The Private and Public Capital Market Disclosure World

BY Lauren LeibowitzPrincipal at 1st BridgeHouse Securities, LLC, CrowdfundBeat Sr. Guest editor,

This blog is a part of a 3 blog series. Click here to read Part 1: The apples and oranges of Crowdfunding – Reward/ Donation Crowdfunding is not investing and Part 2: The inconvenient truth: Most Startups Fail – the Risk Vs Reward trade-off in the PIPR Market


Transparency is efficient

The JOBS Act of 2012 amended securities regulation which have been in place since  1934 is shifting the dynamics of the private capital markets. Private companies can advertise their securities offerings to a bigger and even global market of potential investors because of the removal of the ban on general solicitation of Private Placements (Title II), and because the development of equity crowdfunding market will allow unlimited unaccredited investors to invest in private companies through online funding portals (Title III). The newly amended capital raising regulations enhance transparency and the availability of information in the private markets. In some respects, the private markets and public markets will converge to resemble each other more closely as the pricing and valuation of private companies begin to take on greater efficiency.


Difference Between Private and Public Markets

The public and private capital markets greatly differ in how information is treated and how investments are conducted. For companies to become and maintain their public status, they must comply with strict regulatory requirements regarding disclosure of information and its timing. Most companies remain private, especially small businesses and startups, due to the expense and burden of having to disclosing information publicly.

The reduced disclosure standards represent a middle ground, where the costs are reasonable for private companies, and the disclosure is reasonably transparent for investors. The private capital market has been historically viewed with a country club persona since it’s only exposed and available to Accredited Investors. Accredited Investors may have difficulties accessing information of private companies due to its market’s opaque characteristics. Therefore, it’s imperative for accredited investors to be able to rely and trust their financial professionals who have collected and reviewed the companies’ due diligence. The disclosure spectrum within the public and private capital market directly effects a basic principle of investing: transparency.

Transparency in the private market can be difficult to come by. Greater transparency in the private capital markets results in a more efficient dissemination of information, a trait that public markets already exhibit.  Public markets display relative efficiencies from liquidity due to disclosure requirements and an investor’s ability to readily acquire this information. As most investors would never think about investing in an opportunity without sufficient information, it is logical that due to the opacity of the private markets, many investors choose not to participate in  this space altogether.

Why is Transparency Important?

There are significant costs for raising capital in either market. Public companies pay a price for the ability to acquire capital from the public and be listed on a public exchange. Registration, disclosure, auditing, and compliance costs are typically very expensive to maintain a public exchange listing. Public companies are increasingly under the microscope and scrutinized inside and out. Public firms are also inherently less nimble and have to satisfy shareholders, spending significant resources in public relations and focusing on stock price as a measure of a firm’s success. On the other hand, private firms do not need to disclose any company-specific information to non-essential stakeholders including financial information or any material changes to the organization. Therefore investing in the private markets can be complex.

PIPR: Private Issuer, Public Raise

With the advent of the JOBS Act the PIPR is born – a hybrid security allowing a company to stay private while publicly soliciting their securities deal in the market. Equity crowdfunding allows a private company to conduct a public raise. Private Companies raising capital with equity crowdfunding are in the middle of the disclosure spectrum because even though a public raise is being conducted, the private company has limited disclosure requirements. Equity Crowdfunding attempts to reduce the cost of raising capital publicly via funding portal.  In order to protect investors within the equity crowdfunding market the regulators have implemented investing limitations and disclosures requirements. With the wide availability of information on the internet and communications through social media networks, investors can conduct their own due diligence in conjunction with reviewing the disclosures on the funding portal.

Benefits of Having More Information in Private Markets

After the passage of the JOBS Act and the advent of digital platforms, the private markets will be forced to become more transparent, and as a result, more efficient. Private market opportunities can be accessed globally because of online funding portals. With greater access comes greater competition for the best deals, resulting in greater transparency. Natural selection would theoretically weed out the bad deals and dangerous players in these markets. This greater informational efficiency will also result in more investors and investment professionals understanding the dynamics and potential for returns through private capital market investing. Investors participating in private investments can be more confident in their decisions. Transparency and communication creates trust with private market investors. An Investor must be able to trust the Issuer will operate ethically and in the best interest of the company.

Final Thought

Brave new world awaits.

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