Investor Protection in an Age of Entrepreneurship

Abstract

The creation of trillions of dollars in shareholder wealth by emerging companies has complicated the investor protection policy of securities regulation. The Securities and Exchange Commission (SEC) has not offered a coherent response to the question of when public investors should be permitted to invest in such companies. This Article develops an investor protection framework based on the Knightian distinction between risk and uncertainty that better articulates the challenges of this entrepreneurial age. Securities regulation has traditionally permitted all investors to purchase public securities with measurable risks and restricted them from investing in private securities that are shrouded in immeasurable uncertainty. As private markets have become more sophisticated at valuing companies, it has become more difficult to maintain this traditional divide. Investors believe that the valuations of private companies have become more certain. As a result, emerging companies are going public through Special Purpose Acquisition Companies and direct listings without the use of an underwriter that typically assures investors that a company has a reasonable basis for its valuation. This Article argues that protecting investors from uncertainty is essential to distinguishing between investment and speculation. The SEC should be more cautious in permitting companies to access public markets without measures that protect investors from Knightian uncertainty.

Keywords: Securities regulation, securities law, investor protection, entrepreneurship, valuation