October 25, 2006
Public vs. Private Equity Markets
Posted by Darian Ibrahim

I’m interested in the interplay between public and private equity markets, and specifically whether these markets work together or whether they compete. Bernie Black and Ron Gilson have argued that they work together – that venture capital investment in private entities is dependent on the ability to exit into the public equity market by IPO. A recent NYT article, blogged by Gordon here, underscored this point, noting that venture capitalist Sevin Rosen Funds took the rare step of returning $250-$300 million in investor commitments due in part to “a terribly weak exit environment” characterized by few IPOs.

On the other hand, Don Langevoort has suggested that the public and private equity markets compete, writing that “the SEC wishes to privilege registered public offerings as the favored mechanism for significant forms of capital raising, and wants to avoid structures that allow issuers to tap large-scale sources of capital within the United States while by-passing the registration requirement.” See Donald Langevoort, Angels on the Internet: The Elusive Promise of “Technological Disintermediation” for Unregistered Offerings of Securities, 2 J. Small & Emerging Bus. L. 1, 25 (1998). He points to the SEC’s questionable ban on general solicitation in certain private placements as an example. (Bill Sjostrom also critiques the SEC on general solicitation in this paper.)

So what’s going on? Are the public and private equity markets working together, or are they at odds? My guess is that it’s a little of both. The broader question is whether the current laws (e.g., the private placement exemptions, Sarbanes-Oxley) are striking the appropriate balance between the two markets. Larry Ribstein has repeatedly criticized SOX for tipping the balance too far to the private side (see here for Larry’s SOX posts). Yet the SEC appears to be standing behind SOX, which seems to cut against the competition argument. I wonder what other laws help influence the public/private equity market balance, and how good a job they’re doing?

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