Public Markets Initiative:
Promoting Robust Capital Markets
Healthy Markets is working to restore the depth and breadth of the US public capital markets.
While the federal regulatory regime demands significant public disclosures by public companies about their governance, operations, and financials, the same requirements do not generally apply to private securities. Nevertheless, in repeated efforts to “ease” perceived burdens on sellers of securities, Congress and the SEC have siphoned off trillions of dollars in capital from the well-regulated public markets and into the far-less-regulated “private” markets.
Private capital raising has surged to account for more than two-thirds of all new capital raising, so-called “unicorns” have proliferated, the number of public companies has dwindled to less than half of what it was just two decades ago, and de-listings have outpaced IPOs for most of the past decade. These trends have had dramatic negative impacts on investors, issuers, and the overall economy.
We are working to reverse these trends by recentering the role of information as essential to capital formation.
A fundamental premise of our capital markets is that informed investors will efficiently allocate capital. Conversely, without key information, investors simply cannot fulfill that task -- leading to misallocations of capital and resources. In recent years, we have seen numerous, high-profile examples of these market failures, which have cost investors billions of dollars. But they have also cost good companies who didn’t receive capital, or as much capital as they might have otherwise, had investors not instead funded other options. For example, we will never know what companies weren’t funded because SoftBank instead plowed billions into its money-losing investment into WeWork. That’s a cost not just on investors, but the whole economy.
The recent collapse of several so-called “unicorns” (many of which made it into the public markets before collapsing in valuation) underline these risks. In many cases, once greater information about these companies’ governance, financials, and operations has become widely available, their valuations collapsed. In fact, one recent study found that over the past 10 years, IPOs have under-performed the Russell 3000 by a whopping 28% over their next three years of trading.
At the same time, costs and risks of investing in private securities often dwarf those in the public markets. For example, while the costs of trading a public equity may often be measured in fractions of a penny per share (and is heavily regulated), the costs of trading a similar value in a private security may be orders of magnitude greater. These costs don’t benefit investors or the businesses into which they are investing, but are instead simply transaction costs.
Collectively, these risks and costs translate into billions of investors’ dollars being wasted each year. Nevertheless, despite all of these risks and costs, given that private markets now account for more than two-thirds of all capital raising, investors seeking to access the best opportunities must increasingly turn to them.
The modern public capital markets are a creation of the federal securities laws, which require registration and ongoing reporting by those who publicly sell securities. This regime performs essentially two critical, but distinct functions:
- It ensures that key information about securities, including issuer governance, operations, and financials are widely available, so that market participants can accurately assess the value of the securities and allocate capital efficiently; and
- It levels the playing field between investors and issuers, as well as between different types of investors, by ensuring that all investors -- not just those with market power or access -- have access to key information in a timely manner.
As the SEC notes on its website, "Only through the steady flow of timely, comprehensive, and accurate information can people make sound investment decisions. The result of this information flow is a far more active, efficient, and transparent capital market that facilitates the capital formation to our nation’s economy."
We are working to restore the public capital markets as the default mechanism for raising capital in the United States, and ensuring that investors have equal access to key information about their investments and rights. Again, informed investors and regulators are essential for healthy capital markets.
To learn more about these issues and our efforts, please see our comment letter to the SEC.