“Publicness” in Contemporary Securities Regulation

Donald C. Langevoort, Georgetown University Law Center
Robert B. Thompson, Georgetown University Law Center

This Faculty Working Paper has been updated and posted within the Georgetown Law Faculty Publications series in the Scholarly Commons. It is currently available at http://scholarship.law.georgetown.edu/facpub/976


Securities regulation is under a great deal of stress as Congress and the Securities and Exchange Commission (SEC) seek to balance the promotion of capital formation and investor protection in the face of rapid technological innovation and political disagreement. Much of the stress comes along the murky border between public and private that defines the degree of regulation companies face, often invoking the hyper-technical “metaphysics” of regulatory arbitrage occuring outside the public arenas of SEC rulemaking and enforcement. Our paper considers a variety of seemingly disparate controversies along this border—Facebook’s attempted capital raising efforts that challenged how we define public company status under the Securities Exchange Act; the explosion in reverse mergers as forms of backdoor registration, especially among Chinese issuers; and the battle to define PIPE financing as either a primary or secondary offering under the Securities Act. We argue that the difficulties here are manifestations of our failure to theorize adequately the public-private divide and we suggest ways to think about the issues in terms of a more coherent approach to both the scope and objectives of the two main securities statutes. Our two most prominent securities statutes maintain disparate approaches to publicness and continue to use archaic thresholds like “record” ownership that need to be modernized. We also suggest that the definition of public company under the Exchange Act be revised to separately address those with a large financial and economic footprint, with a second category of smaller and newer issuers that would be subject to a narrower set of core disclosure obligations. More generally, our paper addresses the institutional challenges faced by the SEC in the face of increasingly rapid technological change. Such change constantly creates new unregulated spaces that are occupied by private actors through regulatory arbitrage before the SEC can respond thoughtfully, of which each of the foregoing controversies is an example.