By Amanda Maine, J.D.
In an address at Central Michigan University, SEC Chairman Jay Clayton praised the role of the market on ensuring confidence in market prices. He also heralded the role of small business innovation and assured that the SEC is examining how to foster more entrepreneurial ecosystems beyond the traditional hot spots of the east and west coasts.
Market prices. Prices for stocks, bonds, and other assets should be generated by markets that are “transparent, information-rich, and fair,” Clayton said. Comparing prices to light houses, Clayton observed that they are non-excludable and non-rivalrous—he cannot keep others from using price information, and his use of price information does not affect others’ ability to use that information.
To give a more concrete example, Clayton cited mortgages. Two people with the same credit seeking a 30-year mortgage should pay the same amount, which should fairly reflect their credit relative to others with better or worse credit, Clayton explained. Investors, particularly Main Street investors, should be confident that that public company stock prices reflect the views of all investors, including “professional investors.” All investors benefit from the work of professional investors, which “economists adore,” Clayton quipped.
The availability of market prices is also important from the perspective of public company managers, Clayton said. When managers make decisions impacting the long-term outlook of the company, such as human capital, equipment, and research, they rely on metrics derived from public market-generated pricing information, according to Clayton. “Prices matter,” he said, including earnings multiples and cost of capital estimates. He emphasized that today’s prices impact long-term decisions.
Small business. Clayton then turned to what he called one of his favorite topics: small business capital formation. Clayton noted that 25 years ago, public markets dominated private markets. Today, he observed, private markets are outpacing the public markets. The SEC has an important role to play in the “creation and incubation” of small businesses, Clayton advised.
Clayton touted the establishment of the SEC’s Office of the Advocate for Small Business Capital Formation as an element of the Commission’s dedication to fostering small business growth. He also cited some geographically small but highly functioning networks and ecosystems for small business growth, including Silicon Valley, New York, the Route 128 Corridor, and Austin. These networks or “ecosystems” are vital to reducing the costs of information access, verification, contracting, the protection of rights, and the pursuit of remedies, Clayton said.
The SEC wants to expand the number of these ecosystems beyond the east and west coasts, Clayton stated. Currently 85 percent of venture capital is concentrated in Silicon Valley, Boston, and New York. However, Clayton noted that the Mississippi River Valley has hundreds of large public companies and prominent universities but only a handful of established capital firms. To address this, the SEC is examining how to foster more entrepreneurial ecosystems in non-coastal areas, Clayton said. He said he hoped that people will share their experiences and challenges regarding raising money for small businesses. “Let us know,” Clayton urged.