Going Dark: The Growth of Private Markets and the Impact on Investors and the Economy

Former Commissioner Allison Lee photo

Commissioner Allison Herren Lee

Oct. 12, 2021

Remarks at The SEC Speaks in 2021

Perhaps the single most significant development in securities markets in the new millennium has been the explosive growth of private markets. We’ve become all too familiar with the statistics: more capital has been raised in these markets than in public markets each year for over a decade[1] with no signs of a change in the trend. The increasing inflows into these markets have also significantly increased the overall portion of our equities markets and our economy that is non-transparent to investors, markets, policymakers, and the public.[2] 

The vast amount of capital in these markets, attributable in part to policy choices made by the Commission over the past few decades, has also created new, but no longer rare or mythical, kinds of businesses known as Unicorns – private companies with valuations of $1 billion or more. So christened in 2013 when their existence and number was more fittingly associated with fairy tales, they have since grown dramatically in both number and, importantly, in size, reaching dizzying valuations nearing and even exceeding $100 billion.[3] In today’s markets, companies can and do stay private far longer than ever before, despite the fact that they often dwarf their public counterparts in size and influence. 

These private businesses are not just big, but also consequential, making significant positive contributions to innovation. They shift paradigms, create jobs, stimulate the need for new services and supply chains. They’ve even changed the infrastructure of the nation’s labor force, ushering in the so-called “gig” worker. In other words, they have a dramatic and lasting impact on our economy, at the local, state, and even national level.[4] But investors, policymakers, and the public know relatively little about them compared to their public counterparts.

The shift toward private markets in recent decades has brought us back to a familiar crossroads, one at which we must evaluate the opacity of large and important segments of the economy and what that opacity means for investors and our public markets. We’ve been down this road before – twice, in fact. First, in the early 1930s at the inception of the federal securities laws, when lack of transparency had contributed to misallocations of capital and other market disruptions.[5] Congress addressed this opacity in capital markets, and determined that it was in the public interest to create public companies and periodic reporting requirements for those listed on national exchanges.   

Three decades later, in the early 1960s, Congress recognized that opacity in capital markets had again become a problem. The periodic reporting requirements applied only to exchange listed companies, and the over-the-counter (or OTC) markets had grown significantly in the intervening decades. Thus, both Congress and the SEC acted again, creating Section 12(g) of the Exchange Act, and rules thereunder, requiring all issuers with a sufficient number of shareholders (and a minimum amount of assets) to make periodic disclosures, thereby restoring transparency to what had become a significant segment of the capital markets.    

And here we are again watching a growing portion of the US economy go dark, a dynamic the Commission has fostered – both by action and inaction.[6] So today I want to talk about the role, really the obligation, of the SEC to examine and consider whether we should take steps, including pursuant to the broad authority Congress gave us under Section 12(g) of the Securities Exchange Act,[7] to address the reduced transparency in U.S. equity markets.  

I. Going Dark

The expansion of private markets is not the natural result of the evolution of “free market” forces. Rather, it is a product of the framework of laws and regulations through which markets operate. As one observer described it succinctly and directly:

“A market economy is at its core a collection of rules. No rules, no market. Just as every competitive sport has clear rules, competitive markets need rules: no rules, no game.”[8]

When we relax or repeal certain of these laws or regulations, we do not move closer to a so-called free market, but rather simply alter incentives and magnify the force and impact of the remaining rules on the books.[9]

Congress and the Commission have steadily relaxed restrictions around private markets in a manner that has spurred their dramatic growth. As a result, an ever-increasing amount of capital is raised in these markets each year, with private offerings accounting for approximately 70 percent of new capital raised in 2019.[10] Because of the vast capital available, relaxed legal restrictions,[11] and greater opportunities for founders and early investors to cash out,[12] companies can remain in the private markets nearly indefinitely, with some growing large enough to exceed the GDPs of all but the top sector of the world’s national economies.[13]

Current estimates vary, but generally put the number of Unicorns worldwide at roughly 900, up from an estimated 39 in 2013.[14] The list now includes not just Unicorns (those with an estimated valuation of at least $1 billion) but also so-called “Decacorns” (estimated valuations of $10 billion) and even “Hectocorns” with valuations approaching and exceeding $100 billion.[15] Although some of these large firms are subject to industry-specific regulation, such regulation does little to address financial transparency, and may be quite sparse (as with the growing number of crypto-related Unicorns).[16]

Unicorns are notable not just for their size, but for their transformational impacts on our way of life. They have, for example, changed the transportation[17] and travel[18] habits of millions across the globe, spawned billions of dollars in litigation, changed the legal underpinnings of entire markets,[19] and launched civilians into space.[20] 

Yet, despite their outsize impact, there is little public information available about their activities. They are not required to file periodic reports or make the disclosures required in proxy statements. They are not even required to obtain, much less distribute, audited financial statements. This has consequences for investors and policymakers alike, which in turn may have consequences for the broader economy.  

To begin with, investors may lack adequate information about the business and operations of these companies. While large sophisticated investors have some ability to obtain disclosure, they sometimes almost inexplicably fail to do so.[21]

In many cases, remaining informed requires a position on the board, an avenue open only to a limited number of investors. And the disclosure obligations that do exist are mostly a matter of contract rather than regulation, an approach that may affect both compliance and accuracy.[22] 

Then there’s the category of investors in these markets with much at stake and sometimes little to no negotiating power to obtain needed information: employees. Employees who hold equity in the firms where they work often don’t have the information they need to determine, for example, the full financial consequences of leaving their jobs when their stock is subject to a mandatory resale obligation. Quitting can become an investment decision that must be made in the dark.[23] They also may not know whether to dispose of shares in a funding round, or sell into secondary markets that have developed for the stock of numerous private firms.[24] Note too that unions bargaining for employee rights and protections may lack important financial information about companies employing tens of thousands of workers.   

