Why The SEC Is Fighting A War Against Private Placements

The U.S. Securities and Exchange Commission seal hangs on the facade of its building in Washington, DC.
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The U.S. Securities and Exchange Commission seal hangs on the facade of its building in Washington, DC.

In the wake of the Facebook-Goldman fiasco, it’s asking: why does the SEC have a built-in bias against private placements?

John McLaughlin, an attorney whose firm represents Goldman Sachs , offered an answer last week—the SEC is defending its turf.

“The SEC is in business to impose disclosure requirements on public companies. So when a company avoids the public markets by finding private investors who are satisfied with less disclosure, the SEC takes this as an implied attack on its mission,” McLaughlin wrote in the Wall Street Journal.

While turf-defending is part of the story, I don’t think this goes far enough. The reason for the SEC’s bias against private placement are more complex—and more nefarious—than this.

Let’s start with this fact: successful private placements are an embarrassment to the SEC. They demonstrate that large and sophisticated investors are willing to forego the alleged benefits of SEC supervision of a deal. This naturally leads to questions that can be awkward for the SEC.

If the activities of a securities regulator is so important to properly functioning markets, why are some of the most successful and wealthy investors so willing to go without the protections these regulators supposedly provide?

Even more important, an increase in private placements coupled with a decline in initial public offerings would reveal the true costs of securities regulations. These could then be compared with the benefits of securities regulations. Regulations could then be adjusted to fit the market appetite for the regulations.

The SEC wants to conceal the costs of being publicly traded by raising the costs of being privately traded. It hope that by concealing the costs, it can escape public accountability for the costs. If the SEC weren’t making private placements difficult, it would become too obvious how difficult it was making going public.


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