December 03, 2007
"Private" v. "Public" Securities Markets
Posted by Troy Paredes

First, let me thank the folks at the Conglomerate for inviting me to guest blog. I’m a regular reader and look forward to having a chance to share some thoughts.

Let me start with an observation: The “private” securities market is becoming larger and larger and ever more important. For example, the growth in private equity has received much attention lately (in part as a result of claims that companies have gone/stayed private to avoid regulatory burdens (e.g., SOX)). The hedge fund industry is now well over a trillion dollar industry, having ballooned in recent years. In addition, the Rule 144A market is huge, and more active secondary trading of Rule 144A offerings is expected in the future. Brian Cartwright, the SEC’s general counsel, made similar observations in an interesting speech on “The Future of Securities Regulation” that he delivered on October 24, 2007 at Penn Law School (a copy of his speech is available on the SEC’s Web site).

This leads me to the following question: How will the growth of the private market for securities (or, to use Cartwright’s term, continuing “deretailization”) impact securities regulation going forward? Will calls for regulating private pools of capital intensify? One reason people have called for hedge fund regulation is because the industry has grown so considerably. Alternatively, we have seen calls to reduce the burdens on public companies – in effect, to scale back some of the SOX-era reforms and to address securities class actions. Further, will there be growing calls to ease the Investment Company Act burdens that presently limit the ability of mutual funds to engage in hedge-fund-like strategies?

In considering all of this, one can’t overlook that retail investors may become increasingly discontent as they come to appreciate more fully that there is one market for them (public offerings and mutual funds) and another market that only wealthy individuals and institutions can play in. The comments on the SEC’s “accredited natural person” proposal (which proposed adding an investment standard for individual investors to qualify as “accredited” when investing in hedge funds) suggests retail investors want the same opportunities as wealthy individuals and large institutions.

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