The Law and Economics of Scaled Equity Market Regulation

Abstract

Expanding securities-law requirements, along with declining IPOs, have spurred a number of initiatives aimed at providing regulatory relief for smaller and younger firms. But the rhetoric of policymakers defending such efforts is superficial and the academic debate surrounding the issues at stake is desultory. To clear the haze, this Article applies a law-and-economics framework to the question of whether small and young firms should be subject to reduced regulatory scrutiny. An inquiry into the marginal benefits and marginal costs of regulating these groups relative to those of regulating their larger and more mature counterparts reveals whether there are likely to be regulations that provide net benefits when applied to larger firms, but not smaller ones, or older firms, but not younger ones. If such discrepancies exist, regulations for smaller and younger firms should be eased to account for them. In applying this framework, I find support for establishing a lower tier of regulation for smaller companies, but I also find that the case for similar treatment based on age is uncertain. Beyond that, this Article provides a critique of recent regulatory-scaling efforts and guidelines for potential future reforms.

Keywords: JOBS Act, IPO On-Ramp, Scaled Regulation, Securities Law, Disclosure, IPO, Initial Public Offering

JEL Classification: K22