By Rodney F. Tonkovic, J.D.
Better Markets has issued a fact sheet urging the restoration of public markets, the preeminence of which has been eroded by the expansion of private markets. Pointing to the likes of Theranos and FTX, Better Markets posits that private offerings can mask huge problems with the issuers. These "opaque and high-risk" private offerings harm investors by depriving them of mandatory public disclosures and other obligations. While the SEC is planning reforms, Better Markets urges the agency to do more.
Private markets mushroom. Better Markets' fact sheet, "Expanding Private Markets Undercuts Public Markets, Investor Protections, and Capital Formation," argues that there is a harmful imbalance between private and public markets. Over several decades, Congress and the SEC have expanded exemptions from the laws and regulations over public securities offerings. As a result, over two-thirds of new capital raising in the U.S. markets occurs in largely-unregulated private markets that are opaque to the public. These actions, Better Markets argues, have diminished the role of the public markets and their associated benefits: mandatory public disclosure of material information by issuers; public trading venues such as exchanges that provide liquidity; and strong legal obligations and remedies for investors.
Regulation D offerings. Since the SEC instituted the Regulation D exemption in 1982, that framework represents the majority of private securities offerings. But this is only one exemption, Better Markets points out, and there is a broad—and still expanding—list of exemptions.
Better Markets notes that the SEC is as much in the dark as are investors. Form D filings are not subject to review and comment by SEC staff, leading to a lack of data in primary issuances but also an absence of ongoing reporting. Here, Better Markets highlights Forms D filed by Theranos and FTX that included minimal information about these companies.
The public market framework, on the other hand, has proven itself. The linchpin of the public market is that investors can decide for themselves where to place their money, provided they have full disclosure of all material information. In contrast, the fact sheet says, exempt offerings lack many of the safeguards of public offerings, and if investors are misled, their remedies are limited.
What should the SEC do? Better Markets notes with approval that the Commission is considering several proposed rules that could reevaluate the role of exempt offerings, such as amendments to Regulation D and adjustments to the Rule 144 holding period. While there may be good reasons for certain exempt offerings, the current patchwork of regulations benefits companies that wish to raise money without offering adequate investor protections. While some reforms must be made through Congressional action, the fact sheet says, there is fertile ground for analysis and rulemaking by the SEC.
The fact sheet closes with a discussion of the critical role played by the Accredited Investor standard. Better Markets argues that there are some who wish to diminish the standard and open up private offerings to more retail investors unfamiliar with their risks. The definition should instead be strengthened to limit harm to investors. It is past time to update the standard because, in particular, inflation has eroded the dollar and expanded the number of people who qualify as Accredited Investors.
Stephen Hall, Better Markets' Legal Director and Securities Specialist, commented that the fact sheet shows how "Congress and the SEC have steadily expanded the exemptions from the laws and regulations governing public offerings." The solution, he says, is to "restore the preeminence of the public markets, not create yet more avenues for opaque and high-risk private offerings."