Consider also another category of investors: those saving for retirement who may indirectly access private markets through institutional investors. More and more of the capital in private markets comes from pension plans, mutual funds, and other institutions,[25] a trend that will likely continue.[26] Because these institutions are stewards for the savings and retirement assets of millions of Americans, the savings of everyday investors is increasingly exposed to the potential risks associated with a lack of transparency.[27]   

Importantly, policymakers and the public also have a reduced ability to assess the impact of these issuers on the U.S. economy as a whole. The fact that more capital is now being raised in private markets means that a burgeoning portion of the U.S. economy itself is going dark. Twenty years ago private markets represented (by some estimates) roughly two percent of global investable equity assets. Today, that percentage has increased more than threefold to a current estimate of seven percent.[28] Other estimates reflect that global private equity net asset values have grown twice as fast as public market capitalization in the new millennium, with that trend expected to continue.[29] 

The diminishing incentives to raise capital in the public markets portend problems for private markets as well. Private markets may depend in large part on the ability to freeride on the transparency of information and prices in public markets; as public markets continue to shrink, so does the value of that subsidy.[30]

And finally, we must consider whether the growing lack of transparency in capital markets will lead once again to the misallocation of capital that we saw at the inception of the federal securities laws. For example, this opacity could operate to obscure systemic risks such as those posed by climate change.[31]

II. History Repeats

Round 1: 1933-34

As I mentioned, we have been here before. Concern over adequate transparency in the securities markets was the driving force behind the advent of federal securities laws. A relatively small segment of the U.S. population was invested in stock markets at the time, yet the weaknesses in those markets led to “[n]ational emergencies [producing] widespread unemployment and the dislocation of trade, transportation, and industry.”[32] The foundational statutory language made clear that the securities laws were intended to protect the “general welfare.” The principal remedy was disclosure. Thus, Congress passed the Securities Act of 1933, which essentially required companies seeking capital from the public to file a registration statement. But right away, Congress saw that a one-time obligation to file information was insufficient, and a year later it passed the Securities Exchange Act of 1934 (the “’34 Act”) to, among other things, create ongoing periodic reporting obligations.[33]

The ’34 Act required all exchange-traded companies to file annual, quarterly and other reports, including audited financial statements. The approach went well beyond then-existing disclosure requirements at the New York Stock Exchange,[34] and was described by the bill’s sponsor, Rep. Sam Rayburn, as needed to make increasingly complex markets become more honest and “justifiably self-trusting.”[35]

The new reporting provisions applied only to listed companies, not OTC markets. At the time, this was a logical approach given that wealth was heavily concentrated in the largest companies[36] and those companies largely traded on exchanges, making them responsible for a “very substantial part of the entire national wealth.”[37] Moreover, little trading activity appeared to be occurring in the OTC markets[38] and companies in those markets were not considered to be in the same “class” as those listed on an exchange.[39]   

Round 2: 1963-64

However, by the early 1960s, OTC markets had grown substantially. The increase was described at the time as “tremendous”[40] and “dramatic,”[41] adjectives often used today to describe the evolution of the private markets. Commentators at the time also observed that companies were moving to these markets to avoid required disclosure.[42] In response, Congress commissioned a comprehensive study by the SEC (the Special Study),[43] which found, among other things, a problematic lack of transparency in the growing OTC market, as well as a correlation between lack of disclosure and fraud.[44] Thus, an increasing portion of U.S. equity markets lacked transparency, similar to conditions that led to the establishment of the federal securities laws, because regulations had failed “to keep pace with [market] growth and change since enactment of the original securities laws.”[45]     

It was time to reassess.[46] Because, unfortunately, as they knew then and we know today, what happens in capital markets, doesn’t stay in capital markets[47] – fault lines on Wall Street can crack and spread across the entire country upending the lives of all Americans.

In devising recommendations, the Commission focused on the purpose of the federal securities laws,  taking into account the public interest[48] and the effect of the securities markets on “the general economy.”[49] The Special Study described the OTC markets as “large and important” but still “relatively obscure and even mysterious for most investors.”[50] Increased transparency through disclosure was the solution.[51]

In considering which companies should be subject to disclosure, the Commission determined, and Congress ultimately agreed, that the purposes of the securities laws would be best served by a test that looked to the number of investors.[52]

Congress implemented the recommendations of the Special Study by enacting Section 12(g) of the Exchange Act, under which issuers with 500 shareholders of record[53] and, at the time, at least $1 million in assets[54] became subject to periodic reporting.[55] In counting “holders of record,” Congress and the Commission were aware that shares were sometimes held in “street name” accounts,[56] meaning held in the names of the brokers and banks through which they purchased. These beneficial owners thus would not show up as a holder of record. The number of such beneficial owners at the time, however, was modest[57] and considered difficult to count.[58] 

Still the Commission did propose to include “known beneficial owners” in the shareholder count.[59] The concept was not adopted in the final rule, however, and there was no analysis of the change other than to state that it was for “simplification.”[60]  

While the Commission did not ultimately exercise its authority at the time to require issuers to look through to beneficial owners, it is clear the Commission has the authority to do so.[61] In fact, it has already exercised that authority to require issuers to look beyond their list of record holders through to the level of brokers and banks, but no further.[62]

In the JOBS Act, Congress spoke again to the issue, raising the threshold from 500 to 2000, but keeping the threshold at 500 for non-accredited investors.[63] Thus, while expanding only the number of allowable accredited investor shareholders, Congress reaffirmed the view that the number of shareholders (and even the nature of those shareholders) is the proper metric to consider in requiring periodic reporting, so long as a company meets a minimum asset level, now set at $10 million.[64]

But ownership in the securities markets has undergone a fundamental shift since the 1960s.[65] Today, almost no one holds shares in record name,[66] with stock certificates increasingly going the way of landlines and 8-track tapes.[67] Indeed, individuals wanting to be listed as a holder of record can confront unwilling brokers[68] or hefty fees.[69] 

As a result, record ownership has plummeted and in most cases has no meaningful relationship to the number of actual investors. Even some of the largest and most widely traded issuers do not have enough record owners (as that term is currently defined) to meet the requirements of Section 12(g).[70] As a result, the decision to file periodic reports has increasingly become optional.[71] In addition, issuers can exit the periodic reporting process, perhaps by engaging in “creative” shareholder recording methods.[72] And there is a growing possibility that an issuer could have active secondary markets with hundreds perhaps thousands of investors and no obligation to file periodic reports.[73] 

The tie between the actual number of shareholders and periodic reporting has come untethered from its moorings in today’s markets. Our reporting regime is now to closer to where it was in 1964, before Congress intervened to add Section 12(g), with a large and important market segment increasingly obscured, and our rules and regulations ripe for reappraisal. 

III. Looking Forward

Where does this leave us? Investors and the public are increasingly left in the dark when it comes to ever-expanding segments of the economy. This has implications for the future vitality of the private markets (which depend in many ways on the transparency and discipline of public markets) and it has implications for optimizing capital allocation across both markets.

Time and again, we take regulatory action on the grounds that it may encourage companies to go public.[74] But if that is a legitimate goal of the securities laws, then we should also work to ensure that the boundaries between public and private markets are sensibly drawn and maintained, and that the incentives for going public remain balanced.  

