Facilitating Small Business Capital Formation Does Not Need to Be at the Expense of Protecting Investors
Commissioner Luis A. Aguilar
U.S. Securities and Exchange Commission
SEC Government-Business Forum on Small Business Capital Formation
November 17, 2011
Good morning. First, I would like to welcome all of the distinguished panelists, participants, and attendees to the SEC for today’s Government-Business Forum on Small Business Capital Formation. Thank you for inviting me to speak and add my voice to today’s dialogue. Second, I also add my thanks to the staff from the Division of Corporation Finance and the Office of Small Business Policy for their work to facilitate today’s program. Third, before I start, I must remind you that my remarks represent my own views, and not necessarily those of the Commission, my fellow Commissioners, or members of the staff.
Small business is vital to any nation’s economic well-being. I know everyone in this room has been closely following the economic crisis in Europe. I was struck by a recent news article discussing the tragic impact of the crisis on the people of Greece. Specifically, it was reported that “[s]mall shops, in many ways the lifeblood of the Greek economy, which relies on domestic demand, are closing by the day.”1 The European debt crisis reminds us that investors, consumers, entrepreneurs, lenders, underwriters, etc., make up the same economic system, the same market. In this interdependent system, it is essential for all market participants that the fundamentals of this system are strong, fair and transparent.
The principles of a strong, fair and transparent regulatory framework are the defining characteristics of the Federal securities laws. There is no doubt that the system of laws and regulations administered by the SEC has contributed to the United States having the most robust capital market in the world. A key component of the SEC’s mission is to facilitate capital formation while at the same time protecting investors. Many studies have demonstrated how regulations fostering investor protections can promote capital formation.2 For example, a 2003study showed that the MD&A disclosure required in public company filings under the Exchange Act resulted in more accurate and informed share prices, which contributes to a better functioning real economy.3 A 2006 study found that the Exchange Act amendments of 1964, which extended disclosure requirements to over-the-counter companies, created substantial value for the shareholders of such companies.4 Such value creation is central to strong capital formation. We must not forget that investors are the capital providers that drive our capital markets – after all they are writing the checks that make capital formation possible.
And, we need to remember that capital formation is much more than just capital raising. True capital formation requires that funds raised be invested in productive assets. The more productive those assets are, the greater the capital formation facilitated by such investment.5 Fair disclosure rules level the playing field and help provide investors with the information they need to make reasoned investment decisions. Accordingly, market safeguards that promote reliable disclosure engender the confidence investors need to invest their savings in debt, equity and other securities. The need for full and fair disclosure, so that investors can make investment decisions with the benefit of material information, is a founding principle of the Federal securities laws.6
I look forward to today’s dialogue, and to your thoughts as to how we can improve the economic environment for entrepreneurs and investors alike, because smart and workable regulation is a necessary component of a robust capital market and strong capital formation.
Thank you for your participation in today’s forum. You have my best wishes for a productive day.
1 Landon Thomas Jr., Normal Life on Pause, and a Sense of Simmering Rage, N.Y. Times, November 7, 2011, at A5.
2 See, e.g., Frank B. Cross and Robert A. Prentice, The Economic Value of Securities Regulation, 28 Cardozo L. Rev. 333 (2006). See, also, Luis A. Aguilar, Comm’r, U.S. Securities and Exchange Commission, Speech at the Council of Institutional Investors Spring Meeting: Facilitating Real Capital Formation (April 4, 2011), available at www.sec.gov/news/speech/2011/spch040411laa.htm#P64_30599, notes 24-26; but cf id., note 20. For the effects of information asymmetry on capital formation, see, George A. Akerlof, The Market for ’Lemons’: Quality Uncertainty and the Market Mechanism, The Quarterly Journal of Economics (August 1970) (demonstrating that a lack of adequate information about the quality of an item being purchased can drive a market out of existence: “There may be potential buyers of good quality products and there may be potential sellers of such products in the appropriate price range; however, the presence of people who wish to pawn bad wares as good wares tends to drive out the legitimate business. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.”).
3 Merritt B. Fox, Randall Morck, Bernard Yeung, and Artyom Durnev, Law, Share Price Accuracy, and Economic Performance: The Empirical Evidence, 102 Mich. L. Rev. 331 (2003). The conclusion that more accurate and informed share prices contribute to the real economy references Jeffrey Wurgler, Financial Markets and the Allocation of Capital, 58 J. Fin. Econ. 187 (2000) and Artyom Durnev et al., Value Enhancing Capital Budgeting and Firm-specific Stock Return Variation, 58 J. Fin. 64 (2004). Id. notes 86 and 87.
4 Michael Greenstone, Paul Oyer, and Annette Vissing-Jorgensen, Mandated Disclosure, Stock Returns and the 1964 Securities Acts Amendments, Quarterly Journal of Economics, May 2006 (stating that the “results imply that the 1964 Amendments created … $3.2 to $6.2 billion [,measured in 2005 dollars], of value for stockholders”). A summary version of the paper is available at http://www.stanford.edu/group/siepr/cgi-bin/siepr/?q=system/files/shared/pubs/papers/briefs/policybrief_jan06.pdf. See also, Allen Ferrell, Mandated Disclosure and Stock Returns: Evidence from the Over-the-counter Market, 36 J. Legal Studies 1 (2007). An earlier draft is the John M. Olin Center for Law, Economics, and Business Discussion Paper No. 453 (December 2003). http://www.law.harvard.edu/faculty/fferrell/pdfs/Ferrell-MandatedDisclosure2.pdf.
5 See, e.g., Simon Kuznets, Capital in the American Economy: Its Formation and Financing (Princeton University Press 1961).
6 See, e.g., Sonesta International Hotels Corp. v. Wellington Associates, 483 F.2d 247 (2nd Cir. 1973) (stating, with respect to Secs. 10(b), 13(d), 14(d), and 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. Secs. 78j(b), 78m(d), 78n(d), and 78n(e) (1971), “These laws are founded on the principle that full and fair disclosure of all material facts must be made to investors so that they may have the benefit of the facts in making their investment decisions.” (citing Affiliated Ute Citizens v. United States, 406 U.S. 128, 151, 92 S. Ct. 1456, 31 L.Ed.2d 741 (1972), and 1968 U.S.Code Cong. & Adm.News p. 2813).