Washington, D.C. — Congress intentionally designed the U.S. securities laws to ensure that companies seeking money from the public first provide the public with timely information essential to making investment decisions. Beginning in the 1980s, however, Congress and the U.S. Securities and Exchange Commission (SEC) increasingly expanded exemptions from the public disclosure framework, and today, companies can raise an unlimited amount of money from a wide swath of the public without providing basic information about their operations, financials, or risk.
A new CAP report examines how this private market juggernaut is harming investors, putting everyday Americans’ savings at risk, undermining principles of fairness in the marketplace, and misallocating capital toward riskier investments that might not otherwise attract investors. The lack of disclosure and accountability has created unfair and risky private markets where companies can grow to valuations in the billions of dollars and sell products and services to millions of people, without providing basic reliable information about their operations, financials, and risks. Millions of Americans’ retirement and education savings are now partially invested in these dark private markets.
This new report calls on Congress and the SEC to restore the public disclosure and accountability framework to protect investors, ensure fairness in capital markets, and facilitate informed capital formation at a time when the economy faces multiple risks, including a critical energy transition to avoid the catastrophic harms of climate change.
The report recommends that the SEC and Congress take the following actions:
- The SEC should change the definition of “holder of record” to reflect true owners: The SEC’s current interpretation of “holder of record” is outdated and effectively permitting companies to have thousands of investors without having to comply with the SEC’s disclosure and accountability framework, as Congress intended.
- Congress should amend the Securities Act to make large, widely held companies public: Exemptions and loopholes from the public markets framework have enabled very large companies to remain in the private markets while receiving support from a broad swath of investors and affecting the lives of millions of people.
- Congress and the SEC should condition any exemptions on fair and timely access to essential information to investors: Regardless of wealth or market power, all investors should have the same essential information needed to make informed investment decisions.
- The SEC and Congress should review all exemptions from the public registration and disclosure framework and restore its broad application: More importantly, exemptions from the SEC’s transparency and accountability framework should be rare and narrowly construed.
- The SEC should collect more data on private markets: The SEC should require private issuers and investment funds to provide the agency with more detailed and timely information about their use of exemptions, including prefiling and post-closing data. The provision of these data should be a prerequisite to the use of any exemption from the public disclosure framework.
“Over the past 40 years, expanding exemptions from the public disclosure and reporting framework have made it far too easy for companies to gain access to capital from the public without providing basic information about their financials, operations, or risks to investors,” said Alexandra Thornton, senior director of financial regulation at CAP and co-author of the report. “Congress and the SEC should move quickly to address this growing problem so that hard-working Americans’ education and retirement savings are not at risk.”
Read the report: “How Exemptions From Securities Laws Put Investors and the Economy at Risk” by Tyler Gellasch, Alexandra Thronton, and Crystal Weise.
For more information or to speak with an expert, please contact Sarah Nadeau at [email protected].