 Accordingly, we should consider whether to recalibrate the way issuers must count shareholders of record under Section 12(g) (and Rule 12g5-1) in order to hew more closely to the intent of Congress and the Commission in requiring issuers to count shareholders to begin with. In other words, it’s time for us to reassess what it means to be a holder of record under Section 12(g). We have received rulemaking petitions asking us to examine this issue.[75] The North American Securities Administrators Association has supported a reexamination,[76] as have academics[77] and other experts.[78] A former Chair of the SEC flagged the issue in Congressional testimony as well.[79] 

As we reexamine how issuers should count shareholders, we should broadly consider a number of important factors that may implicate our public-private boundary: 

  • We should better understand the issue of disclosure arbitrage and the circumstances under which public companies may deregister because they have fewer than 300 shareholders of record yet in fact have a sizeable investor base.[80] Data shows that the number of shareholders of record (as currently defined) in public companies has dropped dramatically over time.[81] What opportunities has this created for deregistration, and do we think it wise and consistent with our mission to permit this?
  • We should better understand how the growing lack of transparency is affecting ordinary investors such as retirees invested through mutual and pension funds, and employees who may become overinvested in a company’s shares without the ability to assess their true value.[82]
  • We should analyze how shares are held in the private markets. Although street name ownership is common in the public markets, some evidence suggests it may be less common in the private markets.[83] And if shares in private markets are more commonly held in the names of beneficial owners, might those accounts be transferred into street name later in a company’s life cycle in ways that could escape notice under the anti-evasion provisions of Rule 12g5-1(b)(3)?[84] 

If the number of shareholders is to have any meaning at all as a trigger for going public, we should look broadly at the different forms of beneficial ownership. This means considering to what extent issuers should have to look through to the actual investors whose economic well-being is at stake, including looking beyond street name accounts held at brokers and banks, as well as potentially looking through special purpose vehicles and partnerships.[85]

Of course re-evaluating how issuers count shareholders is not the only potential avenue for addressing policy concerns related to how we determine public company status. Others have suggested additional approaches (beyond just number of shareholders). They include, for example, considering revenues or market capitalization, a certain level of “public float” in private trading venues, or number of employees.[86] Some of these approaches may require Congressional action. But the Commission can and should act now within our existing authority to restore transparency in capital markets. That means, at a minimum, it’s time to revisit how we define shareholders of record under 12(g). And more broadly, it means recalling the fundamental importance of transparency in capital markets, and the need to continually reassess whether we have the right balance between public and private markets – one that supports both innovation and a well-informed, optimized allocation of capital.  

[1] See Morgan Stanley, Public to Private Equity in the United States: A Long-Term Look (Aug. 4, 2020) (“Further, companies have raised more money in private markets than in public markets in each year since 2009. For example, companies raised $3.0 trillion in private markets and $1.5 trillion in public markets in 2017. These changes in how investors invest and how companies raise capital have important implications for holding periods, the perceived volatility of the returns, and liquidity.”).

[2] See McKinsey, A year of disruption in the private markets: McKinsey Global Private Markets Review 2021 (Apr. 2021) (“Global private equity AUM reached $4.5 trillion in  the first half of 2020—growing 6 percent from  year-end 2019, or an annualized 16.2 percent since 2015.”); Vanguard, The role of private equity in strategic portfolios (Oct. 2020) (“[T]he asset size of the private equity market has been gradually growing on an absolute basis and relative to the public equity market over the last 20 years. Private equity has risen from 2% to 7% of total investable global equity assets.”). 

[4] Consider for example Airbnb, which just went public last year, or Uber, which just went public in 2019. Both had already altered the way we get from place to place and how we find accommodations before going public. See Erin Griffith, Airbnb prices I.P.O. at $68 a share, for a $47 billion valuation, New York Times (Dec. 9, 2020); Michael J. de la Merced & Kate Conger, Uber I.P.O. Values Ride-Hailing Giant at $82.4 Billion, New York Times (May 9, 2019). See also, infra notes 17-18.

[5] See H.R. Rep. No. 84, 73d Cong., 1st. Sess. (1933) (describing “irresponsible selling of securities,” and providing that “[w]hatever may be the full catalogue of the forces that brought to pass the present depression, not least among these has been this wanton misdirection of the capital resources of the Nation”); H.R. Rep. No. 1383, 73d Cong., 2d Sess. (1934) (“Just as artificial manipulation tends to upset the true function of an open market, so the hiding and secreting of important information obstructs the operation of the markets as indices of real value.”); Cynthia A. Williams, The Securities Exchange Commission and Corporate Social Transparency, 112 Harv. L. Rev. 1197, 1243 (1999) (describing the House report on the ’34 Act, and providing that “[o]ne concern was that unregulated stock exchanges caused the misallocation of capital: that the securities markets could ‘draw funds from local banks which would otherwise seek moderate investment in local business enterprise, to finance the pool of a far-away metropolitan speculator distributing through the stock exchanges the securities of a huge corporate merger designed ultimately to swallow and destroy local enterprise.’ And, as the House Committee Report concluded, this misallocation of capital ultimately affected not only investors ‘but eventually the operating profits of every business in the country no matter how unrelated to stock exchanges.’”) (internal citations omitted).

[6] There are numerous examples over the last decade of the Commission relaxing restrictions on exempt offerings – some statutorily required, and some not. See, e.g., Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets, Final Rule, Rel. No. 33-10884, 209 (Nov. 2, 2020) (including amendments to raise offering limits for three different exempt offerings; relax statutorily imposed investment limitations for certain investors; shorten the integration safe harbor period from six months to 30 days; expand the use of test-the-waters communications across all exempt offerings and for all types of investors; reduce disclosure requirements under Regulation D; permit the creation of a Crowdfunding special purpose vehicle, among other things); see also Changes to Exchange Act Registration Requirements to Implement Title V and Title VI of the JOBS Act, Final Rule, Rel. No. 33-10075 (May 3, 2016); Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and 144A Offerings, Final Rule, Rel. No. 33-9354 (July 10, 2013). Also notable are the steps the Commission has declined to take such as finishing its 2013 proposal to amend Form D to enhance the ability to evaluate offerings under Regulation D and failing to adjust the accredited investor wealth thresholds to account for inflation. See Amendments to Regulation D, Form D, and Rule 156, Proposed Rule, Rel. No. 33-9416 (July 10, 2013); Amending the Accredited Investor Definition, Final Rule, Rel. No. 33-10824, 143 (Aug. 26, 2020).

[7] 15 U.S.C. 78l(g).

[8] See Tariq Fancy, The Secret Diary of a ‘Sustainable Investor’ — Part 3, Medium (Aug. 20, 2021).

[9] See John C. Coates, Testimony Before the Subcommittee on Securities, Insurance, and Investment of the Committee on Banking, Housing, and Urban Affairs United States Senate on Examining Investor Risks in Capital Raising (Dec. 14, 2011) (“While the various proposals being considered have been characterized as promoting jobs and economic growth by reducing regulatory burdens and costs, it is better to understand them as changing, in similar ways, the balance that existing securities laws and regulations have struck between the transaction costs of raising capital, on the one hand, and the combined costs of fraud risk and asymmetric and unverifiable information, on the other hand”).

