Securities Regulation in Low-Tier Listing Venues: The Rise of the Alternative Investment Market

Article excerpt

I. INTRODUCTION

In recent years, participants in the world's capital markets witnessed a shift in the tide of international listings. As the U.S. financial market rapidly loses its standing as the center of the global economy, other countries eagerly rise to challenge its dominance. In the aftermath of the Enron collapse and the "dot com" bubble burst, investors and other market participants are turning away from the regulatory burden imposed by the rigorous U.S. securities framework. While some favor delisting,1 others seek jurisdictions with less stringent regulation in which the costs of being a public company are comparatively lower.2 By reducing the cost of listing and remaining listed, this trend allows systems that feature lighter levels of regulation and specialized market segments to thrive. These events might well be considered symptoms of global regulatory competition among securities regulators and stock exchanges.3

The worldwide growth of competing trading fora and a stirring movement for reform in the U.S. have given new life to an old debate concerning the proper degree of regulatory stringency for financial markets. Ascertaining the level of securities regulation that will prove most effective in increasing overall social welfare is not an easy task. A straightforward cost-benefit examination might be insufficient to solve this problem, since it is difficult to quantify the economic effects of securities regulation.4 In any case, an optimal securities framework should strike a balance between investor protection and compliance costs for listed companies.5 The tension lies in introducing proper measures to attain such a balance, while still allowing for the development of a deep and liquid capital market. For instance, even if prophylactic regulation boosts investor confidence in the market, thereby enhancing liquidity, such rules can increase the costs of equity issuances beyond reasonable boundaries.6 This situation could induce public companies to de-list or to seek alternative listing venues.7 Yet, lighter levels of regulation could lead to market failures, eroding investor confidence to a point in which liquidity is constrained and a crash ensues.8

Two moments in U.S. capital market history provide further insight. The 2002 Sarbanes-Oxley Act9 ("SOX") is often criticized for increasing listing costs in the U.S.10 SOX was merely the product of a legislative reaction following a market crash, however, which brings to mind the response to the 1929 collapse that prompted the U.S. Congress to pass the Securities Act of 1933(11) and the Securities Exchange Act of 1934.12 Although the 1930's measures and minor subsequent amendments significantly raised listing costs, they created a framework in which the U.S. market flourished for several decades.13 Scholars argue that despite its higher costs, SOX's dissuasive effect on fraudulent behavior will generate net long-term benefits.14 Moreover, well-known regulatory figures, like former Securities and Exchange Commission ("SEC") chairman Arthur Levitt, call for the implementation of still stronger measures in the United States.15

Nevertheless, proponents of a lighter approach to securities regulation abound in the U.S. and abroad.16 As companies flee from the burden of U.S. regulation, policy-makers and scholars argue for an alleviation of local regulatory requirements for listed companies. The Report of the Committee on Capital Market Regulation (informally dubbed the "Paulson Report," after U.S. Treasury Secretary Henry Paulson) set the tone for reform by pointing out the erosive effect of regulatory intensity on U.S. dominance and competitiveness.17 The publication of the Paulson Report was followed by a study conducted by the Commission on the Regulation of U.S. Capital Markets in the 21st Century.18 The argument of this more recent report hinges on a comprehensive overhaul of the U.S. securities framework, focusing on the federal government's regulatory approach to financial markets and the SEC's powers regarding SOX. …

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