SEC Chairman: Reform IPO disclosure rules to revive the American Capital Market

Source: SEC official website, compiled by Golden Finance

On the morning of December 2, local time in the United States, Paul S. Atkins, chairman of the Securities and Exchange Commission (SEC), rang the opening bell at the New York Stock Exchange and delivered an important speech titled “Revitalizing the American Capital Markets on the 250th Anniversary of the Nation.” In his speech, he elaborated on the reforms of SEC capital market regulatory rules and the specific measures that the SEC is currently taking, indicating an overall vision to strengthen the American capital markets for the next century.

Paul S. Atkins stated in his speech that one of his top priorities is to reform the SEC's disclosure rules, focusing on achieving two goals. First, the SEC must base its disclosure requirements on the principle of financial materiality. Second, these requirements must align with the size and development stage of the company. He also mentioned that the disclosure reform is only one of the three pillars to revitalize the glory of IPOs. The second pillar is to depoliticize shareholder meetings, refocusing them on voting for director elections and significant corporate matters. Additionally, the SEC must reform the legal environment for securities litigation to eliminate frivolous lawsuits while preserving avenues for shareholders to raise reasonable claims.

The following is the full text of Paul S. Atkins' speech:

Ladies and gentlemen, good morning. Lynn, first of all, I want to thank you for your enthusiastic introduction and for hosting this event at the exchange. I also want to thank all the market participants present today. Of course, I am also very pleased to see colleagues from various government departments. Thank you all for being here, and I appreciate your understanding that the views I express today represent only my personal position as Chair and do not necessarily reflect the views of the U.S. Securities and Exchange Commission (SEC) or the views of the other Commissioners.

Introduction

To think about the future of the American financial system, there is perhaps no more suitable place than here. The New York Stock Exchange is the temple of capital markets, filled with various rhythms and rituals that allocate resources to socially valuable uses. If you listen closely, you can hear the soft murmur of human wisdom that has long echoed within this hall. And today, this echo still resonates around us.

Stepping out of this door, the surrounding neighborhoods themselves tell the story of America. No matter which direction you walk a short distance, you can reach some landmark buildings, such as Federal Hall, where Washington took the oath of office and where Congress established the Treasury; and that sycamore tree, under which more than twenty stockbrokers founded the predecessor of today’s exchange; as well as those cobblestone streets, which were already the cradle of commerce long before the skyscrapers of Manhattan rose.

The square mile around us is less a place than a prologue—a beginning of a story, and now this story will be continued by us.

Of course, seven months from now, this history will reach a rare milestone—we will celebrate the 250th anniversary of the founding of our nation. 250 years ago, a group of revolutionaries declared that rights are neither permissions to be fought for nor privileges to be taken away. They advocated for the right to self-governance, and rightly so, but they also advocated for the right to be self-sufficient. They asserted the right to work, to take risks, to become wealthy through their own efforts, and to pursue happiness and property. Indeed, our Founding Fathers strove for autonomy both in the centers of power and in the marketplace of ideas.

Such an important anniversary requires more than just a ceremony; it imposes higher demands on us. It invites us to reflect, and, more importantly, it compels us to resolve to ensure that the future we shape lives up to the legacy we inherit.

The Beginning of the U.S. Capital Market

So, please allow me a few minutes to review how this history began.

Before becoming a nation, the United States was just an investment.

The earliest British permanent settlement in the Western Hemisphere was financed through a joint-stock company, which allowed people to pool funds, share risks, and share profits to undertake this uncertain venture. For example, the Virginia Company—the first large securities issued by England for the Americas—funded the Jamestown colony through share subscriptions, with investors expecting returns from land, trade, and dividends.

Decades later, a similar structure laid the foundation for the prototype of this great city of New York, foreshadowing that New York would one day become the center of the global securities market. In fact, today's Manhattan was originally a corporate investment project. This morning, we bring you the company's initial stock issuance document—the “birth certificate” of New Amsterdam—which constantly reminds us that the establishment of Manhattan was based on the idea that prosperity arises from putting capital to its most productive use.

