The U.S. securities laws exist to ensure that businesses seeking to raise money from the public must first provide the public with sufficient information to make informed investment decisions.
Enacted after the stock market crash of 1929 led to the bankruptcy of millions of Americans and the economy’s collapse, the U.S. securities laws established a public disclosure and reporting framework to ensure that companies selling securities to the public are transparent and accountable. This framework succeeded remarkably well for nearly five decades and contributed to the growth and success of America’s capital markets. During that time, courts held that most companies were required under the law to comply with the public disclosure framework.
In the 1980s, however, Congress and the U.S. Securities and Exchange Commission (SEC) began creating and expanding exemptions from the public framework. As a result, companies could increasingly access capital from the public without providing basic transparency and without being subject to investor or public accountability.
Today, the opaque private capital markets, where securities offerings are often sold and traded with little or no reliable information, are so vast that more capital is raised there each year than in the public capital markets. There are now more than 650 private startup companies in the United States valued at $1 billion or more—in some cases, much more.1
Huge private companies may have tens of thousands of shareholders, have thousands of employees, and sell products or services to millions of American consumers. Yet they are not obligated to provide basic information to the public about their financials, operations, or risks or to obtain an independent audit of their financials. The enormous growth of the private markets, combined with the lack of reliable disclosures, has overwhelmed federal securities regulators, who struggle to estimate the markets’ size, much less police them.
At the same time, the alarming size of the private markets, where companies do not have to provide reliable information about financials, operations, or risks, poses a looming threat to investors and the economy. Millions of Americans’ retirement and education savings are partially invested in dark private companies and funds. Without rules requiring fair disclosure of material and reliable information, the private markets are unfair, providing valuations of companies that are often seriously inflated and offering special treatment to some investors while, at the same time, charging hidden and excessive fees to others. The result is that capital formation is distorted. Without adequate and reliable information, capital cannot flow to its highest and best use at a time when America faces many global challenges, including a critical economic transition toward cleaner forms of energy.
To adequately protect Americans’ retirement savings, businesses in need of capital, and the economy overall from undisclosed risks—including fraud and the catastrophic harms of climate change—Congress and the SEC must restore the public disclosure and accountability framework by limiting or eliminating the exemptions from public disclosure and reporting. In addition, all large companies should be required to provide the public with basic transparency and be held accountable to the public.
These changes would restore investor protections, fairness in capital markets, and healthy capital formation.