Venture Exchange Regulation: Listing Standards, Market Microstructure, and Investor Protection

Abstract

This chapter from the forthcoming Handbook on Law and Entrepreneurship (Gordon Smith, Christine Hurt & Brian Broughman eds.) sets out a template for the regulation of venture exchanges — securities markets specifically designed for trading smaller and younger firms.

I argue for listing standards that eliminate the smallest and youngest firms, and those where the listing exchange perceives a heightened risk of fraud. I also suggest that market microstructure rules should mandate fully transparent call-auction trading and limit trading to the listing exchange. Finally, I argue that the most efficient and effective way to protect investors is to deemphasize ex ante regulation, in particular, mandated disclosures, much of which retail investors would likely ignore, and instead emphasize ex post regulation, in particular, SEC enforcement of the rules against securities fraud, market manipulation, and insider trading.

Keywords: entrepreneurship, secondary markets, venture exchanges, crowdfunding, Regulation A, unicorns, liquidity, initial public offerings, IPOs, microstructure