August 19, 2014
Does the Public/Private Divide in Federal Securities Regulation Make Sense?
Posted by Usha Rodrigues

Like Lisa, I participated in this excellent discussion group at the SEALS conference co-organized by Joan Heminway.  As I told co-organizer and friend-of-Glom Mike Guttentag, for a week I had a Word document open with the titular question at the top.  Participants were supposed to submit a 2-3 page paper before the meeting.  I totally lamed out.  I kept trying to write, but couldn't come up with anything coherent. 

I do have an answer to the question, though: Yes, the public/private divide does make sense.  But it's gone, daddy, gone. 

As I said at the conference, I think I'm essentially a conservative person: I'm resistant to change.  And when I learned the world of securities, it seemed to me that there was this Grand Bargain.  If you wanted to go public, you got many benefits, most notably a high degree of liquidity and access to public capital markets.  But you had to take the bitter with the sweet: mandatory disclosure and increased liability risks.  If you stayed private, your equity was far less liquid, and you couldn't make use of general solicitation.  Your capital raising was much more circumscribed.  But within those limitations you were free to order the firm more or less as you saw fit.  Other substantive areas of law of course constrained private firms--environmental law, labor law, etc.--but in terms of corporate and securities law, they were relatively free.  I realize this is a simplification, but in broadstrokes I think it's true.

No more.  The Grand Bargain is gone. General solicitation for private firms.  Conflict minerals rules.  Emerging growth companies.  Disclosure of executive pay ratios. Private secondary markets.  Dodd-Frank, the JOBS Act, and technology have made a hash out of it.  Or at least, the line between public and private is blurred.

This blurring makes me uneasy.  I feel like there's a disruption in the natural order of things. But I can't tell if that's my innate conservatism talking, or if there really was something we lost with the Grand Bargain. 

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