The Fundamentals of an Electronically-Based Federal Securities Act

Abstract

We argue that the only level of market efficiency that is significant in fulfilling the objectives of the Securities Act of 1933 informational efficiency (not fundamental or allocational efficiency) and that many commentators overstate the weaknesses in SEC regulatory initiatives by premising their criticism on funamental or even allocational efficiency arguments. We next argue that the major impediment to reforming the operation of the Securities Act is not shifting the focus to company registration as recommended by the Advisory Committee on Capital Formatin and Regulatory Processes, but the continual imposition of section 11 liability in the issuer's path as it speeds toward capital markets. We argue that so long as section 11 liability has such a focus the operation of the Securities Act will be transactional and will continue to stimulate many issuers to raise funds via Rule 144A or Regulation S. The paper concludes with a description of how section 11 liability could be shifted to a triennial review of Exchange Act filings with more limited "due diligence" standards applied to selected portions of the Securities Act registration statement.

JEL Classification: G14, G18, K22