[10] See Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets, Proposed Rule, Rel. No. 33-10763 (Mar. 4, 2020) (“In 2019, registered offerings accounted for $1.2 trillion (30.8 percent) of new capital, compared to approximately $2.7 trillion (69.2 percent) that we estimate was raised through exempt offerings.”).

[11] See deregulatory examples cited, supra note 6; see also Renee Jones, The Unicorn Governance Trap, 166 U. Pa. L. Rev. Online 165 (2017) (summarizing  the easing of regulatory restrictions on the issuance and transfer of startup shares, including reducing Rule 144 holdings periods and eliminating the prohibition on general solicitation in Regulation D Rule 506 offerings).

[12] See Patrick Henry, et al., Deloitte, The growing private equity market (Nov. 5, 2020) (“From 2006 to 2019, the number of SBO [secondary buyout] exits increased by 5.2% per year, while PE exits via IPOs declined by 7.3% per year.”); Elisabeth de Fontenay, Written Testimony before the United States House of Representatives Committee on Financial Services Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets, 'Examining Private Market Exemptions as a Barrier to IPOs and Retail Investment’ (Sept. 11, 2019) (“Large companies also flush with capital have become highly active in the private-investment space as well: sales of private firms to these so-called ‘strategic acquirers’ have replaced the IPO as the primary exit for venture capital investments.”); see also Diana Milanesi, The Rise of the Secondary Trading of Private Company Shares in the United States, Europe, and the United Kingdom: New Opportunities and Unique Challenges, TTLF Working Papers No. 46, Stanford-Vienna Transatlantic Technology Law Forum (2019) (“[A]s the length of time that companies take to go public has increased, many companies are going through their main growth period while remaining private, thus increasing the demand for secondary investment opportunities. As a result of these trends, secondary transactions involving shares of private companies have grown significantly in the United States, Europe and the United Kingdom in recent years”). Note that exit by acquisition may not be the best value-enhancing strategy for the acquirer. See McKinsey, Mastering three strategies of organic growth (Aug 21, 2017) (“A look at the share-price performance of 550 US and European companies over 15 years revealed that, for all levels of revenue growth, companies with more organic growth generated higher shareholder returns than those whose growth relied more heavily on acquisitions.). 

[13] Compare Tomio Geron, Facebook Prices Third-Largest IPO Ever, Valued At $104 Billion, Forbes (May 17, 2012), with Worldometer, GDP by Country, and note that Facebook’s IPO valuation exceeded the GDPs of all but the top third of the world’s economies.

[14] See CBInsights, The Complete List of Unicorn Companies; Gene Teare, The World’s Unicorns Are Now Valued At $3T — Up By A Trillion In The Past Year. Who Invested?, Crunchbase (July 19, 2021); see also Motive Capital Corp., Form 8K (Sept 13, 2021) (“Since 2018, the number of unicorns has almost tripled creating a $2.4TN market cap opportunity in those names alone.”).

[17] Uber, for example, at the time it went public in 2019 at a valuation of roughly $75 billion, operated on six continents, in 63 countries and 700 cities, employed over 22,000 people, and had 91 million active users. See Uber Technologies, Inc., Form S-1 Registration Statement (April 11, 2019); see also Scott Beyer, Uber Has Revolutionized Transit More In 7 Years Than The Government Has In 7 Decades, Forbes (Oct. 28, 2016). 

[18] Airbnb, for example, at the time it went public in 2020 at a valuation of roughly $47 billion, operated in 220 countries and regions around the world, had some 54 million active users and a total of 825 million guest arrivals since inception. Airbnb, Inc., Form S-1 Registration Statement (Nov. 16, 2020); see also Suzanne Bearne, Airbnb is forcing everyone to up their game: how hotels are changing tack, Guardian (Apr. 11, 2018).

[19] See Tina Bellon, Gig companies' push for state-level worker laws faces divided labor movement, Reuters (June 9, 2021) (“New York is just one of several states where gig economy companies led by Uber (UBER.N), Doordash (DASH.N), Lyft (LYFT.O) and Instacart are courting unions and state officials in an effort to cement their workers' status as independent contractors across the United States….According to a Reuters review, the companies over the past few months set up lobbying groups in Massachusetts, New York, New Jersey, Illinois, Colorado and Washington to push for laws that declare app-based ride-hail and food delivery drivers independent contractors, while proposing to offer them some benefits.”).

[21] See, e.g., Francine McKenna, The investors duped by the Theranos fraud never asked for one important thing, MarketWatch (Mar. 20, 2018) (“Conspicuously absent from the package that went to investors are income statements, balance sheets and cash-flow statements audited and signed by a qualified public accounting firm.”); This failure to get info is not limited to companies with a headline grabbing downfall. See, e.g., Elisabeth de Fontenay, Written Testimony before the United States House of Representatives Committee on Financial Services Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets, ‘Examining Private Market Exemptions as a Barrier to IPOs and Retail Investment’ (Sept. 11, 2019) (“To illustrate this concern, consider that before it went public earlier this year, the car sharing service Uber was the largest of the private company unicorns. In January 2016, while raising additional equity capital at a $62.5 billion valuation, its shares were marketed to high-net-worth individuals who were not given any financial statements whatsoever for the company.”). 

[22] For a thoughtful review of the information generally available to investors in private markets, see Jennifer S. Fan, Regulating Unicorns: Disclosure and the New Private Economy, 57 B.C. L. Rev. 583 (2016).   

[23] Consider the example of employees at Good Technology, whose share value plummeted practically overnight after the company was acquired, but who had paid hefty tax bills for years based on a much higher valuation. Katie Benner, When a Unicorn Start-Up Stumbles, Its Employees Get Hurt, New York Times (Dec. 23, 2015).

[24] See Morgan Stanley, Public to Private Equity in the United States: A Long-Term Look (Aug. 4, 2020) (“Finally, there are now ways for employees who are compensated in equity to sell shares. In some cases, funding rounds give employees a chance to cash out. For example, Airbnb, Inc. raised an $850 million round that allowed employees with sufficient tenure to sell $200 million worth of stock. In addition, a number of marketplaces, including SharesPost, Forge, EquityZen, NASDAQ Private Market, ClearList, and Carta, provide liquidity for sellers and buyers. About one-half of private companies surveyed allow their employees to sell shares.”); see also Matt Levine, Boards Have to Pay Attention, Bloomberg (Sept. 13, 2021) (“The average public company trades 126% of its market capitalization every year; a billion-dollar public company will do about $1.26 billion of stock-market volume per year, or about $5 million per day. The average private company (on Forge) trades about 0.2% of its value per year (on Forge); a billion-dollar unicorn will do about $2 million worth of trading in a year. Forge has traded $10 billion of private-company stock since its inception.”).

[25] See Henry, et al., supra note 12 (“In 2020, 66% of institutional investors invested in PE, up from 57% in 2016.”).  

