SECURITIES REGULATION IN LOW-TIER LISTING VENUES: THE RISE OF THE ALTERNATIVE INVESTMENT MARKET

Fordham Journal of Corporate & Financial Law, 2008 by Mendoza, Jose Miguel

It is a fundamental tenet of capital markets that an adequate flow of high-quality information enhances investor confidence and, thus, contributes to the development of deep and liquid financial markets.40 Enhanced transparency might not only allow for timely, extensive information, but can also improve and homogenize the quality of the data disclosed. Standardized information enables investors to compare different business prospects. If investors possess a greater degree of standardized, high-quality information, they may be more inclined to invest in securities markets. Disclosure is frequently coupled with corporate governance mechanisms that attempt to neutralize agency problems in listed firms.41 A balanced mix of properly enforced disclosure requirements and corporate governance rules is a telltale sign of a jurisdiction with a sophisticated capital market.42

Successive financial collapses have led policymakers to focus on disclosure43and corporate governance,44 by introducing and enforcing rules aimed at providing an adequate level of investor protection. This regulatory dynamic, in which market crashes are followed by legislative and policy responses, still determines the aims and stringency level of securities laws in multiple jurisdictions.45 Market complexities, however, make it extremely difficult to introduce such corrective measures ex ante to prevent the market from collapsing.46 Securities laws could thus largely be considered a regulatory response to market failures. Analyzing this interaction between policymakers and the market is central to understanding the role of securities regulation in ensuring a healthy marketplace.

A. A Regulatory Dynamic

The rules set out in advanced economic systems are often the result of a continuous regulatory dynamic in which market flaws are detected and fixed ex post.*1 Most major interventions in the world's financial systems are the result of a market collapse, often preceded by the burst of speculative bubbles and corporate scandals.48 Early examples of this trend include the failure of the Mississippi and South Sea Companies in the eighteenth century, which led to significant investor losses, general public outrage, and ensuing governmental intervention. The stories behind both scandals are well known. After the French and English governments, respectively, granted monopolistic positions to each company, public investors poured funds into these ventures. In each case information was manipulated or concealed from the market and a harmful speculative bubble was quick to inflate and burst, leading to massive losses for the unwary investors of both companies.49 The upshot of these debacles was not only swift governmental action, but also a general loss of confidence in the corporate form, which persisted until the Industrial Revolution.50

In the United States, the regulatory dynamic in securities regulation has been far more visible than in other jurisdictions. Following the devastation of the First World War in Europe, the U.S. emerged as the leading center for financial services. Unrestrained market activity characterized the 1920s era, in which high returns were often the result of speculation and market manipulation.51 In 1929, the speculative bubble finally ruptured, throwing the U.S. economy into a period of economic decline, aptly termed the Great Depression. Public discontent eventually led to the election of Franklin D. Roosevelt and the implementation of his New Deal policies, which sought to reactivate the economy and restore public confidence in the market.52 The securities Act of 193353 and the securities Exchange Act of 193454 served as cornerstones of his policy agenda and were swiftly approved by Congress.55 These measures significantly raised the costs of being a listed company in the U.S.56 Despite raising compliance costs, governmental intervention (including the passage of both acts) succeeded in restoring public confidence and allowed financial markets to flourish. Although corporate scandals and minor market crashes occurred during the ensuing decades, the United States enjoyed a period of relative stability that was to last until the end of the twentieth century.57