All Stick and No Carrot? Reforming Public Offerings

The SEC heavily regulates the traditional initial public offering. Those regulatory burdens fuel interest in alternative paths for private companies to go public. 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 single-minded habit of treating the traditional IPO regulatory process as a one-size-fits-all regime ignores the weaknesses of the traditional IPO, particularly 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; or 2) impose heightened liability, not just to registration statements for initial offerings, but also for the company’s periodic disclosures released during their first year of public trading. We argue that such a regime would push issuers to maximize the joint welfare of both issuers and investors