Bipartisan Securities Reform: Merger of the Public and Private Offerings
Bipartisan Securities Reform: Merger of the Public and Private Offerings
Republicans and Democrats broadly agree on some topics such as the promotion of economic growth, productivity, small businesses, and job creation. After the election, the new president, Congress, and SEC could make progress in those critical areas by joining together to reform the laws that govern the sale of securities by issuing companies.
Economic expansion, job growth, and innovation need access to capital. Selling securities is one way for a business to raise money, but the current rules for offering securities are costly, complicated, and daunting. A way to reduce the cost of raising capital would be to merge the two most popular methods companies use to sell securities.
The two methods are a public offering and a private offering. According to SEC staff data, registered public offerings in the one year from July 2022 through June 2023 raised $ 1.12 trillion. Yes, trillion. Two types of private offerings based on SEC rules raised a total of $ 2.87 trillion in the same period. The public and private offerings have different advantages and disadvantages, and the goal of a merger would be to retain the advantages and mitigate the disadvantages of each method.
The distinguishing feature of a public offer is that it involves extensive disclosures from the selling company. This is mainly an advantage because the disclosures provide potential investors with a basis to decide how much to pay for a share, but the length and detail of the disclosures have been criticized as confusing and too expensive to prepare.
A clear advantage of a public offering is that any adult may buy. In addition, many companies using a public offering also list the securities on an exchange, which enables the first and later buyers to resell easily. The disadvantages are that the public offering process is costly and time-consuming and has convoluted restrictions on communications from the company about the offering. After a public offer, the company faces heightened litigation and takeover risks and continuing, high-cost regulatory burdens.
The advantages of the private offerings are that the regulatory obstacles are minimal, the costs are lower, and the time to completion is much shorter. No disclosures are required, but the practice is for the selling company to provide disclosures calibrated to the experience and sophistication of the likely buyers. No post-offering periodic disclosure duty or other significant obligation exists.
A disadvantage of private offerings is that the set of potential buyers is restricted. A buyer must be an accredited investor such as a financial institution or an individual who meets a personal wealth test or has financial sophistication or experience. Furthermore, those buyers may not easily resell both because of legal restrictions and because the lack of continuing disclosures about the company hampers price discovery.
Larger companies tend to go public. Smaller companies tend to stay private. The consequence is that large parts of the population are denied access to securities sales by smaller companies. Those investments are risky, but some smaller companies have enormous potential for growth and profitability in the future. In this way, the federal securities laws exclude lower income investors from valuable chances to generate new wealth and create an unhealthy divide between the well-off and the less well-off.
A combination of the public and private offerings has much to commend it. The main change of the reform, call it the modern registered offer, would be to the disclosure obligation. The required disclosures would be significantly shortened and streamlined to the minimum essentials an investor needs to make a decision to buy. That would be much reduced from the current public offering document, but it would be mandatory as opposed to the voluntary disclosures for the current private offering.
The requirement for a disclosure document should not bother users of the existing private offering exemptions. The evidence is that they already prepare disclosures, and strict statutory restrictions could be added to prevent the SEC from expanding the amount of disclosure over time.
The second big difference of the modern registered offer would be elimination of the accredited investor category. Any adult would be able to buy. That would open opportunities in the capital markets to less wealthy and lower income segments of the population. It would favor personal liberty, promote greater democratization of finance, reduce government control, and enlarge the pool of capital available to smaller companies.
The modern registered offer would eliminate many of the arcane and restrictive procedures of public offerings. For example, the new offering method would free issuers to communicate about the offering at any time, shorten and limit SEC staff review of a draft registration statement, and promote disclosure to potential buyers before a binding investment decision is made.
To ease resales, selling companies would be allowed to list the securities on exchanges and would have a duty to make future annual and quarterly disclosures, although in the shortened form. Liability provisions favorable to buyers would maintain high investor protections.
This type of dramatic reform to the way things have been done could draw questions or opposition. A way to salve concerns would be to continue to require large companies to issue the current full-length disclosure document when selling securities or making annual and quarterly disclosures. Larger companies, say those with outstanding equity securities having a market value of $ 700 million or more, typically have more disclosures to make and more resources to make them. The simplified disclosure document would be available to small and medium sized companies.
The modern registered offering would be a meaningful bipartisan reform of the securities laws. It would cut regulatory costs, would reduce regulatory burdens, and would not tap the public fisc with government expenditures, tax deductions, or tax credits.
Andrew N. Vollmer is a distinguished senior fellow with the Mercatus Center at George Mason University; former deputy general counsel of the Securities and Exchange Commission; former professor of law, general faculty, at the University of Virginia School of Law; former partner in the securities enforcement group of Wilmer Cutler Pickering Hale and Dorr LLP.