The Deregulation of Private Capital and the Decline of the Public Company

58 Pages Posted: 11 Apr 2017

Date Written: April 11, 2017

Abstract

From its inception, the federal securities law regime created and enforced a major divide between public and private capital raising. Firms that chose to “go public” took on substantial disclosure burdens, but in exchange were given the exclusive right to raise capital from the general public. Over time, however, the disclosure quid pro quo has been subverted: Public companies are still asked to disclose, yet capital is flooding into private companies with regulators’ blessing.

This Article provides a critique of the new public-private divide centered on its information effects. While regulators may have hoped for both the private and public equity markets to thrive, they may instead be hastening the latter’s decline. Public companies benefit significantly less from mandatory disclosure than they did just three decades ago, because raising large amounts of capital no longer requires going and remaining public. Meanwhile, private companies are thriving in part by free-riding on the information contained in public company stock prices and disclosure. This pattern is unlikely to be sustainable. Public companies have little incentive to subsidize their private company competitors in the race for capital--and we are already witnessing a sharp decline in initial public offerings and stock exchange listings. With fewer and fewer public companies left to produce the information on which private companies depend, the outlook is uncertain for both sides of the securities-law divide.

Keywords: securities law, public firm, private firm, disclosure, externalities

JEL Classification: D02, D21, D23, D82, G14, G30, G38, K22

Suggested Citation

de Fontenay, Elisabeth, The Deregulation of Private Capital and the Decline of the Public Company (April 11, 2017). Hastings Law Journal, Forthcoming; Duke Law School Public Law & Legal Theory Series No. 2017-33. Available at SSRN: https://ssrn.com/abstract=2951158

Elisabeth De Fontenay (Contact Author)

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

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