Redrawing the Public-Private Boundaries in Entrepreneurial Capital-Raising
Robert B. Thompson
Georgetown University Law Center
Donald C. Langevoort
Georgetown University Law Center
Georgetown Public Law Research Paper No. 12-119
Georgetown Law and Economics Research Paper No. 12-031
The JOBS Act is the most far-reaching legislative reform in what it means to be a public company or to make a public offering in the almost 80 years of American securities regulation. More generally, though, it exposes the shaky foundation of existing theory that guides how we have thought about dividing public from private obligations in this area of the law. And for the ’33 Act, which regulates the capital-raising portion of securities regulation, the changes spotlight a lingering identity crisis: Given the ever-expanding presence of ’34 Act regulation over the last half-century, why is there any place left for the additional regulation traditionally found in the ’33 Act?
To better understand these issues we look at the evolution of two somewhat out of the way securities transactions — reverse mergers and PIPEs — located in the transition space as companies move between the ’33 and ’34 Acts. What we see are innovative hybrid forms of capital-raising (a ’33 Act function), although clothed in a transactional setting that takes advantage of the less intense regulation of the ’34 Act. We compare these transactions against the core functions visible in securities regulation: mandatory disclosure, SEC review, restrictions on sales pressure, and liability aimed to force due diligence. When one or more of these is compromised or abandoned we ask why and if we are comfortable with what compensates for the loss? More specifically, we identify the particular concern that motivates additional regulation drawn from the ’33 Act for issuer or affiliates sales: will there be a “dump” of a large quantity of stock that will require special selling efforts, with the potential for abuse that entails? We note that these fundamental questions do not always get asked when creative lawyers and their clients claim open spaces created by technological change and aggressive marketplace innovation. Here they assume favorable regulatory treatment, of which the SEC only becomes fully aware after the practice has already been established and when it is very hard to undo the occupation.
This same structure animates our analysis of the changes made by the JOBS Act to the exemptions available under the ’33 Act. For the two new exemptions added (crowdfunding and Reg. A+) we see a balance between the efforts to promote due diligence that will protect investors and the scaled back requirements for disclosure, review and liability — perhaps so much that those exemptions will get very little use, at least by serious issuers. However, for the third major change of the Act, the removal of the general solicitation ban for offerings under Rule 506, the legislation flew in the face of the fundamentals — permitting what is likely to be intense selling efforts on the Internet and elsewhere with no due diligence or liability constraints.
Having identified special sales effort as what justifies ’33 Act regulation, we ask whether this concern might better be addressed with a more technology-driven, forward-looking rethinking of how we regulate sales practices in the securities industry that would be outside of the ’33 Act context to which we are accustomed. Our conclusion here is positive, with a condition so unlikely as to perhaps destroy its value — that sufficient regulatory resources exist for such a repositioning.
Number of Pages in PDF File: 60
Keywords: securities regulation, disclosure, publicness, JOBS Act, reverse mergers, PIPEs
JEL Classification: K22, K19, K29
Date posted: October 9, 2012 ; Last revised: May 18, 2014