John C. Coates IV, professor of law and economics at Harvard Law School, testified before the U.S. Senate Subcommittee on Securities, Insurance and Investment on December 14. In his testimony, Professor Coates took up three themes related to pending proposals to revise securities laws to (among other things) deregulate widely held but unlisted companies and banks, to permit unregistered "crowdfinancing," and to loosen constraints on small public offerings:
(1) the proposals under review all raise the same general trade-off, which is best understood not as economic growth vs. investor protection, but as increasing economic growth by reducing the costs of capital-raising vs. reducing economic growth by raising the costs of capital;
(2) no one can with any degree of certainty predict whether any proposal on its own, much less in combination, will increase job growth or reduce it, because the evidence that would allow one to make that prediction with confidence is not available; and
(3) the proposals are thus all best viewed as proposals for risky but potentially valuable experiments, and should be treated as such – with an open mind, but also with caution and care.
Coates also includes a practical suggestion that any proposal should contain a sunset, with the SEC directed to study the effects of the proposal during a "test" phase, and authorized to re-adopt the proposals if their benefits exceed their costs.
Professor Coates provides detailed answers on a number of specific questions put to him by the Committee on:
- What factors influence the timing and extent of an issuer’s access to the capital markets? How does investor confidence impact markets? What factors contribute to a high degree of investor confidence in the securities markets?
- What legal, financial, and practical risks do companies face when offering securities through the Internet or other social media?
- What investor protections (e.g. basic disclosures, liability, etc.) should exist when securities are sold to investors in public or private markets? Should those protections vary with the size of the offering, whether they are public or private, and whether they are offered to mainstream investors or accredited investors?
- Do secondary market investors face risks different from those who purchase securities primary offerings? How does the availability of information in the secondary market affect liquidity and price?
- How would current legislative proposals affect investors? What changes, if any, should be considered in these proposals?