SEC Commissioner Crenshaw Questions Sufficiency of Regulation of Private Entities
Commentary by Steven Lofchie
SEC Commissioner Caroline A. Crenshaw challenged participants at a Symposium on Private Firms at the University of Chicago School of Business to consider the "right balance between the public and private markets," and to make regulatory recommendations to achieve it.
She highlighted the different regulatory and disclosure obligations for each and questioned the adequacy of the framework in the private market for protecting investors. She stated: "I am concerned that not only are we not advancing access to capital for the businesses that could most benefit, but also that the present system does not provide standardized disclosure that all investors can rely on for decision-making, reporting frameworks that form the basis of corporate accountability, and the industry data we need as regulators to inform our decisions."
Ms. Crenshaw recognized that (i) private markets "are growing at record rates," (ii) private companies are staying private longer and (iii) the number of private companies and the fundraising available to them is outpacing public companies. She noted that even when companies do go public, they often raise significant funding privately beforehand. She pointed out that the SEC is seeing "a steady stream of private fund enforcement actions" which relate to (i) Ponzi-like frauds, (ii) fee and expense frauds and (iii) valuation practices, among others. Further, Ms. Crenshaw suggested that the benefits of taking a company private, such as savings on disclosures and compliance, may not be saving the company money, and that going private is instead just a maneuver to shift costs to investors and markets.
Ms. Crenshaw also concluded that the large wave of capital coming into the private market industry, plus the conduct named in recent private fund enforcement actions, indicates that the SEC's recent rulemaking expanding the "accredited investor" definition and amending the exempt offering framework "may not have been the right approach to serve our goals."
Commentary
The questions concerning the appropriate dividing line between private entities and public entities are important and reasonable. How one frames the questions is important as well. In addition to the standard questions (i) "Should more private companies be forced to go public?" and (ii) "Should there be more regulation of private companies?" — the SEC may want to ask: "Is the regulation of public companies so expensive that the SEC is discouraging companies from going public?" Consider, for example, that the SEC is now proposing to impose what looks to be massively expensive climate disclosure requirements on public companies, thus providing one more very good reason for private companies not to go public, and for public companies to go private.