Jay Clayton, the current chairman of the Securities and Exchanges Commission (SEC) said that publicly traded companies/start-ups should be regulated differently depending on their market size.
In a fairly impressive live interview with Andrew Ross Sorkin of New York Times that focused almost exclusively on cryptos and Initial Coin Offerings (ICOs) – which are now to be regulated the same as Initial Public Offerings (IPOs) – Clayton said this Thursday:
“The numbers don’t lie. We’ve gone from 8,400 public companies to just over 4,000. The size of a company that you see entering the market is much larger. Companies would go public much earlier in their cycle.
There are multiple contributing factors to this, but we need to look at them and one of them is are we… let me put it this way.
Top company in the S&P 500, you know the 100th company is 40x less. Then we go to like halfway down the S&P 500, we’re at 100x less the size. And it gets down to 200, you know 1/200th… you probably shouldn’t regulate 1/200th, much less 1/1000th of the size company, the way you do regulate the top company. We need to think about that a little bit.
Another metric I like to think about is, you’ve got a decent sized company, well run, and it’s a public company, and how much time in a quarter does the management spend on compliance and dealing with regulations and, you know, performing that function.
It’s probably somewhere between 20 and 30 days out of 90, or maybe it’s 15 in a place that is doing it very efficiently. If you look at a similarly sized private company, that number is probably 2, 3, 4, 5, days.
Well, think about that in terms of competitive advantage for the private company. They’ve got another 20 days, 15 days, when management can be devoted to the business, versus compliance.
I ask myself, can we fix that without in any way impairing investors protection.”
So you ask that and how do you answer the question, the interviewer said. “We’re working on it,” was Clayton’s reply.
Later on in an answer to the public Clayton said “if investors don’t have ventures and new ventures to invest in, that’s not protecting them. That’s basically saying you gotta go somewhere else to get the exposure to new ideas.
I don’t want that. I don’t want people to feel they have to send their money offshore or to unregulated markets to get exposure to those things.
People may call it a balancing, I don’t call it a balancing, I think you’re trying to achieve both and I want to bring some of those technology companies back to the investor.
I worry that our ordinary investors do not get exposure to companies until they’re very mature… you should just know that that’s on my mind as well.”
Effectively the chairman appears to have heard this space after he had previously said the current laws are fine and need no changing. Now, in a u-turn of sorts after studying this space since June 2017, he appears to suggest some modification might be required because the numbers don’t lie.
The question now becomes rather than how to regulate ICOs, more of a general question of how you regulate a start-up that wants to go public, how you regulate say a public company that only operates in the Midwest and how you regulate a global company that’s a household brand.
The answer to that is necessarily complex, with this space mainly concerned about the next inventor of the airplane or the bulb who doesn’t want the opportunity to be locked up to only the rich, but wants to fund it publicly so that the people sort of have ownership of the idea rather than a few billionaires.
Such start-up obviously can’t spend one month out of every three months on compliance with probably most of the requirements irrelevant where they’re raising say $20 million.
Obviously there needs to be some requirements and a general duty to reveal material information is a reasonable one, but most of the current requirements probably shouldn’t apply.
What SEC will now come up with is not clear, but Congress is looking at new laws too and has asked SEC to report on this specific matter, so US might end up after all with a reasonable regulatory framework after much megaphone negotiations.
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