In an article published in the Apr. 20 Opinion section of The Wall Street Journal, Harvard Law School Professor Hal S. Scott takes a look at the overregulation of private offerings by the Securities and Exchange Commission, following a recent statement by SEC Chair Mary Schapiro that the agency is investigating ways to reduce regulatory burdens on small-business capital formation. According to Scott, this should prompt a review of the regulation of offerings in both private and public markets.
“In her review of ideas to facilitate capital formation by small companies, Ms. Schapiro should not just focus on the private market,” Scott writes. “Even with relaxation of the number of shareholders [companies can remain private only if they have fewer than 500] and the ban on solicitation, this market will still be dwarfed by the public markets.”
Scott also believes that regulatory issues must be overhauled if the U.S. is to reverse the downward trend in its share of foreign IPOs. “Our public markets are increasingly unattractive to foreign issuers, those who have a real choice as to whether to use our markets—unlike large U.S. public companies that are generally trapped here. The U.S. share of global IPOs by foreign companies was 14.2% in 2010, compared to 28.7% from 1996-2006. When the SEC relaxed its requirements for deregistration in 2007, 13.7% of SEC-reporting foreign companies headed for the exits, and they continue to do so.”
Scott is the director of the Committee on Capital Markets Regulation, which in May 2009 released a comprehensive report entitled “The Global Financial Crisis: A Plan for Regulatory Reform.” He is also co-chair of the Council on Global Financial Regulation (formed in 2010) and director of the Program on International Financial Systems at Harvard Law School. His books include the law school textbook International Finance: Transactions, Policy and Regulation (17th ed. Foundation Press 2010); and The Global Financial Crisis (Foundation Press 2009).
Capital Market Regulation Needs an Overhaul
by Hal S. Scott
Securities and Exchange Commission Chair Mary Schapiro recently informed the House Committee on Oversight and Government Reform that the SEC is reviewing ideas to reduce the regulatory burdens on small-business capital formation. This should translate into a review of how we regulate offerings in private and public markets. Both need major fixes.
Private offerings, such as those to qualified investors or to large institutions under Rule 144A, do not trigger the mandatory disclosure rules applicable to public offerings. Nor are privately held corporations subject to burdensome public market regulation like Section 404 of the Sarbanes-Oxley Act (requiring internal control audits), which in 2009 cost the average publicly held company more than $2 million in direct costs alone, according to the SEC’s own survey.
These advantages help explain why many U.S. companies prefer to remain private, and why in 2010 79.3% of the funds raised in the U.S. by foreign companies in global initial public offerings were raised through the private Rule 144A market.
But there are serious limitations on the use of private markets that need reforming. …