Abolishing Ipos

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Revisiting“TruthinSecuritiesRevisited”: AbolishingIPOsandHarnessingPrivateMarketsinthePublicGood A.C.Pritchard* Abstract: This essay explores the line between private and public markets. I proposeatwo‐tiermarketsystemtoreplaceinitialpublicofferings.Thelowertier wouldbeaprivatemarketrestrictedtoaccreditedinvestors;thetoptierwouldbea public market with unlimited access. The transition between the two markets wouldbebasedonissuerchoiceandmarketcapitalization,followedbyaseasoning period of disclosure and trading in the public market before the issuer would be allowedtomakeapublicoffering.Iarguethatsuchsystemwouldpromotenotonly efficientcapitalformation,butalsoinvestorprotection. I. Introduction    Milton Cohen, in his seminal article, Truth in Securities Revisited,1was the first to highlight the awkwardness created by the enactment of Securities Act of 1933,2which regulates public offerings of securities, prior to the enactment of the SecuritiesExchangeActof1934,whichgovernsthedisclosureobligationsofpublic companies. 3 Cohen pointed out that if the Securities Act had been adopted subsequentto,orsimultaneouslywith,theExchangeAct,itwouldhavebeennatural for public offering disclosure obligations to piggy‐back on the periodic disclosure obligations mandated for public companies.4Franklin Delano Roosevelt’s political calculation, however, ensured that the bills would be separate and that the

* Frances and George Skestos Professor of Law, University of Michigan Law School. This article was prepared for the Berle IV Conference held at University College, London. Thanks to participants at that conference for helpful suggestions and criticisms, as well as Jesse Fried and ChuckWhitehead. SpecialthanksgotoDonLangevoortandBobThompson.Iwasaskedtocommentontheir article, “Publicness” in Contemporary Securities Regulation after the JOBS Act, 101 GEO. L.J. (forthcoming,2012),whichwastheinspirationforthisproject.Theirarticleprovidesamuchmore comprehensive discussion of the background issues raised here; we disagree on the best way forward,butIhavebenefittedfromanumberofhelpfulconversationswiththemonthistopic.Iam gratefultotheCookFundoftheUniversityofMichiganLawSchoolforsupportforthisproject. 179 HARV. L. REV 1340 (1966) 2Pub.L.No.73‐38,48Stat.74(1933),codifiedasamendedat15U.S.C.§77. 3Pub.L.No.73‐404,48Stat.881(1934),codifiedasamendedat15U.S.C.§78. 4Cohen,supranote,at1341‐1342.

Electronic copy available at: http://ssrn.com/abstract=2103246


Exchange Act would come second.5That accident of history meant that the two statuteswoulddevelopseparatedisclosureobligations.Thatseparatedevelopment ignored the economic reality that the information investors would seek in valuing securities would be largely the same, regardless of whether they were purchasing from an issuer in a primary transaction or another investor in a secondary transaction. Companies’publicofferingandsecondarymarketdisclosureobligationshave gradually converged since Cohen wrote in the 1960s. The rise of integrated disclosureobligationsforthetwoActsinthe1980s6isgenerallyconsideredaway station along the path to full‐blown company registration.7Company registration wouldallowacompanytoregisterasapubliccompanyjustonce,thereafteroffering andsellingsecuritieswheneveritwantedwithouttheneedtoregisterthesecurities themselves.8The move...
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