Last week, The Wall Street Journal published an article titled: “SEC Sends a Message to Startups About ‘Fake It’ Culture.” According to the article, the “[s]tartup culture” at issue “encouraged setting lofty or even unrealistic growth projections to maximize company potential and catch the attention of investors and customers.” The solicitation of such “investors” triggers the agency’s regulatory oversight over startup funding rounds and initial public offerings. As Monique Winkler, the director of the SEC’s San Francisco office, put it, “the SEC will continue to aggressively pursue private company executives who use falsehoods to raise money from investors.”

Culturally, some might view “fake it until you make it” as a simple testament to the faith and hope that business founders have in their company’s innovations and inventions. The SEC’s recent enforcement actions serve as a reminder that startup fundraisers cannot use the “fake it until you make it” ethos to whitewash lying to investors. The SEC’s warning against crossing the line from good-faith optimism to fraud did not break any new ground. Indeed, over five years ago, the regulatory agency took dead aim at perhaps the paradigmatic misuse of the “fake it until you make it” motto when it charged Theranos CEO Elizabeth Holmes and former President Ramesh Balwani with an “elaborate, years-long fraud in which they exaggerated or made false statements about the company’s technology, business, and financial performance.” Rather, Friday’s warning served as a less than gentle reminder that the agency remains focused on “fraud in funding.”

Why did the SEC choose to issue this reminder now? The agency did not say. But with the stock markets at record highs, and the promises of billions of dollars to be made in artificial intelligence investments discussed at every turn, this may be Gary Gensler’s “irrational exuberance” bubble to burst. Excessive frothiness on Wall Street can easily lead to overeager investors in startup land whose investment decisions are governed more by FOMO (the “fear of missing out”) than sound financial analysis. And those overeager investors can be easily preyed upon by startup fundraisers armed with fanciful tales of riches rather than solid financials.

The Oxford Languages Dictionary defines “fraud” as “wrongful or criminal deception intended to result in financial or personal gain.” Winkler’s reference to her agency’s recent pursuit of the Skael case is on all-fours with this definition. According to the SEC’s lawsuit, “Skael co-founder and Chief Executive Baba Nadimpalli managed to raise more than $30 million from investors in the San Francisco-based startup between January 2021 and February 2022 by claiming it had as much as $7 million in annual recurring revenue [when] the actual figure was no more than $170,000.”

Culturally, some might view “fake it until you make it” as a simple testament to the faith and hope that business founders have in the innovations and inventions they are hawking. Elizabeth Holmes, for example, seems to have been a “true believer” that Theranos would eventually produce the world-changing blood test she promised. Appropriately couched as “forward-looking” future aspirations rather than present-day realities, such enthusiastic representations might not necessarily be wrongful. As Holmes’ attorney argued to her jury, if everyone knew about this aspect of the startup culture, then it could hardly have been material information relied on by investors.

But the rubber hits the road when the fundraising turns to the topic of the startup’s financials. There is no way to wish away lies about company revenues as immaterial. To the contrary, there may be no more important information to a potential investor’s decision-making process, especially when it comes to startup companies without any historical track record. One does not have to think too hard to envision how the investors in Skael would have reacted if they knew that the company’s actual annually recurring revenues were over forty times less than represented to them.

The bottom line here is that startups and their fundraisers should be especially careful to turn square corners with potential investors when it comes to accurately reporting about the company’s financials. There is no wiggle room here for cultural idiosyncrasies. There is only room for the truth.

Likewise, when it comes to considering investments in startups, FOMO-stricken investors should take a deep breath and a second look at the information being presented to them, especially the company’s financials. If something seems too good to be true, it probably is just that, even in this wonderland of record high stock markets with money aplenty to throw at the next big thing — like artificial intelligence.

A word to the wise to follow on the SEC’s warning to the unwise. The SEC is watching these fundraising transactions and clients should have skilled SEC counsel at the ready in case the agency calls. No one wants to be a party to a federal fraud investigation, which can turn a hoped-for Hollywood ending of “mak[ing] it” into a film noire ending of utter despair.