CommentaryRunning a publicly traded company in America in 2023 is torture. Breaking the federal government’s voluminous rules, even unintentionally, can land you in prison.
If, for example, a judge or jury can be convinced that one of the investors in your public shares knew things that he shouldn’t have, and profited from the information, he will be tarred, feathered, and incarcerated as an insider trader, the moral classification of which in the present culture lies many notches beneath that of sexual deviant.
The disgraced stock trader Ivan Boesky’s use of information regarding various companies’ impending mergers and other proposed deals was an ill-defined offense seldom prosecuted, but the mega-broker had made hundreds of millions of dollars, and resentment of wealth was in the air in the mid-1980s. He ended up paying more than $100 million in fines and spending three years behind bars, even though he agreed to rat out on others.
All-star Major League Baseball slugger Doug DeCinces’s crime essentially was to be a friendly next-door neighbor to the CEO of a struggling publicly traded medical supply company. Instead of borrowing a cup of sugar, the home run-hitting third baseman got a tip about an impending merger and used it to make more than $1 million. The Securities and Exchange Commission (SEC) made him pay $2.5 million, he was convicted on 13 counts of insider trading, and in 2019, at age 68, he was sentenced to eight months of home detention. (It’s unclear if the sentence forbade fraternizing across the picket fence with others in DeCinces’s neighborhood.)
The real crime seems to be that someone did too well and ignited envy and resentment in others. The truth is that insider trading—legal until the presidency of Franklin D. Roosevelt—would make stock prices a truer measure of the value of a company by providing more information to the market sooner, benefiting all investors whatever their net worth might be.
According to Paul Mahoney, a distinguished professor at the University of Virginia School of Law, the disclosure regulations imposed on public firms “may lead companies to remain private and therefore out of the reach of the mandatory disclosure system for public companies. Such decisions can impose indirect social costs by keeping private firms operating at a suboptimal scale and by depriving retail investors of investment opportunities.”
The social consequences should disturb even those on the left because, as Mahoney notes, “The latter effect may exacerbate wealth inequalities because the regulatory system constrains the ability of typical retail investors to invest in privately held companies, but puts fewer constraints on high-income or high-net-worth households.”
When Republicans attain power, they’ve been known to provide some deregulatory relief in the investment sphere, most notably the case during the presidency of Donald Trump, but always in the face of heavy fire from the Democratic Party and the media, their artillery consisting of accusations that the party of business is helping its “rich friends.” Then the regulations all come back like gangbusters, plus new ones, when the ever-more socialist-friendly Democrats get back in the driver’s seat.
Providing a solution may require a new paradigm, and the way forward might come from the private equity industry. Slandered as heartless job destroyers, a charge that helped defeat 2012 GOP presidential nominee, retiring senator, and Bain Capital co-founder Mitt Romney, private equity firms actually do the opposite. They save troubled or defective publicly traded companies by executing the extremely complicated legal process of converting them into private companies, under the status of which the firms can be fixed.
After such life-saving surgery, they can, if ownership chooses, return to public status, with all the access to capital that offers, leading to expansion of their workforce and the prospect of lots more profit.
What if there were a way for firms seeking outside capital to reach the many thousands of modest investors out there without having to be a public company subject to suffocating over-regulation? This new derivative instrument would probably entail such small investors signing away some or most of the rights enjoyed by stockholders, such as a contract stating that they aren't among the owners of the firm and have no vote as to who sits in management, and maybe even forfeiting any and all rights to sue management.
But at the same time, they would share in the profits just as if they were shareholders in a public company. An honest, transparent design would have to be formulated for the valuation of their investments, hardly an impossible feat considering the complexities formulated to contract exotic investment instruments such as puts, calls, and hedges.
Unlike junk bonds, tuned initially to bypass SEC regulations designed to obstruct mergers and takeovers, this new paradigm of retail investing ideally would have its genesis in the passage of laws authorizing the described innovations—hopefully featuring the exclusion of the SEC and the rest of the government from oversight and penalty jurisdiction.
It's extraordinary to consider that even the Department of Justice concedes that the figure who's most associated with junk bonds, Drexel Burnham Lambert financier Michael Milken, who made a billion dollars over four years absolutely legally, was convicted not for anything to do with selling high-risk instruments but for failing to disclose his tampering with the prices of securities. The governing principle is obvious: “Find some way—any way—to get the guy who made an obscene sum of money.”
The costs of operating a public company are hardly worth the high blood pressure, and unburdening oneself of the regulatory octopus via technical acrobatics has been tried again and again and seems impossible. Congress must find a way for investors to swim in other waters, where the creature doesn't lurk. Otherwise, as government regulation forces capitalism to get more complicated and expensive, a pure socialist economic regime—letting the government run everything—will become ever more seductive to voters.