Laurie Smilan is of counsel and Nicki Locker is partner at Wilson Sonsini Goodrich & Rosati. This post is based on their WSGR memorandum.
When Congress enacted the Securities Exchange Act of 1934, providing for federal regulation of securities traded on the public markets, it took the opportunity to consider conforming amendments to the sister statute regulating initial public offerings it had enacted the year before, the Securities Act of 1933. One such amendment would have done away with the ’33 Act’s concurrent jurisdiction and removal bar provisions, instead providing for exclusive federal jurisdiction like the new ’34 Act did. An ABA Special Committee had advocated for the change, which was included in the original Senate bill, out of concern that concurrent jurisdiction “will inevitably result in varied interpretations of the Act.” The Special Committee warned that “in view of the [‘33 Act’s] heavy liabilities,” “the resulting uncertainty” of “varied [and inconsistent] interpretations” by state and federal courts “will almost certainly operate as a detriment to legitimate business.” Unfortunately, the amendments were not adopted and the prophecy has proved prescient.
As senior SEC officials, the Treasury Department, and stock exchange leaders have recognized, the threat of protracted and often frivolous securities class action litigation has contributed to a decades-long decline in IPOs. Rather than risk becoming the target of vexatious securities litigation, companies increasingly choose private capital transactions or strategic combinations in lieu of going public, a phenomenon that has had significant detrimental effects on both the economy in general and small investors in particular. Congress attempted to stem the tide when it adopted the Private Securities Litigation Reform Act (“PSLRA”) in 1995. However, since that time, the number of public companies has been halved and the number of IPOs has declined from 949 in 1996 to an average of less than 150 per year.
