SEC Commissioner Allison Herren Lee touted the benefits that the public markets provide to issuers and investors. She expressed skepticism that the relative preference of issuers for raising money in private transactions is due to over-regulation of the public markets.
At SEC Speaks 2020, the Commissioner cited an SEC finding that 70 percent of capital raised is in private transactions. Ms. Lee decried those "reflexively blaming overregulation" as the source of the decline in the attractiveness of the public markets. Ms. Lee argued that it has been "the continued deregulation of private capital-raising" that has motivated the shift to private markets. She touted the benefits of public markets, including good disclosure that "puts smaller investors on a relatively equal footing with larger investors and corporate insiders," and, on the issuer side, the ability to raise more money.
Commissioner Lee noted two developments that might "enliven public markets and expand investor opportunities": direct listings and special purpose acquisition companies ("SPACs").
On direct listings, Commissioner Lee stated that because an issuer does not have to engage an underwriter to launch, as is the case in a traditional IPO, the process becomes less expensive. She acknowledged that there is likely no statutory "underwriter" who may be subject to liability under Section 11 of the Securities Act, which reduces the incentive for careful due diligence.
On SPACs, Commissioner Lee pointed to the reduced costs of an issuer going public through a SPAC, but also noted the potential for a conflict of interest between the sponsor and investors, given that the sponsor is likely to make money only if the SPAC is able to invest its money within a prescribed time frame and thus may be incentivized to pursue a less-than-ideal acquisition in order to secure compensation.
Commentary - Steven Lofchie
Commissioner Lee argues that the problem of issuers moving away from public markets to raise funds is not due to too much regulation in the public markets, but that it is too easy to raise money privately. In short, if you lead a horse to water and it won't drink, just don't let it have any water, and eventually, it will.
Perhaps shutting down alternative sources of liquidity is a workable strategy for revitalizing the public markets. However, it is notable that both of Ms. Lee's public market innovations - the direct listing and the SPAC - are successful because they avoid much of the regulatory risk (in the case of the direct listing) and the expensive disclosure requirements (in the case of the SPAC) that would be present for more traditional IPOs.
As to Commissioner Lee's observation that public markets are useful because they put retail investors on the same disclosure playing field as sophisticated, that seems overly optimistic. To the extent that retail investors read and understand disclosure documents at all (and SEC studies have indicated that they don't), they do not have the time to keep current or to evaluate one investment opportunity versus another. The great benefit of public markets to retail investors is that they allow retail investors to piggyback off the analyses done by institutional investors. If institutional investors, who really do look at the disclosures, set a "fair value" on the security, then retail investors are reasonably protected, even if they do not understand, or even read, the disclosure documents. (In fact, that seems to be the beauty and benefit of public markets: that retail is allowed to implicitly rely on the valuations of institutional investors.)
Commissioner Lee also praises the benefits of public markets for issuers, saying that they allow issuers to raise more money. That may be so, but obviously, the issuers are not perceiving the comparative benefits.
Many regulators tout the benefits to small investors of investing in highly diversified mutual funds or index funds. Investments of those types may provide safety, but they also favor big issuers that are large enough to be included in the index; to put it differently, those types of investments relatively disfavor small issuers, as Commissioner Lee herself concedes with her observation that mutual funds prefer holdings of "highly-liquid securities."
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