All Stick and No Carrot? Reforming Public Offerings
32 Pages Posted: 28 Oct 2022 Last revised: 11 May 2023
Date Written: October 24, 2022
The SEC heavily regulates the traditional initial public offering. Those regulatory burdens fuel interest in alternative paths for private companies to go public, “regulatory arbitrage.” The SEC’s response to the emergence of alternatives, most recently SPACs and direct listings, has been to suppress them by imposing heightened liability under Section 11 of the Securities Act. The SEC’s treatment of the traditional IPO regulatory process as a one-size-fits-all regime ignores the weaknesses of this process, in particular the informational inefficiency of the book-building process. In this essay we argue that the agency’s focus in regulating issuers going public should be on promoting market pricing driven by sophisticated investors with access to credible disclosure. We propose an alternative approach that provides issuers with a clear choice in going public: 1) provide disclosures for a seasoning period prior to listing their securities for public trading, with corresponding reductions in regulatory requirements for going public (the “carrot”); or 2) impose heightened liability on company’s going public without a seasoning period, not only for registration statements, but also for the company’s periodic disclosures released during a post-offering seasoning period (the “stick”). We argue that such a regime would push issuers to maximize the joint welfare of both issuers and investors.
Keywords: public offerings, direct listings, SPACs
JEL Classification: K22; G38
Suggested Citation: Suggested Citation