Why
is the Nasdaq market wobbling so feebly, on top of an incredible 30
percent decline from its high just three months ago? The unprecedented
economic boom since 1983 is widely attributed to the explosion in value
created by high-tech firms. They have raised the funds, lifted the stock
market, created the jobs and fueled the prosperity that is the envy
of the world. In fact, it is small businesses generally that has led
the way in a general flowering of entrepreneurship not exceeded in modern
times. Yet, bad public policy from the Clinton administration is threatening
to kill the goose that laid the golden egg.
The secret to growth is reliable information on risks and potential
rewards, undeterred by government meddling. If markets are efficient,
businesses with the potential for success can raise the capital needed.
It is America's efficient capital markets that have made it so successful.
But it is often overlooked that there are several capital markets and
all must be working for real prosperity to develop and endure. It is
clear the national stock exchanges are efficient for large firms. Yet,
access to capital for smaller firms is much more problematical and now
is under severe threat from an quiet action taken by the Securities
and Exchange Commission last year.
All the new jobs created since the expansion began under Ronald Reagan
have come from firms with fewer than 500 employees. Two-thirds came
from firms with fewer than 20 employees. Most of these were financed
by personal and family resources. But the firms that created the greatest
wealth and the most jobs had to raise funds in private or public stock
offerings. They cannot raise funds from the New York, American or even
Nasdaq national exchanges because they are too new and small, even those
worth several hundred million dollars.
Below these are three available markets: the Nasdaq small capital market,
the Nasdaq over-the-counter (OTC) Bulletin Board, and the private so-called
"pink sheet" markets. The problem is that the SEC in 1999 made it more
difficult for them to raise funds from the first two, forcing many into
the inefficient stocks not even traded on line — the chaotic pink sheet
market. These firms are called "small public companies." They are the
engines of growth, the future Microsofts. But the SEC put them in a
squeeze. Responding to a congressional concern about "penny stock" abuses,
it doubled the asset requirements for all four Nasdaq markets.
Many sound firms that once were eligible for the quoted Nasdaq were
thrown off. While the SEC admitted there were only a few abusers, it
eliminated 3,000 OTC firms, according to the National Small Public Company
Leadership Council. The paradox is that most firms at least those that
survived fell into the unregulated pink sheet market where they are
more subject to abuse.
When the OTC firms were required to re-register with an incredibly complex
Form 10 that required SEC approval, the bureaucrats were swamped. Long
delays resulted even for those that could afford the legions of lawyers,
accountants and consultants and that were ultimately approved. This
delay caused serious liquidity problems and chased many into bankruptcy.
One of the slighted reforms of the Reagan era was SEC Rule 504, which
allowed firms to raise small amounts of capital — at first $500,000,
now $1 million — over 12 months without the red tape of burdensome forms
and notices. This little reform in 1982 may have been the most important
germinator of the entrepreneurial creativity and wealth thereafter.
Tens of thousands of small firms have used this provision on the way
up to raise critical capital. Yet, after requiring the OTC firms to
register, the SEC did not allow registered firms to use Rule 504 offerings
any longer, dealing them a double blow in their constant search for
additional resources.
Fortunately, the SEC knows many of its procedures are outmoded and it
is conducting a full-scale review of its 1930s-era laws with an eye
to an entire rewrite. This is an opportunity for Congress to go back
to the Reagan reforms. It should limit the asset requirement levels
and open Rule 504 offerings to all qualifying firms. It should return
to the 1993 rule allowing stock sales without massive documentation
for smaller offerings, only subjecting them to general fraud and civil
liabilities statutes. While it is at it, Congress should lift the ceiling
for 504 offerings to $5 million and link this limit to inflation for
the future.
The Clinton administration has been lucky with this economic boom, which
started under its predecessors. But the markets are now shaky and unless
the small-public-firm capital market error under Bill Clinton's watch
is corrected, the whole prosperity could tank.
Donald
Devine, former director Of the U.S. Office of Personnel Management,
is a columnist and a Washington-based policy consultant and a Vice Chairman
for the American Conservative Union.
