In various public statements of late, representatives of the Securities and Exchange Commission have noted concern regarding the growth of the private markets. The statements have pointed to the fact that fundraising in the private markets has surpassed fundraising in the public markets. For example, a recent speech cited statistics that private assets under management reached an all-time high of $9.8 trillion as of July 2021, an increase of ~33% from $7.4 trillion in 2020. The number of U.S. public companies has declined. According to statistics published by the SEC’s Office of the Advocate for Small Business Capital Formation, there were 7,414 U.S. public companies in 1997 and 4,071 public companies in 2021. By contrast, the number of companies achieving unicorn status continues to grow—now reaching over 1,000 worldwide, and over 600 in the United States. In aggregate, the 1,057 unicorns worldwide at year-end 2021, according to CB Insights, had a valuation of approximately $3,502 billion.
Over time, there has been greater legal certainty regarding the availability of exemptions from registration from the Securities Act registration requirements. This can be traced back to the adoption of Regulation D, and more recently to the adoption of a number of new exempt offering alternatives resulting from the enactment of the JOBS Act. The shortening of the Rule 144 holding period also has contributed to reducing the liquidity discount associated with private placements. The 2020 amendments rationalizing the exempt offering alternatives and modernizing the securities integration framework also has provided much-needed clarity. Recent statements from SEC representatives appear to suggest that exempt offerings came “without the transparency, accountability and investor protections afforded by the public markets.” However, the JOBS Act required investor protections—such as investor verification in the case of Rule 506(c) offerings, Securities Act liability in the case of Regulation A and Regulation Crowdfunding transactions, and the use of a gatekeeper (either a funding portal or a broker-dealer) for crowdfunded offerings—and the SEC rules implementing the JOBS Act mandates also impose investor limits in the case of Regulation A and Regulation Crowdfunding transactions, in addition to requiring disclosure documents in the case of both Regulation A and Regulation Crowdfunding offerings.
Concerns also have been raised as to whether investors in the private markets lack the “standardized disclosure that all investors can rely on for decision-making, reporting frameworks that form the basis of corporate accountability.” However, the basis of the statutory private placement exemption, the Section 4(a)(2) exemption, has always been that there is a category of investor that does not require the protections associated with the registration requirements. The SEC has on its rulemaking agenda revisiting the Exchange Act Section 12(g) threshold. The SEC also has introduced significant proposed amendments to various disclosure requirements that would be applicable to public companies, including disclosures related to cybersecurity and climate change. Also, the SEC has proposed amendments that would affect an alternative approach to entering the public markets—that is a business combination with a special purpose acquisition company, or SPAC. However, there is nothing on the SEC’s rulemaking agenda that would address the initial public offering process. Interesting, given that direct listings and combinations with SPACs have come about, at least in part, as challenges to the traditional IPO. And we’ve witnessed a number of other changes to the traditional IPO process in recent years that suggest areas in which the process may no longer address market needs as well as it once did. To contemplate turning back the clock and re-regulating the private markets, without taking a step back and considering the IPO process and the regulation of public companies would be profoundly disruptive.