Facebook, The JOBS Act, and Abolishing IPOs

Abstract

The market for initial public offerings (IPOs) — the first sale of private firms’ stock to the public — is notorious for its swings from peaks to valleys. This paper argues that these swings reflect serious flaws in the IPO scheme, and that U.S. capital markets should move toward a more stable alternative. Specifically, this paper argues for a two-tier market system in which new stock issuers initially participate in a less-regulated private capital market of accredited investors and then, if they choose, they can move to a more regulated, broader public market. Likewise, firms currently participating in the public market can choose to move to the accredited investor market. Such a scheme would harness private markets to promote the public good while simultaneously eliminating the public bad of IPOs.

Keywords: capital markets, initial public offereings, IPOs, private markets, accredited investor market, two-tier market system

JEL Classification: K00, K22, K23