The Breakdown of the Public–Private Divide in Securities Law: Causes, Consequences, and Reforms
18 N.Y.U. J. L. & Bus. 221 (2021)
96 Pages Posted: 29 Nov 2021 Last revised: 4 Feb 2022
Date Written: November 15, 2021
As a regulatory scheme, U.S. securities law has traditionally been designed around a set of lines—the “public–private divide”—which separate public companies, public capital, and public markets, from private companies, private capital, and private markets. Until the early 2000s, the lines were successful in establishing two largely coherent legal realms—a highly regulated public realm and a lightly regulated private realm. A series of bold and often-inconsistent reforms between 2002 and 2020, however, have transformed this longstanding regime into a low-friction system wherein public capital flows to both public and private companies, private capital is ever more abundant, and firms can effectively eschew public company status, which is both more costly and much less essential to firm success than ever before.
This Article contends that, taken together, regulatory developments from the past two decades have led to the breakdown of the public–private divide: in effect, the boundaries between the regulated and unregulated realms have been removed and the public–private distinction has lost its descriptive and explanatory power as an organizing principle of securities law. The Article contributes to the literature by (1) putting forward a novel and comprehensive analytical account of the breakdown of the public–private divide (up through the completion of the deregulatory cycle in late 2020), (2) identifying the consequences of these developments with respect to specific firm constituencies and on a systemic level, and (3) investigating possible reforms and their expected effectiveness in returning securities law to a state of conceptual coherence.
The breakdown of the public–private divide can be attributed to a deregulatory cascade in the name of capital formation, which occurred during the 2010s, and which, in turn, was set off by the perceived malaise of U.S. capital markets in the prior decade. As the Article shows, capital formation in 2021 is thriving—the number and aggregate valuation of so-called unicorn firms are setting records, as is the number of annual IPOs—but the new regulatory and market realities are characterized by a series of problems. These include the now-elective nature of public company regulation, the diminished regulatory capacity of securities law, the fragmentation of investor protection, and the increased vulnerability of employee–investors.
The scale of the problems suggests that the necessary reforms are likely to be foundational. Given past experience with hasty and crisis-driven legislation enacted by Congress, the Article urges the SEC to commence a broad deliberative process involving multiple stakeholders to rethink the appropriate structure of securities law. The outputs from this process will be particularly valuable whenever the next window of opportunity for change arises.
Keywords: securities law, public company regulation, public-private divide, unicorn firms, JOBS Act, Rule 12g-1, Rule 12g5-1, shareholders of record, investor protection, capital formation
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