The Twilight of Equity Liquidity

Abstract

This Article argues that U.S. equity markets fail to offer a satisfactory listing venue for emerging firms. I contend that this lacuna is a manifestation of a flawed structure of equity-market regulation and that this void undermines entrepreneurship, jeopardizes the future of U.S. equity markets, and weakens the broader U.S. economy. To close this gap and respond to these concerns, I recommend a new theoretical structure for regulating equity markets. Under the “lifecycle model” I propose, regulations would adapt to firms as they age. The key change would be to establish a market specifically for newly-public young firms, where they would be subject to a regulatory regime that is strict enough to protect investors yet flexible enough to accommodate innovation and growth. As firms age, they would be moved to different markets, each set up to meet the unique regulatory challenges firms pose as they mature. This template is designed to offer entrepreneurial firms an attractive platform on which to list their shares while placing equity-market regulation on sound theoretical footing. In a brief Epilogue, I assess the implications of the recently-enacted JOBS Act on this argument and conclude that the case for reform based on the lifecycle model is undiminished.

Keywords: equity, regulation, IPO