The US has a baffling two-tier system of rules for its companies. Public companies are buried in regulation while little is demanded of comparably sized private businesses. The Securities and Exchange Commission, under the new leadership of Chair Paul Atkins, is set to relax disclosure requirements for public companies. It should take the opportunity to apply the same standard to all big US companies, even those staying private.
There used to be a genuine distinction between public and private businesses. For a long time, public companies were far bigger and more valuable, requiring vast amounts of capital to operate. Public markets were pretty much the only place to get it. That’s no longer true: There’s nearly $23 trillion invested in private assets in the US alone. Unlike in public markets, though, many of those investments were made with scant or questionable financial disclosure.
This lack of transparency around private assets has helped the industry grow and innovate; it has also created a rapidly expanding multi-trillion-dollar black box that could pose systemic risks. Meanwhile, the regulatory burden on public companies is driving them to flee the stock market or avoid it altogether. Atkins can right the balance and safeguard investors.
If free markets functioned flawlessly — alas, they don’t — investors would have the information they need to make fully informed choices. The market would work out what facts and figures it needs and how often, and companies would provide them. Atkins trusts the market. He is pushing a new rule that will require public companies to report their financial statements biannually rather than quarterly, as they’re now required to do, but leave them free to report more often if they choose. “Let the market decide how often companies report,” Atkins wrote in a recent op-ed in support of the change.
I favor unconstrained markets wherever possible, but I also know that absent rules to compel full and honest disclosure, some — perhaps many — companies will withhold critical information from investors or mislead them altogether. That was all too common before Congress created the SEC in the 1930s and began mandating financial disclosures from public companies. It still is when it comes to private investing.
Without all the facts, investors will inevitably make bad choices. Individually, it may be their own misfortune, but collectively, it’s everyone’s problem. Ill-informed and thereby inherently speculative investments greatly contributed to the 1929 stock market crash that gave birth to the SEC and disclosure rules for public companies. I worry that we are fated to relearn that lesson with private assets, only this time on a bigger scale. The US stock market was valued at roughly $1.6 trillion in today’s dollars at its peak in 1929, a fraction of the money invested in private markets today.
In this light, the debate underway about how many times a year public companies should report misses the big picture — the opinions expressed are generally right but misguided. Citadel CEO Ken Griffin, who supports quarterly reporting, told CNBC recently that he doesn’t understand “the merits of holding back from the market readily knowable information.” On the other side, former SEC Chair Jay Clayton, my old colleague at Sullivan & Cromwell, reminded the network in a separate interview that “senior management at public companies spend way, way too much time preparing for quarterly earnings.”
They’re both right. Disclosure rules should require companies to report readily available information to investors, mindful of the burden it places on them. But that should apply to both public and private companies. One way to balance those considerations is to require biannual reporting for all companies, public or private, valued at, say, $250 million or more, which is the bottom end of the range for small-cap publicly traded companies. The same threshold should apply to private asset funds.
There’s more to be gained from transparency around big private companies than would be lost by requiring public companies to report less frequently, if anything.
The frequency of reporting has moved over time, both in the US and elsewhere, with little discernable, or at least arguable, impact. The US required companies to report their financials annually until 1955, then biannually until 1970, and quarterly ever since. The European Union, the United Kingdom and Australia already require semiannual reporting.
It’s not even clear that public companies will report any less frequently. Many of them broadcast earnings ahead of the deadline or share information that isn’t required, all to satisfy and attract investors. That is likely to continue. Either way, the market is more interested in forward earnings estimates than historical results, and Wall Street analysts will continue publishing their forecasts as often as investors demand.
In the meantime, as private markets grow in the shadows, there are mounting questions about the health of private credit and the stability of private equity — questions that can’t be properly answered without more information. We don’t know much more about a growing number of mega sized, perhaps systemically important private businesses, such as OpenAI or SpaceX, each of which would easily rank among the US’s 50 most valuable public companies.
Beyond that, there are nearly 20,000 private US companies with revenue of $100 million or more, which very likely pegs their value at more than $250 million based on a conservative multiple of sales. That’s many times the number of comparably sized companies trading on the US stock market.
If transparency is key to healthy markets, which has been a foundational principle of financial regulation for nearly a century, focusing on a relatively small number of highly valued companies while ignoring the rest doesn’t make much sense. A better approach is to bridge the disclosure gap between public and private companies with thoughtfully crafted rules for both.
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