The Need to Enhance US Equity Market Structure

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Crowdfund Insider | By | June 14, 2014

Mary jo white2Last week during a quick trip to New York City, SEC Chair Mary Jo White addressed the Sandler O’Neill & Partners, L.P. Global Exchange and Brokerage Conference.

The title of her speech was “Enhancing Our Equity Market Structure” – a noble subject to be certain.  The SEC has an overflowing plate of regulations to address right now.  With Dodd-Frank stumbling along,  the JOBS Act slowly pushing forward, and critical issues such as high frequency trading being addressed, our securities regulators have much to do.  The efficacy and transparency of our securities markets is vital to our economic well being.  Market operations have changed dramatically over the past several decades.  An effective transactional exchange is frankly something many of us simply take for granted.

But what of crowdfunding?  For crowdfunding to truly work there must be a mechanism in place for these new types of securities to be transacted after the initial purchase.  While many dream of a “good exit” where a large company purchases the small company for a huge premium- for the most part companies that are successful will continue to grow while many will stumble and perhaps fail.  Failure is a much needed part of our capitalist system that pushes non viable companies out allowing resources to align with the more compelling models (at least in theory).

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For those of us who invest in early stage companies there will be a time when one wants to get out.  Some things are not forever and owning shares falls under this category. Not having a viable secondary market for this new asset class will dull the potential of crowdfunded offerings and hobble the economic impact. While many industry participants have focused on enacting legislation to facilitate capital formation for startups, there remains the question of where to go to dispose of these shares?  Illiquidity creates inefficiency.  A robust secondary market can address this challenge.

While Chair White’s speech does not directly address the various aspects of the JOBS Act including Title II, Title III and Title IV – it does not take much to extrapolate the compelling need for a new approach for our securities markets.

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To quote the SEC Chair:

First, we must evaluate all issues through the prism of the best interest of investors and the facilitation of capital formation for public companies. The secondary markets exist for investors and public companies, and their interests must be paramount.

Second, we must account for the varying nature of companies and products, with a particular sensitivity to the needs of smaller companies. One market structure does not fit all. [emphasis added]

While much of the speech addresses immediate issues of dark pools, HFT and the profound need for greater transparency, she circles back to the requirements of small companies;

In enhancing market structure, we must focus closely on the particular needs of smaller companies and their investors. As you know, I instructed the SEC staff last fall to move forward on work to develop a pilot program to allow wider tick sizes for the stocks of smaller companies. I anticipate that the Commission will soon complete its review of the terms of such a pilot, which will inform our broader understanding of how to build more robust markets for smaller issuers. I am also open to other ideas on ways to achieve this vitally important objective.

Some crowdfunding platforms in Europe are creating their very own secondary markets. Several US based exchanges are sizing up the opportunity with the caveat there still remains many unknowns.  What is certain is that these new securities demand a mechanism to allow both the purchase and sale in shares of these early stage companies for the system to evolve, grow and benefit all.

The speech in its entirety is reproduced below.

_______________________

Enhancing Our Equity Market Structure

June 5, 2014

It is great to be here with you in New York to speak about our equity market structure and how we can enhance it.

While I know your views on particular issues may differ, you all certainly appreciate that investors and public companies benefit greatly from robust and resilient equity markets.

During my first year as Chair, not surprisingly, I have heard a wide range of perspectives on equity market structure, reflecting its inherent complexity, the relationships among many core issues, as well as the different business models of market participants. To frame the SEC’s review of these issues, I set out last fall certain fundamentals for addressing market structure policy. One of those is the importance of data and empirically based decision-making. At that time, we launched an interactive public website devoted to market structure data and analysis drawn from a range of sources. The website has grown to include work by SEC staff on important market structure topics, including the nature of trading in dark venues, market fragmentation, and high-frequency trading.

Through this initiative and others, we have taken important steps to further strengthen the investing environment. And today, as we move forward in the next phase of our efforts to enhance our market structure, I am recommending additional measures to further promote market stability and fairness, enhance market transparency and disclosures, and build more effective markets for smaller companies. I am also recommending to the Commission the creation of a new Market Structure Advisory Committee of experts to review specific initiatives and rule proposals. Your input also remains essential to help us ensure that our markets continue to operate openly, fairly, and efficiently to benefit investors and promote capital formation.

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