By Lev Bagramian
Today, companies with sizable financing needs have a multitude of options. They can borrow from banks, from business development companies, or from private funds; they can issue equities through crowdfunding; or they can raise up to $50 million a year through what’s known as “Reg A+”, along with other options. Importantly, they can also raise nearly unlimited amounts of funds through what’s known as Reg D Private Placements.
Under the Securities and Exchange Commission’s (SEC) rules, a company may not offer or sell securities unless this offering has been registered with the SEC or is specifically exempt from such registration. Reg D Private Placements are such exempt securities, and “are not subject to some of the laws and regulations that are designed to protect investors, such as the comprehensive disclosure requirements that apply to registered offerings.”
These Reg D offerings have grown almost three-fold in the past five years. Here are some startling facts: between September 2013 and December 2014, over $1.5 trillion was raised through Reg D. More recently, in 2015, over $1.35 trillion, and in 2016, nearly $1.32 trillion was raised through Reg D. Compare this to what was raised through the IPO process: $209 billion and $163 billion, respectively, in the same period. To say that the decrease in IPOs has stifled access to financing is, at best, erroneous.
One particular feature of Private Placements such as Reg D is that financial intermediaries – i.e., investment banks, too-big-too-fail banks, finders, or broker-dealers – are rarely used. This saves hundreds of thousands, if not millions of dollars for the issuer, but it is bad news for the financial services industry.
Many in and out of Washington, DC lament that there are not enough companies going public nowadays. It is still unclear what the impact of fewer IPOs is on our job market and operating companies’ growth prospects. But what is becoming clearer is that the slow pace of IPOs has meant less revenue for financial intermediaries – the same folks who flood the regulators’ inboxes with comments and calls for de-regulation. The other constituency that complains about regulation are companies seeking ways to cut their operating costs instead of innovating and competing with up-and-coming companies with growth prospects. Still others say that the downturn in IPOs hurts small retail investors who cannot participate in private offerings.
All of this has led some to argue that IPOs and public companies should be significantly de-regulated. But policymakers and the SEC in particular should not succumb to these pressures without a very hard look. There is a reason that small investors are protected from the generally much riskier private offerings. And regulators should view with skepticism the claims of stagnant businesses looking to cut costs or prop-up financial intermediaries that are being increasingly shunned by companies seeking financing through other sources. The point is that policymakers must not de-regulate without a sound basis. That means considering all the relevant factors, including the potential harm to investors and the threat of financial instability among financial firms. It’s important to determine who the real “winners” of deregulation will be. All too often, it’s not the public.
IPOs are important for capital formation but they are only one part of a much larger financial ecosystem of financing for the real, productive economy. Policymakers would do well to conduct a deep, data-driven analysis of that ecosystem and how IPOs fit into it to understand what is working or not and how any given aspect can be improved. That said, we must above all never lose sight of essential investor protections, which are the foundation for investor confidence. That confidence in turn is essential for maintaining the deep, broad capital markets that serve investors and issuers alike.