Cornell Law Review Volume 98 Issue 6

Redrawing the Public-Private Boundaries in Entrepreneurial Capital Raising

Congress enacted the Jumpstart Our Business Startups (JOBS) Act in 2012 amidst a perceived crisis in entrepreneurial capital raising. The number of initial public offerings (IPOs)—long the gold standard for capital raising by successful emerging companies—has dropped off considerably in the last decade. Companies not yet large or successful enough to consider an IPO complain about the obstaclesassociated with finding early-stage capital from venture capitalists or “angel” investors just in trying to get off the ground. Loosening up on the securities laws’ regulatory burdens was the chosen legislative solution, demonstrating a political willingness to trade off some level of investor protection in order to promote capital formation and its
hoped-for payoff, job creation.

We can hardly be sure this will work because we do not yet understand enough to explain why IPOs have dropped in numbers or why capital formation has apparently come under such stress. It could have more to do with structural changes in our knowledge-based economy or the shifting preferences and sentiments of consumers and investors than with regulatory costs. Even if we focus on regulation, it is far from clear which regulations most need pruning. Regulatory effects are often dimly understood. Complaints by entrepreneurs about unnecessary costs can help spot inefficient regulatory requirements; however, they can also mask a self-serving effort on the part of those entrepreneurs to gain a bigger share of the private benefits of corporate control through diminished disclosure and accountability, all simply under the pretext of job creation.

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