[26] See id. (“Since bond yields are expected to stay low and public equity returns are likely to be below historical annualized returns over the next 10 years, institutional investors—pension funds, insurance companies, endowments, foundations, investment companies, banks, and family offices—are increasing allocation to private capital.”).

[27] Transactions in these markets also appear costly. See Matt Levine, Money Stuff: Public Markets Don’t Matter Like They Used To, Bloomberg (Aug. 5, 2020) (“Also while private-company trades are infrequent, they are also expensive . . . In public markets, brokers and wholesalers and exchanges compete fiercely and controversially over fractions of pennies to execute trades. In the private market Forge makes about 2.5% or 3%.”). 

[28] See Vanguard, supra note 2.

[29] See McKinsey, supra note 2; see also Joshua Franklin and Laurence Fletcher, Hedge funds muscle in to Silicon Valley with private deals, Financial Times (Sept. 9, 2021) (“The data from Goldman Sachs Prime Services highlight how hedge funds, typically known for investments in publicly traded assets, have been drawn to private markets in an effort to fire up largely lacklustre returns. It also shows how private equity and venture capital have shot into mainstream finance. The asset class has soared to more than $7tn in value and is expected to double again by 2025, while the number of US public companies has roughly halved since 1996.”).    

[30] See Elisabeth de Fontenay, The Deregulation of Private Capital and the Decline of the Public Company, 68 Hastings L.J. 445, 456 (2017) (“[P]rivate companies are thriving in part by freeriding on the information contained in public company stock prices and disclosure. This pattern is unlikely to be sustainable. Public companies have little incentive to subsidize their private company competitors in the race for capital and we are already witnessing a sharp decline in initial public offerings and stock exchange listings. With fewer and fewer public companies left to produce the information on which private companies depend, the outlook is uncertain for both sides of the securities-law divide.”).

[31] As the Commission moves forward with disclosure requirements concerning climate change, for example, issuers could avoid new disclosures required in our periodic reports by moving to the private markets. Alternatively, they could re-deploy assets that contribute to climate change to the private markets. Thus, their public company disclosure could improve but, because carbon-related assets are being shifted to the private markets, the effect on our understanding of climate change risk would remain unchanged. This is not to say that private companies don’t have an important role to play in climate solutions. See, e.g., Yakob Reyes, Tom Steyer: Private companies starting to invest more in climate solutions (Sept. 23, 2021). Likewise, this shift could obscure important market dynamics that affect the growing economic inequality in our country. Issuers in the private markets need not make their board composition public. Evidence exists that issuers in these markets are far less diverse than those filing periodic reports and disclosing board composition. See Andrew Ross Sorkin, The Missing Piece in the Push for Boardroom Diversity, New York Times (Sept. 7, 2021) (“The 18 top venture capital and private equity firms in the nation — Andreessen Horowitz, Blackstone, Carlyle, Greylock, KKR and Sequoia among them — have invested in 843 private companies that have gone public since 2000…. Of the 4,700-some board seats at those companies over the same period, only 49 have been held by Black directors.”).

[32] 15 U.S.C. 78b(4).

[33] 15 U.S.C 78m. The ’33 Act immediately drew commentary on the need for more than a one-time disclosure. See William O. Douglas, Protecting the Investor, 23 Yale Rev. 521 (1934) (noting the ’33 Act “merely requires the recital of certain facts at one point of time in the life of the security” but failed to provide a mechanism for “obtaining subsequent reliable information either in the form of annual reports or otherwise”).

[34] See Robert L. Knauss, A Reappraisal of the Role of Disclosure, 62 Mich. L. Rev. 607, 622 (1964) (“The New York Stock Exchange had required [only] annual reports of listed companies for several years before enactment of the Exchange Act. The Exchange Act codified this approach, applying it to all registered exchanges and requiring that reports be filed with the Commission as well as the Exchange. Nothing need be given to purchasers, but current information about the company is on file.”). 

[35] H. R. Rep. No. 1383, 73d Cong., 2d Sess. (1934) (“Just in proportion as it becomes more liquid and complicated, an economic system must become more moderate, more honest, and more justifiably self-trusting.”). 

[36] Id. (“Since the war the interest of the public at large in the ownership of corporate enterprise has grown bigger, the size of the corporate unit has increased, the diffusion of corporate ownership has widened, all correlatively. Not only is nearly one half of the entire national wealth of the country represented by corporate stocks and corporate and Government bonds, but nearly one half of that corporate wealth is vested in the 200 largest nonbanking corporations which, piercing the thin veil of the holding company and disregarding a relatively few notable exceptions, are owned in each case by thousands of investors and are controlled by those owning only a very small proportion of the corporate stock.”).

[37] Id. (“Stock exchanges which handle the distribution and trading of a very substantial part of the entire national wealth and which have developed a technique of sucking funds from every corner of the country cannot operate under the same traditions and practices as pre-war stock exchanges which handled substantially only the transactions of professional investors and speculators. And standards of corporate management adequate to inspire investor confidence in the ‘caveat stockholder’ era of closely held stock.”).

[38] See Knauss, supra note 34, at 624 (“The justification for bringing these companies under federal regulation is that it is in the public interest. At the time the Exchange Act was passed, the bulk of securities in which there was active trading were listed on at least one of the numerous exchanges.”). 

[39] See Stock Exchange Regulation Hearing before the Committee on Interstate and Foreign Commerce, 73rd Cong., 2d Sess., on HR 7852 and HR 8720 (1934) (statement of Oliver J. Troster, Secretary of the New York Security Dealers Association) (“The function of the exchange which makes a business of trading in securities is simple in such a case, being merely to provide a place where buying and selling orders can be matched at one price at a fixed rate of commission. The normal over-the-counter security does not belong to this class. It is ordinarily of a type which could not be successfully listed or dealt in on an exchange.”). 

[40] See Knauss, supra note 34, at 624 (“Since the 1930’s the over-the-counter market has had tremendous growth.”). See also Report of the Special Study of the Securities Markets of the SEC, H. Doc. No. 95, 88th Cong., 1st Sess., Part 1 (Apr. 3, 1963) (“The volume of over-the-counter sales also has grown. The study estimates that in 1949, this volume was $4.9 billion, compared with $38.9 billion in 1961, a gain of almost eight times. Another basis for gaging the growth of the over-the-counter markets is by the number of different stocks appearing in the daily sheets published by the National Quotation Bureau. This number, which includes various foreign, investment company, and exchange-listed issues, has expanded quite steadily from approximately 3,700 on January 15, 1939, to 8200 on January 15, 1963.”) [hereinafter Special Study].

