Elisabeth de Fontenay
Volume 68, Issue 3, 445-502
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 freeriding 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 capitaland 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.