Internationalization of Primary Public Securities Markets

Article excerpt

HAL S. SCOTT [*]

I

INTRODUCTION

In fully internationalized securities markets, issuers in public primary markets should be able to issue securities to investors worldwide using one set of optimal distribution procedures and disclosure documents, and subject to one set of liability standards and enforcement remedies. Rules in which the benefits outweigh the costs are optimal. Optimal standardized issuance ("OSI") across borders would reduce the costs of issuing securities that are in international demand, a benefit that would be shared by both issuers and investors. Also, OSI would result in more perfect competition in the issuing market for such securities (just as in the goods market) and a more efficient allocation of capital worldwide. OSI is only relevant when there is sufficient investor demand for a public international distribution. This article is concerned only with those cases. The significant growth of registered offerings of foreign issuers in the United States, from seventy-eight in 1990 to 526 (with a total value of $145.9 bi llion) in 1998, is a strong indication of such investor demand. [1]

This article focuses on public primary markets rather than public secondary markets. While the two markets are related--publicly distributed securities are invariably listed and traded in public secondary markets--they are not the same. Public securities are initially distributed through an underwriting process where securities are sold to investors by the issuer through underwriters; thereafter, the securities are traded in the secondary market. Primary market distributions play a crucial part in the allocation of capital. Investors purchasing in primary markets, as opposed to secondary markets, cannot necessarily rely on prices set in deep liquid markets where rational expectations of the value of the securities have been incorporated into the price. [2] Additionally, public primary markets involve purchases by individual investors; indeed, issuers make such distributions in order to reach these investors. While initial public offerings ("IPO"s)--an important part of the public primary market--are heavily dominated by institutional investors, individual investors participate significantly in these markets, as well.

This article assumes that there is no conflict between having standardized and optimal disclosure rules. Merritt Fox, to justify his issuer nationality approach, argues to the contrary when he raises the possibility that the socially optimal level of disclosure may differ for different countries. [3] He argues, in effect, that the optimal level of disclosure in Germany and Japan, where capital has been traditionally allocated mainly through banking markets, may be lower than in the United States, where securities markets have played a more important role. [4] However, in major markets, including Germany and Japan, securities markets currently play an important enough role that those countries care about how they allocate capital. Securities markets in these countries, as compared to banking markets, are gaining importance. Further, even if one should be more tolerant of less disclosure in Germany, such a rule would only affect allocation of capital within Germany. Such tolerance would not be appropriate in a n international context where the concern is with allocation among issuers of different countries. If Deutsche Telekom raises significant capital outside Germany, we should be concerned with choosing the right set of rules for the world, not just Germany.

Part II of this article discusses the current obstacles to achieving OSI. It argues that the imposition of U.S. rules for disclosure, distribution, and enforcement, within and to some extent outside the United States, impedes the achievement of OSI. It also argues that the solution is not merely to abolish mandated disclosure. The article then proceeds to examine options for dealing with the problem. …