[41] See Special Study, Part 2 (“In recent years the volume of over-the-counter trading has grown dramatically. In 1961, the dollar volume of stock sales in the over-the-counter markets was approximately eight times as great as in 1949. This increase in growth was accompanied by an increase in the number of issues traded in the over-the-counter markets-issues which varied widely among themselves in numerous respects.”); see also Usha Rodrigues, The Once and Future Irrelevancy of Section 12(g), 2015 U. Ill. L. Rev. 1529 (2015) (“Indeed, the estimated dollar volume of OTC securities in 1963 had grown to sixty one percent of the national security exchanges.”).

[42] See Knauss, supra note 34, at 624 (“Since the Exchange Act, many companies have refrained from listing, and others, such as banks, have delisted in order to avoid the required disclosures.”). 

[43] H.R. Rep. No. 882, 87th Cong., 1st. Sess. (Aug. 10, 1961) (“House Joint Resolution 438 would authorize $750,000 for the Securities and Exchange Commission to make a study and investigation of the adequacy, for the protection of investors, of the rules of national securities exchanges and national securities associations.”). 

[44] See Special Study, Part 3 (“The correlation between fraud and lack of disclosure unfortunately can be shown still to exist.”); see also Knauss, supra note 34, at 625 (“Evidence compiled by the Special Study shows unquestionably that voluntary reporting and the quality of proxies issued by over-the-counter companies are inadequate. Investor fraud appears more prevalent with regard to unlisted securities, and unquestionably a more free and open market is needed for these securities.”). 

[45] See Special Study, Part 2.

[46] See Special Study, Part 1 (“The tremendous growth in the securities markets over the past 25 years, and most particularly the increased public participation, imposed strains on the regulatory system and revealed structural weaknesses. Neither the securities acts, the Commission, nor the industry itself fully anticipated the problems arising from the entry of unqualified persons, the spectacular development of the over-the-counter market, the vast number of companies going public for the first time, or a variety of other striking changes. Some of these problems resulted from inadequacies in established enforcement machinery, both Government and industry. Others reflect patterns of conduct now tolerated, but which, upon exposure and analysis, appear incompatible with the public interest.”).

[47] Consider the relationship between market downturns and economic downturns from the Great Depression to the Great Recession. See also Special Study, Part 1 (“Turning briefly to the general public interest in securities markets, as distinguished from the direct and indirect interests of public investors, it may first be noted that the state of the trading markets unquestionably has an important bearing on the flow of new capital into private enterprise, and thus on the country’s rate of economic growth. During the 5 year period 1957-61, as an illustration, corporations in the United States made expenditures for plant and equipment of $148 billion plus $38 billion for other investments and increased net working capital. Of this total expansion, $39 billion came from the issuance of stocks and bonds representing the additional funds needed beyond reinvested earnings and depreciation.”). 

[48] See Special Study, Part 1 (“The latter sense is expressed by section 2 of the Exchange Act, which succinctly states various reasons why securities markets are ‘affected with a national public interest.’… The emphasis on the public interest in this and other clauses of section 2 is echoed repeatedly in the substantive provisions of the statute. Over and over again Congress proclaimed that the regulatory authority conferred on the Commission was to be exercised ‘in the public interest’ and ‘for the protection of investors.’ Thus, while the private ownership of exchanges was not disturbed, the Exchange Act, in the words of the House of Representatives committee report preceding its enactment, proceeded on the theory that ‘the exchanges are public institutions which the public is invited to use for the purchase and sale of securities listed thereon, and are not private clubs to be conducted only in accordance with the interests of their members. The great exchanges of this country upon which millions of dollars of securities are sold are affected with a public interest in the same degree as any other great utility.’ Similarly, ‘the public interest" and ‘protection of investors’ were established as the dominant considerations in the operation and regulation of over-the-counter markets.”).

[49] See id. (“Securities markets in the United States are, in contemplation of law and in fact, public markets. They are public both in the sense that large numbers of people are directly or indirectly involved in owning and trading securities, and in the broader sense that the performance of securities markets affects the general economy and well-being in important ways.”). 

[50] See id. (“The over-the-counter markets are large and important, they are heterogeneous and diffuse, they are still relatively obscure and even mysterious for most investors, and they are also comparatively unregulated. These characteristics are not unrelated: The obscurity stems in part from the markets’ very size, variety, and diffuseness, while the relative lack of regulations reflects a failure to keep pace with their growth and change since enactment of the original securities laws plus the difficulty of encompassing their wide variety in uniform regulatory measures.”).

[51] See Special Study, Part 9 (“Disclosure is the cornerstone of Federal securities regulation; it is the great safeguard that governs the conduct of corporate managements in many of their activities; it is the best bulwark against reckless corporate publicity and irresponsible recommendation and sale of securities.”). 

[52] The Commission understood that the approach would extend the periodic disclosure requirements to some issuers with “inactive” trading markets. See Special Study, Part 3 (“The cumulative effect of differing shareholder-size coverage criteria should also be considered. It will be observed that a standard of coverage of 300 or more shareholders would include well over half (62 percent) of all companies; would include only a small proportion of all very inactive companies (13 percent of those with less than 25 transfers and 32 percent of those not quoted) and would include almost all of the active companies.”). The Commission considered and rejected a host of additional possible alternatives to number of shareholders, including trading activity, number of shares outstanding, number of shares in public hands, the concentration of holdings, and corporate earnings.

[53] The legislation adopted by Congress was designed to implement the Special Study. Much of it was based upon language provided by the SEC, including the provisions addressing issuers that would become subject to continuous disclosure. Even the change from Special Study Recommendation of 300 to 500 came from the Commission.

[54] The statute originally set the amount at $1 million. It has since been raised to $10 million. See 15 U.S.C. 78l; 17 CFR 240.12g-1. 

[55] 15 U.S.C. 78m. 

[56] See Hearings on H.R. 6789, H.R. 6793, S. 1642 before a Subcommittee of the House Committee on Interstate and Foreign Commerce, 88th Cong., 1st Sess.(1963) (Statement by the SEC with Respect to Proposed Amendments) (“A survey by the New York Stock Exchange in 1959 estimated that approximately 8 percent of all securities held by public investors were held in street name by broker-dealers.”); see also Special Study, Part 3 (“All of these numbers are in terms of record holdings, as distinguished from beneficial. As a general rule, therefore, they presumably understate the numbers of investors affected, since a single record holding is more likely to represent several beneficial holders than visa versa.”).

[57] See Special Study, Part 3 (“While table IX-1 shows that 40 percent of all issuers had from 10 percent to 29 percent of their shares registered in names of broker-dealers or bank nominees, it is impossible to state the exact extent to which taking account of the underlying beneficial holdings would shift the distribution of companies and result in different numbers of companies covered at different shareholder levels.”).

