The recent federal appeals court decision vacating the Biden administration’s extensive new rules regulating managers of private investment funds should encourage the Securities and Exchange Commission (SEC) to put aside its obsession with private funds, which are only open to the wealthiest investors, and instead focus on policies to restore U.S. public capital markets to benefit all Americans.
Sadly, the Biden SEC continues to pursue punitive policies against public companies despite the fact that the number of U.S. public companies has declined to close to 4,000 at the end of 2023 from a peak of close to 8,000 in 1996. This decline reduces the investment choices available in private-sector retirement vehicles such as 401(k)s and IRAs because they invest in publicly traded securities through mutual funds. As we watch the crowding of many Americans’ retirement savings into a few publicly traded stocks—think the Magnificent Seven (Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta and Tesla)—imagine the financial fallout if those stocks were to decline sharply, perhaps due to a war or terrorist attack?
What we need are more public-company baskets to put our eggs in. But the high price of being a publicly traded company—particularly from shareholder “strike suits” alleging failure to disclose material information about the company—incentivizes U.S. companies to remain private. Public companies incur significant costs to comply with each new wave of rules mandating disclosure on current hot political topics. And their CEOs know that if something goes wrong they could soon be a guest of Sen. Elizabeth Warren (D., Mass.) at a Senate Finance Committee hearing and castigated for “corporate greed.” The Biden SEC has exacerbated the problem by suspending the well-established timelines for reviewing initial public offering filings, discouraging companies from proceeding.
The lone reversal of the decline of public companies came during the Trump administration when a boom in Special Purpose Acquisition Companies led to a temporary reversal of the downward trend. In 2022 the Biden SEC made short work of the SPAC boom by suddenly deciding that the vehicles might be investment companies subject to regulation under the 1940 Investment Company Act governing mutual funds despite having approved SPACs for many years. Of course, SPACs are not perfect, but they are better than the alternative of a continued decline in the number of U.S. public companies, which impacts the 401(k) and IRAs of the vast majority of Americans who are not government employees entitled to a pension. These retirement vehicles, first introduced in the 1970s and ’80s, are revolutionary because they give most Americans a stake in U.S. public capital markets. Rather than being the province of only the wealthy, publicly traded stocks are now important to most working Americans.
American innovation and public market capital formation remains second to none. Yet policy decisions by the Obama and Biden administrations are threatening this supremacy. The SEC’s 2022 proposal to require Environmental Social and Governance disclosure by U.S. publicly traded companies has nothing to do with making profitable decisions for shareholders. It is, rather, a disclosure trap that will be exploited by the plaintiffs’ shareholder bar to sue companies that get mandated disclosure wrong as it has nothing to do with their business.
How best to reverse the decline in the number of public companies and grow U.S. public capital markets? The SEC should begin pursuing policies to encourage entrepreneurs and executives of private companies to offer their shares to the public. These policies should include steps to reduce the cost of being a public company by making lawsuits over disclosures more difficult to pursue. Onerous disclosure accounting requirements should be eliminated or relaxed for all companies, especially for companies seeking to make an initial public offering.
The SEC, either under this administration or the next, should also clarify that SPACs are not investment companies and, if needed, reform SPAC disclosure rules to encourage their use to make more companies public. Regulators would do well to hold public roundtables to discuss these ideas and any other proposals to grow the U.S. public markets again to benefit all Americans with increased prosperity and the majority of Americans who save for retirement through 401(k) and IRAs.
