On September 13, 2024, the SEC settled charges against Zymergen Inc. for misleading investors in its IPO by overstating market opportunities and revenue prospects for its product, Hyaline, resulting in a $30 million civil penalty against Zymergen. Zymergen’s finance team projected a market size using assumptions that were inconsistent with analysis conducted by its internal sales team. Zymergen’s finance team estimated a $1 billion market size, while the sales team, who actually spoke with customers, estimated the market to be only $42 million to $100 million—a stark 90-95% difference.
Zymergen’s case is a cautionary tale: overhyping market potential without a reasonable basis can invite SEC scrutiny and lead to serious regulatory consequences. Companies – and especially pre-revenue and early-stage companies – must ensure that all public disclosures are accurate, consistent, and grounded in reliable internal data to maintain investor trust and comply with SEC regulations.
What is permissible?
Market size is an important disclosure point in offering documents. In fact, most offering documents must include a description of the principal market for the products and/or services of the company, which often includes information on the size of the market. However, companies must ensure any market size claims are grounded in facts and consistent internal data. Estimations should reflect reasonable assumptions about target markets and realistic pricing structures. Discrepancies, like those between Zymergen’s finance and sales teams, should be reconciled to ensure accurate disclosures. Projections are also particularly risky – misleading projections can lead to SEC actions and substantial penalties, as seen with Zymergen’s $30 million fine.
Best Practices for Market-Size Disclosures (and Mistakes to Avoid):
- Align Internal Teams: The misalignment between the company’s finance and sales teams led to misleading disclosures. Companies should ensure comprehensive collaboration across teams to present accurate and unified market data.
- Disclose Realities: Companies must disclose both successes and challenges. Zymergen ignored internal reports showing technical and commercial challenges with its customer pipeline, choosing to present a sunnier outlook than the reality of the situation. Providing a balanced view helps maintain credibility and avoids misleading investors with an overly optimistic narrative. Don’t let your optimism override transparency—acknowledge the bumps along the road to keep investors properly informed.
- Transparent Projections (Or better yet – Don’t use projections!): We almost always advise our companies against using projections in their offering documents, as we believe the risk of liability related to making such projections outweighs the potential rewards. But for those companies that insist on using projections, companies should ensure those projections are realistic and labeled accurately, backed by sound methodologies that reflect internal consensus and market conditions. Zymergen described its revenue projections as “conservative,” despite them being up to double the initial figures from the sales team. The finance team further inflated these numbers before sharing with analysts. Projections aren’t a place for creative writing.
Conclusion:
This action highlights the risks for companies that make unsupported market claims in offering documents. The SEC doesn’t take kindly to unsubstantiated claims in offering documents and in disclosures to investors.
Stick to the facts, keep disclosures honest, and back up your claims with reliable data to stay in the SEC’s good books.
Author: Geoffrey Ashburne