The New Public/Private Equilibrium and the Regulation of Public Companies

Abstract

This Symposium Article examines how the public/private divide works today and maps out some of the potential implications for major issues in securities law. Classic debates in securities law were often predicated on the idea that public companies are a coherent class of firms that differ markedly from private companies. For more than fifty years after the adoption of the federal securities laws, this view was justified. During that period, the vast majority of successful and growing private firms eventually accepted the regulatory obligations of being public in order to access a wider and deeper pool of capital, among other benefits. This was a descriptive reality, but it had important normative implications as well. An identifiable class of large, growing firms went public, and they generally went public for a reason they shared: raising capital. As a result, regulatory interventions imposed on the category of “public companies” had a coherent target. 

We argue that firms’ going public decisions are now shaped by a much larger and more varied set of factors. These factors are complex, cross-cutting, and impact firms considering going public in very heterogeneous ways. This complexity results from several developments and we emphasize two. First, it is a result of the fact that while the public/private divide was created by securities law, public and private markets now provide two widely different ecologies for firms, which profoundly shape firms’ governance as well as the issuance and trading of their shares. Second, long-term advances in the ease of capital raising in private markets have made it possible for firms to remain private indefinitely and have diminished or eliminated the capital-raising advantages of public markets. The result of this latter change has been rightly called a “new equilibrium.” In that equilibrium, fewer and older firms go public, while other successful firms remain private indefinitely. In this equilibrium, capital raising is no longer the primary reason firms go public. Rather, we argue, firms go public due to one or more of the many other features of the public market’s ecology. 

The normative implication of this new equilibrium is to reduce the coherency of the regulation of public companies. The benefits and costs of being public (or private) apply unevenly to firms eligible to go public. Instead, to a greater degree firms now face idiosyncratic, company-specific tradeoffs between being public or private, and they often go public for reasons unrelated to the original design of the public/private divide. Regulations imposed on public firms are likely to not only be increasingly under- and over-inclusive, but also to apply to a class of companies whose coherency as an economic phenomenon may be increasingly suspect.