New Equity Offering Model: the Semi-Public Market
By Jeff Sayre
Corporations have a fiduciary responsibility to their debt and equity holders—collectively called their stakeholders. But when a company decides to issue stock in the public market, they lose significant control over how their shares are valued and traded. This is deemed acceptable, of course, because there are many shareholder advantages when a private company goes public.
With the recent meltdown in the global-financial system, it became apparent that risky-trading behavior is a rampant, real issue in financial markets. Whereas requiring strict disclosure and transparency may help ameliorate risky trading in general, a new study explains a possible genetic link to risky economic behavior. Taking measured risks in business are necessary. But it is never wise to make financial gambles. This is exactly what happened and continues to happen today.
How can corporations accrue some of the advantages of the open market while better insulating themselves from banking and insurance firms that literally game the system? I believe that the current two-part equity system–private or public–does not currently make that goal possible. The two-part system does not offer corporations–who choose to take advantage of the benefits of “going public”–a sufficient level of fiduciary control over their capital structures.
What if another option existed? What if corporations could decide the terms with which their stock would be publicly traded?
I propose that the SEC create a new type of stock market—the semi-public market. In this market, corporations would decide the listing terms of their stock from a SEC-predefined list of market-trading options.
Options might include:
- Whether or not the stock would be allowed to trade on the derivatives market
- Whether or not the stock could be shorted
- Whether or not the stock could be bought on margin
- The number of days the stock had to be held before it could be sold: (zero – ?)
- Whether the stock traded on a third-party market or on the corporation’s own, regulated trading platform
- The maximum percentage ownership of the float allowed to various entities: institutional investors, private equity, hedge funds, individual investors
- The terms of their IPO
In summary, I propose that companies are offered three structures for issuing their stock:
Allowing corporations the ability to customize the market environment in which their shares trade offers three obvious advantages to stakeholders. First, potential shareholders will have a wider selection of investment options that better suit their risk profiles. Second, corporations will regain an acceptable level of fiduciary control over their capital structure while still having an option to go public. Third, some of the market manipulation that publicly-trade companies currently face can be alleviated which will result in increased insulation from some forms of systemic risk.
What do you think? Should corporations have three options for issuing their stock instead of the current two?