New SEC Rules A Bit Tepid

Last week the Securities and Exchange Commission (SEC) has quietly passed two sets of rules on the public sale of securities.  One set of rules is final; the other set is proposed (and highly likely to become final).  The rules attempt to allow companies to take some advantage of the ubiquity of the Internet.  They fall far short.

    On December 1^st, a set of rules went into effect that loosens restrictions on how securities offered to the public may be registered and marketed.  For years companies and their underwriters (investment banks) have operated under severe restrictions on how much and in what form they can communicate with prospective buyers.  No offers before registration with the SEC; no written offers after registration and before SEC clearance (waiting period) other than a form document – the preliminary prospectus; and offers after clearance on with delivery of a final prospectus. 

            The new rules allow more forms of communication, many of which will be on the Internet.  In the waiting period, corporations can use more “free-writing” to offer securities.  The free writing will include various forms of Internet solicitations.  The kind of Internet solicitations a company may use depends on how “seasoned” it is as a public company.  Companies doing IPOs have the least freedom, but they will still have more room than they do now to use Internet ads; the ads will have to link to a full preliminary prospectus.

            The new proposed rules on proxy solicitations are designed to enable publicly-traded corporations to solicit proxies through the Internet.  Shareholder may receive written proxy materials on request, but otherwise an Internet solicitation will suffice.  Those challenging managers may also use the new solicitation rules.

            These are relatively minor relaxations of traditional rules to acknowledge the usefulness of the Internet in corporation governance mechanics.  They have long, long overdue.  Consider also what the SEC is not doing, however.

            The Internet radically reduces sales costs by reducing the need for intermediaries.  One can now buy new and used cars and computers and airline tickets on line.  We enjoy increased transaction speed and lower transaction costs in these products.  We should be able similarly to buy securities online in public distributions (cutting out fees to investment bankers and broker/dealers).  Small firms in particular could raise money with much less cost this way.  And we should be able to vote directly on line in elections of board members (cutting out fees to proxy solicitation firms).  The SEC will not allow either.  The agency believes that open online solicitations will lead to abuse, so we must be content with paying intermediaries.

            Allowing firms to reduce substantially the costs of raising capital and of running shareholder elections is in the national interest and we should ask the SEC to consider seriously the full potential of the Internet.  New protections can be devised to replace old ones (such as the due diligence of investment bankers) in line with new distribution techniques. 

            The old paper system needs to be scrapped, not just relaxed, and a new Internet system devised to replace it.  A bit of creativity is all that is required here.