Merritt B. Fox is Michael E. Patterson Professor of Law and the NASDAQ Professor for the Law and Economics of Capital Markets at Columbia Law School. This post is based on his recent article, published in the Duke Law Journal.
Much attention has been paid recently to fostering the ability of small and medium size enterprises (SMEs) to raise capital through offerings that lead to liquid trading of their shares. Liquidity makes the shares more valuable to prospective investors, who will therefore be willing to pay more for them. The traditional route to achieving such liquidity has been an IPO registered under the Securities Act. Registration has proven impracticably burdensome for many SMEs, however. Under the JOBS Act and the FAST ACT, Congress has reacted by creating pathways for more lightly regulated “quasi-IPOs.” These reforms are a brave experiment, but one likely to end poorly. In creating these pathways, Congress has ignored economic principles relating to the market-destroying information asymmetries between potential investors and the issuing firm. A more promising approach is the SEC’s current Disclosure Effectiveness Initiative, also triggered by Congressional action, which may lead to a cost-benefit-based paring of the questions that must be answered under the traditional registration process and periodically thereafter. Such a streamlined set of questions could help at least some SMEs. Whatever the regulatory reform, however, the hard reality is that the cost of compliance will still make a public offering an impractical form of finance for most firms below a certain size.
