Over the last few weeks, the House of Representatives has passed three bills, in each case by an over 400 vote margin, that create new exemptions under the Securities Act of 1933 in the hopes of fostering job creation. Other legislation may soon also pass the House that raises the level at which an issuer must become a “reporting” company under §12(g) of the Securities Exchange Act of 1934 to 1,000 shareholders of record (and also excludes certain categories of shareholders from this computation). Today, one suspects that even a bill permitting the dumping of toxic waste into rivers and harbors or decriminalizing insider trading would have a fair chance of passage—if it were captioned the “Job Creation Act of 2011.”
But will these new exemptions really be used? If not, they will hardly create jobs. This column will agree that there is a problem of access today in our equity capital markets: smaller issuers cannot do initial public offerings (IPOs) for a variety of reasons. As a result, they rely on private placements. This may or may not be efficient (as the private equity market may inherently provide cheaper access to equity capital for smaller companies). This decade long shift to private equity financing as a substitute for smaller public offerings probably has a variety of causes, including the gradual liberalization of Rule 144, changes in market structure that reduce the willingness of brokers and investment banks to support research by securities analysts, and the appearance of a private equity secondary market. Together, these factors mitigate the traditional problem of illiquidity associated with private placements and may often make them a more attractive alternative to a risky and costly smaller public offering.
