Next SEC Must Restore Capital Formation Mission
Phil Rothenberg, a corporate and securities in-house attorney based in Silicon Valley and former staff attorney at the SEC, contributed significantly to the research and writing of this post.
The Securities and Exchange Commission (SEC) has rightly garnered criticism from both political parties over the last few years for its regulatory overreach. The next president, whoever that might be, should replace SEC Chair Gary Gensler with new SEC leadership who ensure that the SEC focuses on its core mission of facilitating capital formation.
The SEC’s current neglect of this important part of its mission is interfering with the self-professed priorities of both presidential candidates to create more opportunities for middle-class and lower-income Americans.
As stated on its web site, the SEC’s three-part mission is “to protect investors; to ensure fair, orderly, and efficient markets; and to facilitate capital formation.” This tri-fold mission is not meant to be mere lip service; it is rooted in statutory mandates dating back decades. Congress specifically directed the SEC to consider all three aspects of its mission in passing rules, developing policies, and when considering enforcement actions.
Congress’ actions in setting capital formation as a priority for the SEC stem from a bipartisan recognition that capital formation is the lifeblood of our economy. Without capital formation – the mobilization and investment of savings — there are no investors to protect and no markets to maintain. Without access to capital, small companies looking to grow will die as growth stage companies or even earlier as brilliant whiteboard ideas that never saw the light of day.
Indeed, the SEC states on its own web site that “access to capital is particularly critical for small businesses, which create approximately two-thirds of all new jobs in the U.S. economy.” Yet in recent years, particularly under Gensler’s tenure, the SEC has almost completely lost its way and repeatedly disregarded advancing capital formation as part of its mission.
Under Gensler, the SEC has been fixated on advocating for special-interest causes. These include mandates forcing companies to disclose their alleged impact on climate change and destructive regulation by enforcement toward the cryptocurrency sector. In tandem with pursuing new initiatives involving , the SEC has disregarded and almost completely forgotten its mission of facilitating capital formation.
Take, for instance, the behemoth climate disclosure rule – currently paused by litigation – that would require public companies to quantify and disclose a laundry list of information related to greenhouse gas emissions. In the rule’s 885 pages (No, that is not a typo), there is scant discussion of its effects on capital formation, such as whether the costs will discourage new entrants from entering the public markets or existing publicly traded firms from remaining there.
Similarly, the SEC shrugged its shoulders when briefly discussing potential harms for capital formation in a rule finalized in January greatly restricting special purpose acquisition companies’ (SPACs) ability to bring companies to the public market. The SEC concedes that the rule “could deter some private companies from going public and, thus, potentially reduce overall public offering activity and capital formation.” The SEC adds, though, that “we are not able to estimate how many companies would consider these alternatives,” raising the question of why it did not attempt to quantify such an estimate.
Rules such as these that dismiss the importance of capital formation signal to entrepreneurs that the cost of going – and staying – public could be very high. These and other rules passed by the Gensler SEC are likely accelerating the trend of reduced IPOs and public listings in the U.S. market. The last two years have seen near-record low numbers of IPOs. This trend is harmful both to aspiring entrepreneurs not well-connected with wealthy venture capitalists, and to middle-class investors looking to build wealth by investing in growing companies, as they were able to do in past decades when today’s corporate giants like Microsoft, Walmart and Home Depot went public at relatively early stages.
The next president must appoint a new SEC leadership team who does not think of capital formation as merely an afterthought. Rather, new SEC leadership should put capital formation front and center when setting the SEC’s priorities and supervising the writing of its rules.
Read more at Forbes
