Report on Access to Capital and Market Liquidity

Many people seem to think that the new commissioner of the Securities and Exchange Commission, Jay Clayton, is likely to focus more on capital formation issues than the previous commissioner. The recent report on Access to Capital and Market Liquidity from the SEC’s Division of Economic and Risk Analysis caught my attention.

From the signing of Dodd-Frank in 2010 through the end of 2016, the DERA notes $20.20 trillion in capital formation, of which $8.8 trillion was raised through registered offerings, and $11.38 trillion was raised through unregistered offerings. More money is being raised through private placements, than through public offerings. From 2012 to 2016 the amount raised was 26% greater. From 2009 through 2011 it was only 21.6% greater.

That data should be a caution to regulators who want to make changes to Regulation D and the “accredited investor” standard.

“When combined, the capital raised through Regulation D and Rule 144A offerings in a year is consistently larger than the total capital raised via registered equity and debt offerings. Most Regulation D offerings (over 66%) include equity securities; by contrast, in the Rule 144A market, the vast majority of issuers are financial institutions and over 99% of securities are debt securities.”

The report also looks at the new public private-placement offerings under 506(c). Only 3% of the capital raised under Regulation D since rule 506(c) went into effect has been through issuances claiming the 506(c) exemption. The report also noted that the average amount raised in a 506(c) offering is only half of that raised in Rule 506(b) offering, $13 million to $26 million. “Overall, it is not clear whether offerings under Rule 506(c) are indicative of new capital formation or a reallocation from other offering types.”

What is one of the reasons for a private placement over a public offering? It seems cheaper.

“Nonfinancial issuers paid on average about 6% in total fees for Regulation D offerings in 2009-2016. In comparison, a company going public pays an average gross spread of 7% to its IPO underwriters, while a reporting company raising equity through a follow-on (seasoned) equity offering pays an average gross spread of about 5.4%.”

There is a lot more detail in the report. More than I’m ready to digest (or want to digest).