Merritt B. Fox


The public offering of truly new securities involves purchases by investors in sufficient number and in small enough blocks that each purchaser’s shares can reasonably be expected to be freely tradable in a secondary market that did not exist before the offering. Increasing the ability of small and medium-sized enterprises (SMEs) to make such offerings has been the subject of much recent discussion.

At the time that a firm initially contemplates such an offering, unusually large information asymmetries exist between its insiders and potential investors. These can lead to severe adverse-selection problems that prevent a substantial portion of worthy offerings from being successfully marketed. A regime relying solely on market-based antidotes to this problem—signaling, underwriter reputation, and accountant certification—and backed only by liability for intentional affirmative misrepresentation will fall well short of being a solution. This shortfall suggests a role for regulation.

This Article goes back to first principles to determine the proper content of such regulation. The relevant questions include: What should issuers be required to disclose at the time of the offering and thereafter? Under what circumstances should various offering participants be liable for damages if, at the time of the offering, there were misstatements or omissions? And should this regime be mandatory or optional? The answers are then used to critically evaluate a number of recent U.S. reforms aimed at increasing SME offerings by lessening regulatory burdens. These include Securities Act Rule 506(c), Regulation A+, and the new crowdfunding rules.

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