[58] See id. (“Only record holdings are considered; it was not possible to determine numbers of beneficial owners.”). Is it really so complicated today? Public companies can and do receive information about the number of beneficial holders of their shares from the brokers and banks who hold in street name every proxy season. See Letter from James J. Angel (Mar. 1, 2015) (“One good approximation for the number of beneficial shareholders is the number of voting materials that issuers pay to transmit to their shareholders.”). There is also evidence that private companies already have this information. See Mary L. Schapiro, Chair, U.S. Securities and Exchange Commission, Statement before the Committee on House Oversight and Government Reform (May 10, 2011) (“Conversely, the shareholders of most private companies, who generally hold their shares directly, are counted as “holders of record” under the definition.”).  

[59] Shortly after adoption of the 1964 amendments, the Commission proposed to count as holders of record those beneficial owners that were “readily” available. See SEC Rel. No. 34-7426, Proposed Rule (1964) (proposing that “securities registered in the name of a broker, dealer or bank or nominee for any of them, which at the time are being held by the broker or dealer in customers’ accounts or by the bank in custody or investment advisory accounts, shall be included as held of record by the number of separate accounts for which the securities are held. Each registered owner known by the issuer, or a person maintaining its record of security holders, to be a broker, dealer or bank or nominee for any of them shall be requested to furnish the issuer the number of such separate accounts. A recipient of such a request will be expected to comply only to the extent the information can be readily supplied, and the issuer may rely in good faith on such information as is received in response to the request.”). See also Special Study, Part 3 (“It is assumed that the statutory amendment or appurtenant regulations would define ‘shareholders’ to include known beneficial holders.”).

[60] See SEC, Report on Authority to Enforce Exchange Act Rule 12g5-1 and Subsection (b)(3) (Oct. 15, 2012) (“Shortly after Congress enacted Section 12(g), the Commission adopted Exchange Act Rule 12g5-1 to define ‘held of record’ and to define ‘total assets’ for purposes of Section 12(g) in 1965. The Commission determined not to require issuers to count as holders of record the separate accounts in which securities are held by brokers, dealers, banks or their nominees for the benefit of other persons. The Commission explained that this would ‘have the effect of simplifying the process by which companies determine whether or not they are covered by [Section 12(g)].’”) [hereinafter 12g5-1 Report].

[61] This was made clear in part through the inclusion of explicit authority in Section 12(g) rather than reliance on the more general authority in Section 3(b). See Investor Protection Hearings on H.R. 6789, H.R. 6793, S. 1642 before a Subcommittee of the House Committee on Interstate and Foreign Commerce, 88th Cong., 1st Sess. (1963) (Statement by the SEC with Respect to Proposed Amendments) (“Although the terms ‘total assets’ and ‘held of record’ probably would fall within the scope of section 3(b), this provision would clarify the Commission’s authority as to these terms and insure adequate power to prevent circumvention of the statutory standards for registration.”). See also S. Rep. No. 379, 88th Cong., 1st  Sess. (1963).

[62] See SEC Compliance and Disclosure Interpretation 152.01 (“Institutional custodians, such as Cede & Co. and other commercial depositories, are not single holders of record for purposes of the Exchange Act’s registration and periodic reporting provisions. Instead, each of the depository’s accounts for which the securities are held is a single record holder.”).

[63] The JOBS Act, and related rulemaking, was not the first time since 1964 that the scope of 12(g) reporting requirements was adjusted. The Commission approved an NASD rule amendment in 1999 that brought OTC Bulletin Board companies within the scope of periodic reporting requirements. See SEC Rel. No. 34-40878 (Jan. 4, 1999).

[64] During the passage of the JOBS Act, Senator Jack Reed proposed an amendment to change the method of counting from record to beneficial owners. The amendment was defeated, however, amidst pushback from large banks. See 158 Cong. Rec. S1884 (Mar. 21, 2012); Rodrigues, supra note 41, at 1560 (“Banks, like Goldman Sachs and JPMorgan Chase & Co., perceived a threat to their investment business, and they reacted vehemently, inserting themselves for the first time into the JOBS Act debate.”).

[65] See 12g5-1 Report (“Since 1964 and the advent of Section 12(g) and the rules promulgated by the Commission thereunder, a fundamental shift has taken place in how securities are held in the United States. When Section 12(g) was enacted, most investors in U.S. publicly-traded issuers owned their securities in registered form, which means that the securities were directly registered in the name of a specific investor on the record of security holders maintained by or on behalf of the issuer. Today the vast majority of investors own their securities as a beneficial owner through a securities intermediary, such as a broker-dealer or bank. This is often referred to as holding securities in nominee or ‘street name.’”).

[66] See id. (“Based on an analysis of available data over the period 2008 through 2010, the Commission’s Division of Risk, Strategy and Financial Innovation estimates that over 85% of the holders of securities in the U.S. markets hold through a broker-dealer or a bank that is a Depository Trust Company participant.”).

[67] The Commission, for good reason, discouraged record ownership in an effort to “immobilize” stock certificates. See 12g5-1 Report (“Consistent with congressional intent, the Commission has encouraged the immobilization of stock certificates through the use of securities depositories. These changes and the move towards immobilization had the effect of decreasing the number of investors who held in registered form and greatly increasing the number of investors who own their securities as a beneficial owner or in street name.”).

[68] See Comment Letter from Anthony Lampert, File No. 4-483 (March 19, 2009) (“But, nearly all stock brokerage firms now require their customers to hold stock ‘in street name.’ Many will not accept a sell order, unless they hold the stock in street name.”).

[69] See Petition for Commission Action to Require Exchange Act Registration of Over-the-Counter Equity Securities (July 3, 2003) (“Brokerage firms penalize investors who wish to take physical possession of a stock certificate by charging a fee, usually $50 for each transfer. In addition, investors are warned that sales will take longer to accomplish because the broker must take physical possession of the certificate, and physical possession of a stock certificate is dangerous, as the certificate can be stolen or forged.”). 

[70] See 12g5-1 Report (“It should be noted that given the percentage of securities of issuers that are immobilized and trade through DTC, there are also numerous exchange listed companies that have a small number of record holders.  However, companies whose securities are listed on a national securities exchange are required to be registered pursuant to Section 12(b), and to comply with the reporting and other obligations under the Exchange Act, regardless of the number of record holders.”). 

[71] See id. (“It should be noted that a significant subset of companies may still choose to voluntarily register under Section 12(g). Currently, there are 1,321 companies who are registered under Section 12(g) even though they have less than 300 holders of record and hence, appear to be eligible to deregister.”). 

[72] See NASAA Letter to Senator Jack Reed (Mar. 22, 2012). (“Thus, many small and large private companies can avoid reporting requirements by creative shareholder recording methods.”). 

[73] See 12g5-1 Report (“In these ways, issuers with more than 2000 beneficial owners, but less than 2000 holders of record, can be actively traded in the over-the-counter markets or in private secondary markets, without triggering the threshold requirements to report under the Exchange Act. Investors in these securities do not necessarily have the disclosures provided by Exchange Act reporting, though generally there must be some information available to a broker-dealer in order to initiate or resume publication of a price quote in a security.”). 

