VERY likely that the whole scarf will unravel, but at best at this point the investigation appears far too narrow.

At worst, this may be little more than an attempt to short circuit the direct listings that these companies used, which deprieved Wall Street investment banks of much of the normal fee revenues that come from a conventional IPO:

The Securities and Exchange Commission is investigating the listings of Slack Technologies Inc. WORK 1.32% and other major companies on the New York Stock Exchange, in a probe looking at how trading was handled on the first day, people familiar with the situation said.

SEC enforcement staff have recently sent letters including one seeking information from electronic-trading firm Citadel Securities LLC related to how it opened Slack’s stock for trading on June 20 in the workplace-messaging app’s so-called direct listing, the people said. It also seeks information on other initial public offerings.

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The SEC is probing IPOs over the past several years of other so-called unicorns, companies known for achieving high valuations while private, the people said.

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More large companies have gone public in recent years following big capital infusions from venture capitalists that allowed them to stay private far longer than was common in the past. Companies that have gone public on the NYSE in recent years include Alibaba Group Holding Ltd. , Snap Inc. and Uber Technologies Inc.

Slack’s debut represented a new breed of public offering. The workplace-messaging company went public via a direct listing, in which a company lets its shares float on an exchange without hiring banks as underwriters like in a standard IPO. Banks do play a more-limited role as advisers, helping guide buyers and sellers to an opening price. Spotify Technology SA also used the process to debut on NYSE last year.

Direct listings allow companies to save on underwriting fees and bypass some restrictions that come with IPOs, such as limits on promoting the stock to the public and avoiding some lockups that prevent insiders from selling for a certain period.

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The day Slack went public, some floor brokers felt Citadel Securities’ initial indications were too low and didn’t reflect accurate supply and demand for the stock, according to people familiar with that day’s events.

NYSE floor brokers have complained for years that banks working on big IPOs push DMMs to issue indications that are too low while taking unnecessarily long to open the stocks. That could allow banks to poach clients from rivals over the course of the morning, because the banks may be able to privately give mutual funds and other investors a more accurate indication of the opening price, current and former floor brokers said.