Of course, this premise—and the financial system derived from it—is rooted in a more distant foundation that can be traced back to the time of the Glorious Revolution in England. At that time, Parliament seized despotic power from the monarchy and established the principles of protecting property rights, enforcing contracts, and the nation being bound by predictable rules rather than the personal will of a monarch. By creating an environment that fosters market prosperity, England became a financial powerhouse. Our Founding Fathers inherited this worldview and on this basis forged a more perfect union—of which the most notable may be Hamilton, and today we gather opposite his grave.

Hamilton understood that a well-structured market could unleash the tremendous vitality of America, something that no monarch or government institution could achieve. After all, a free market is a hallmark of free people. As Dr. Ludwig von Mises aptly pointed out, “If history can teach us anything, it is that private property is inseparable from civilization.”

Therefore, in Essay No. 11 of The Federalist Papers, Hamilton praised the “spirit of adventure” inspired by the “American commercial spirit”—“this unparalleled spirit of enterprise, which characterizes the talents of American merchants and seamen, is itself an inexhaustible source of wealth,” and then he predicted that this spirit has the potential to make America an “object of admiration and envy for the world.”

Hamilton saw in this “spirit of adventure” the potential of a vibrant young nation, whose people could create their own prosperity. Indeed, he believed that the government must establish stable rules, maintain public credit, and reliably enforce contracts. Within this framework, the securities market would emerge, initiating the most remarkable capital mobilization in human history.

The canals connecting inland and coastal areas are financed by government bonds. The railways connecting the entire continent require unprecedented huge investments, which in turn fostered the emergence of secondary markets, auditing standards, and modern corporate governance structures. The steel that builds our cities, the oil that powers our factories, and the electricity that lights our homes all depend on the generous contributions of domestic and foreign investors, who are willing to invest in the American national ideology that was still taking shape at the time.

Of course, we must humbly acknowledge that as a nation, we sometimes fail to adhere to some of the most basic founding principles. However, by the early twentieth century, millions of Americans owned securities and had a framework for achieving their aspirations. In fact, the wealth accumulated through financial markets accelerated social mobility.

As the century progresses, various ideologies compete to build economic strength from the top down, while our model has steadily proven its value on the global stage. We have redefined the boundaries of what is possible through the invention of the telephone and phonograph, assembly lines and airplanes, semiconductors that have made computers ubiquitous, internet protocols that connect the world, GPS technology for locating, social media platforms that disseminate information at the speed of thought, and the new field of artificial intelligence that is changing the way we live and work today.

Throughout this long journey of innovation, a clear pattern emerges: the significant leap in American life has always stemmed from people's willingness to tolerate and accept risk, which has been supported by a system that rewards those who dare to take risks. Our prosperity is not a historical coincidence, and our future leadership position is not a given. The twentieth century was a victory of economic freedom over various restrictive dogmas. However, principles do not sustain themselves. Freedom is not a heritage we inherit, but a responsibility we undertake. In recent years, our regulatory framework has deviated from the founding principles that once helped America become the preferred destination for global public companies.

Divergence of SEC Capital Market Regulation

As a background, since the enactment of the Securities Act in 1933, Congress has passed a series of legislation aimed at addressing the fraud and manipulation that existed on Wall Street before the stock market crash. Congress enacted securities laws at the federal level with the intention of rebuilding public confidence in the market, thereby increasing market transparency. After all, the market needs trust, and trust requires transparency.

Shortly before the Securities Act came into effect, President Franklin D. Roosevelt articulated his vision for this groundbreaking legislation in a message to Congress. He opposed the role of the federal government as a “selective regulator,” meaning that the government would approve securities offerings and deem them suitable for public investment solely based on the expectation of value growth. Instead, President Roosevelt aimed to protect investors through a disclosure-based regulatory mechanism—requiring companies that issue securities to the public to provide all material information regarding those securities.

In short, the Securities Act maintains the Hamiltonian model by incentivizing capital to flow towards opportunities based on investors' judgments. President Roosevelt explained in the same message to Congress that “the purpose of the Securities Act is to protect public interests while minimizing interference with legitimate business as much as possible.”

But over time, the inherent tendencies of the federal government gradually became evident. The pace of regulatory increases exceeded the problems they were originally intended to address—and in the process of deviating from Congress's original intentions, the government attempted to replace the judgment of market participants with its own.

