Private markets are the new public markets. That’s a thing that I say a lot, but here is a front-page The Wall Street Journal article about it: “At least $2.4 trillion was raised privately in the US last year. That widened a gap that emerged in 2011 with the public markets, which raised $2.1 trillion, according to the Journal’s analysis of tens of thousands of securities filings and data provider Dealogic. Deals known as private placements, the largest chunk of the private markets, raised at least $1.6 trillion for businesses last year, according to the Journal’s analysis of more than 40,000 filings.”
The private markets are now where the money is. If you are a company that is raising money, the odds are that you are doing it privately. If you are a company that is doing a share buyback, on the other hand, the odds are that you are a public company. That sorting is not absolute, but it is a useful guide: You stay private to raise money and build your business and grow; you go public to allow your investors to cash out.
One leading worry is that if the growing interesting speculative companies that need cash are increasingly private, while the public companies are increasingly boring, then the sorts of people who can only invest in public companies—that is, most normal investors—won’t have great investment choices: “Securities laws keep ordinary investors out of these high-growth markets, forcing the ‘little guy’ to stick with a stock market that Elizabeth de Fontenay, a law professor at Duke University, describes as becoming a ‘holding pen for massive, sleepy corporations’.”
This is Jay Clayton’s worry at the Securities and Exchange Commission (SEC), and it’s widely shared, especially at the SEC: “At an SEC conference last year, Michael Piwowar, a commissioner, questioned “the notion that non-accredited investors are truly protected by regulations that prevent them from investing in high-risk, high-return securities available only to the Davos jet set.”
And it’s reasonable enough, though I don’t know how much of it is regulatory. Even in the absence of regulation, if you had a choice between raising money by going around to thousands of individual investors and asking each of them for a few thousand dollars, or just having SoftBank write a giant check, you might choose SoftBank. The private markets are just more flexible than the public markets, in part for regulatory reasons but also because dealing with identified sophisticated counterparties is often easier than dealing with mass anonymous markets. It might be nice for “Mr. and Ms. 401(k)” if they could invest in the next hot new start-up, but you can’t force the hot new start-up to take them as investors.
But there’s another worry that goes something like this: “Even when companies disclose private placements, the very limited information leaves most in the dark. Telegram is a good example. It has said nothing about the fund-raising for its planned new digital network and banking system. It isn’t even clear who owns the company. The website says Telegram is “supported” by Russian brothers Pavel Durov and Nikolai Durov, who were named as Telegram executives in the SEC filing for the $850 million funding.”
Who are the “most” who are being left in the dark here? Telegram’s investors, presumably, get the information that they want. I mean, perhaps they’d like more information, but they get the information that they require to invest, and if they don’t, they don’t have to invest. They are, by hypothesis, sophisticated; they can make the decision to invest with imperfect information, or to demand more information.
But other people are left in the dark. If companies don’t go public, then they don’t make public filings. They don’t have to disclose much financial and business information to the public: They might disclose it to their investors, or they might not, but they don’t publish it on the SEC’s website for everyone to see. This is, of course, nice for them. But it is less nice for competitors who want to understand the competition, and public-market investors who want to understand the industry, and journalists who want to write about them, and random bystanders who want to read about them.
What right does anyone have to find out things about private companies? I think the real critique goes something like this: The corporation is a societal construct; we give limited liability and other rights to the corporate form, but we expect something of corporations too. Our expectations are poorly articulated: There’s some tax stuff , and you need to register the corporation, but in general most of the social expectations are informal and customary rather than legally ironclad. You can have a corporation without going public and filing with the SEC and giving your audited financial statements to anyone who wants them. But most big corporations used to do all that stuff, because it was more or less necessary in practice even if it wasn’t legally required: Without doing that stuff, you couldn’t raise money publicly, so you couldn’t get big.
But now you can raise money privately and get as big as you like, and so a lot of the customary stuff is no longer necessary in practice, for the companies, or for their investors. The question now is which parts of the old corporate bargain are still necessary for society—do we want the norm for big companies to be disclosed audited financials, or can we skip it?—and how those parts should be implemented. Because the old way of implementing them seems to be losing its grip.