[74] Such actions are generally designed to scale back reporting obligations in an effort to cut costs under the hypothesis this will encourage public offerings. See, e.g., Amendments to the Accelerated Filer and Large Accelerated Filer Definitions, Proposed Rule, Rel. No. 34-85814 (May 9, 2019) (asserting that exempting more companies from the requirement that auditors attest to management’s assessment of the effectiveness of the issuer’s internal control over financial reporting “may be a positive factor in the decision of additional companies to register their offering or a class of their securities”); Smaller Reporting Company Definition, Final Rule, Rel. No. 33-10513 (June 28, 2018) (asserting that making smaller reporting company status—and the corresponding reduced disclosure requirements—available to more registrants “could encourage capital formation because companies that may have been hesitant to go public may choose to do so if they face reduced disclosure requirements.”).

[76] See Michael Pieciak, Testimony before House Financial Services Subcommittee Hearing IPOs/Retail Investment Private Market Exemptions Barriers (Sept. 11, 2019) (“The Commission has interpreted the term ‘held of record‘ to narrowly mean only those shareholders listed on corporate records. The vast majority of shareholders of public companies are not listed on corporate records; instead, their stock is held through custodians such as banks and brokerage firms who hold shares through accounts at a depository company, and it is the depository company that is listed as the registered holder in corporate records.”). 

[77] For academic support for enhanced transparency in private markets, see, e.g., Jennifer Fan, Regulating Unicorns: Disclosure and the New Private Economy, 57 B.C. L. Rev. 583 (2016); Renee Jones, The Unicorn Governance Trap, 166 U. Pa. L. Rev. Online 165 (2017); Ann M. Lipton, Not Everything is About Investors: The Case For Mandatory Stakeholder Disclosure, 37 Yale J. Reg. 499 (2020); Verity Winship, Private Company Fraud, 54 U.C. Davis L. Rev. 663 (2020); Elizabeth Pollman, Private Company Lies, 109 Geo. L. J. 353 (2020). But see Andrew L. Platt, Unicornophobia (Sept. 1, 2021), forthcoming Harv. Bus. L. Rev (2022).

[78] See Tyler Gellasch & Lee Reiners, Global Financial Markets Center, From Laggard to Leader: Updating the Securities Regulatory Framework to Better Meet the Needs of Investors and Society (Feb. 2021) (“The SEC should consider amending its definition of ‘shareholder of record,’ which currently permits private issuers to easily avoid the Section 12(g) trigger by obfuscating the actual owners of their securities. Further, the SEC should consider revising the application of exemptions to offering rules for private funds to capture funds with more than $1 billion in assets or more than 100 beneficial owners to require them to register as investment companies.”).

[79] See Schapiro, supra note 58 (“I believe that both the question of how holders are counted and how many holders should trigger registration need to be examined.”); see also Commissioner Cynthia A. Glassman, Remarks Before the SEC Speaks Conference: The Light at the End of the Tunnel – What's Next? (Mar. 3, 2006) (“[W]e may want to consider whether the number of record holders should be the main criterion that determines whether or not a company is public. The current registration and deregistration statutes and rules are premised on the number of record holders rather than total shareholders. For shares held in street name, the record holder is the broker, not the beneficial shareholder. Forty years ago, when the current rules were adopted, less than 25% of public company shares were held in street name. Now, 85% of public company shares are held in street name. Thus, a company with many total shareholders, but few holders of record may not have to report, whereas another company with fewer total shareholders, but more record holders may have to report. This anomaly suggests to me that we need to consider whether these requirements should be premised on different criteria.”).  

[80] See id. (“At the same time, it has allowed a number of public companies, many of whom likely have substantially more than 500 shareholders, to stop reporting, or ‘go dark,’ because there are fewer than 500 ‘holders of record‘ due to the fact that the public companies’ shares are held in street name.”). Investors have asserted that this “going dark” phenomenon has occurred with some frequency, resulting in significant harm to their investments. See Comments on Rulemaking Petition: Petition for Commission Action to Require Exchange Act Registration of Over-the-Counter Equity Securities.

[81] See 12g5-1 Report (“These changes and the move towards immobilization had the effect of decreasing the number of investors who held in registered form and greatly increasing the number of investors who own their securities as a beneficial owner or in street name. This trend impacts Section 12(g) and Rule 12g5-1, as investors who own their securities as beneficial owners or in street name, or through other entities, are not counted as holders of record under Rule 12g5-1.”).

[82] See H.R. Rep. No. 398, 114th Cong., 2d Sess. (2016) (Minority Views on H.R. 1675) (“Another concern is that the bill only encourages employees to own more of their employer’s stock, rather than encouraging more employees to own their employer's stock. Therefore, the bill could expose employees to concentration risk in their retirement accounts. This is made worse by the fact that the JOBS Act made it easier for privately-held companies to remain private by, for example, exempting employees who receive stock as a result of a compensation plan from being counted as ‘holders of record.’ By allowing companies to stay private longer, if not forever, the bill would enable companies to encourage overinvestment by employees in a company that they cannot value and that may never permit them to sell, except back to the company.”).

[83] See Rodrigues, supra note 41, at 1542 (noting that “hardly any private company shares are held in street name”); Schapiro, supra note 58 (“[T]he shareholders of most private companies, who generally hold their shares directly, are counted as ‘holders of record’ under the definition.”).

[84] The anti-evasion provisions are important, but consider whether they have proven valuable in practice. For example, when Facebook went public it revealed a far higher number of allowable shareholders (nearly 1400) than the threshold of 500. See Facebook Form S-1, Amendment No.7. A study by SEC staff in 2012 revealed that these anti-evasion provisions have been little used. See 12g5-1 Report (“Rule 12g5-1(b)(3) has been invoked by the Commission or in private litigation sparingly and little precedent interpreting the rule is available.”).

[85] The JOBS Act created an exemption from counting for Crowdfunding shareholders, and since then the Commission has compounded this exemption by permitting the creation of Crowdfunding special purpose vehicles. It also created an exemption for Regulation A shareholders under certain circumstances.

[86] See Gellasch & Reiners, supra note 78, at 11; see also Jay R. Ritter, Considering Causes and Remedies for Declining IPO Volume, Harvard Law School Forum on Corporate Governance (Apr. 2, 2012) (based on testimony before the Senate Committee on Banking, Housing, and Urban Affairs) (“My suggestion would be to keep the 500 shareholders of record threshold, but exclude current and former employees from the count, and to add a public float requirement.”); John C. Coffee, Jr, Statement at Hearings Before the Senate Committee on Banking, Housing and Urban Affairs (Dec. 1, 2011) (suggesting a public float test).

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