Shortly after I left the U.S. Securities and Exchange Commission (SEC) in the mid-1990s, there were over 7,000 publicly traded companies on the exchanges, ranging from small innovative firms to industry giants. However, by the time I returned to the SEC as chairman earlier this year, that number had declined by about 40%.

Everything that happened during those decades has sounded the alarm for excessive regulatory expansion. This story tells us that the road to public ownership is becoming narrower, the costs are increasing, and it is filled with too many rules, which often do more harm than good.

These trends undermine the competitiveness of the United States; exclude ordinary investors from some of the most dynamic companies; and force entrepreneurs to seek funding elsewhere, whether in private markets or abroad.

This decline is not inevitable and can be reversed. Although the SEC has accumulated many rules and practices in urgent need of reform over the decades, perhaps nothing reflects the overexpansion of regulation more than the lengthy disclosure requirements in the commission's rulebook today.

SEC Capital Market Regulatory Reform Measures

For many years, especially over the past two decades, special interest groups, politicians, and sometimes even the SEC itself have exploited the disclosure system created by Congress for our markets to try to advance certain social and political agendas that are far removed from the SEC's mission of promoting capital formation, protecting investors, and ensuring fair, orderly, and efficient markets.

The accumulation of regulations over the years has resulted in a significant amount of paperwork, which, rather than clarifying issues, tends to obscure them. Today, lengthy annual reports and proxy statements impose huge costs on companies, as they consume a lot of time from the board and management, and require a substantial number of specialized lawyers, accountants, and consultants to prepare. Despite the high costs, investors sometimes fail to benefit from this information, as they find it difficult to understand, or feel overwhelmed by the sheer volume and complexity of the content, ultimately choosing to ignore it.

As the chairperson, one of my top priorities is to reform the SEC's information disclosure rules, focusing on achieving two objectives. First, the SEC must base the information disclosure requirements on the principle of financial materiality. Second, these requirements must be aligned with the size and development stage of the company.

Regarding the first objective, the Supreme Court clarified the objective standard of materiality and explained that if a rational shareholder is very likely to consider certain information critical to their investment decision, then that information is indeed material. Achieving this objective requires the SEC to exercise restraint and caution when formulating rules, and Congress should do the same when directing the SEC to mandate the disclosure of information on specific topics. The prosperity and development of our capital markets do not depend on the quantity of information disclosed, but rather on the clarity of that information and its significance to investors. Justice Thurgood Marshall warned in his opinion for the Supreme Court: “The materiality of certain information is questionable, and insisting on the disclosure of such information may do more harm than good… If the standard of materiality is set too low… shareholders may be overwhelmed by a flood of trivial information—this is clearly detrimental to their ability to make informed decisions.”

To avoid information overload for investors, we should take this warning seriously. As advocated by President Roosevelt, our information disclosure system is most effective when the SEC provides a minimum effective regulation for accessing information that is crucial for investors. At the same time, we should also allow market forces to drive companies to disclose any other operational information that may be beneficial to investors. On the contrary, if the SEC requires all companies to provide the same information without allowing them to adjust the disclosure content based on their specific circumstances, and merely demands that the information be “consistent and comparable” across companies, then this information disclosure system becomes ineffective.

In fact, even under the current circumstances where there are numerous information disclosure requirements, companies still provide additional information, such as non-GAAP data or key performance indicators, which are tailored to the company's business or industry and are more driven by investor demand rather than by the SEC's rulebook.

When the SEC's information disclosure system is abused and requires the disclosure of information that is not substantively related, investors do not benefit from it. Warren Buffett emphasized a typical example of this risk in his recent Thanksgiving letter to shareholders. No summary can fully capture Mr. Buffett's original words. Therefore, I will quote a passage from his letter here:

In my lifetime, reformers attempted to shame them by demanding the disclosure of the comparison between the chief executive officer's pay and that of ordinary employees. The length of the proxy statement quickly ballooned from the previous 20 pages or less to over 100 pages.

However, these well-intentioned measures have not been effective and have instead backfired. Based on most of my observations, the CEO of Company A is examining the competitors of Company B, subtly hinting to the board that he should receive a higher salary. Of course, he also increased the salaries of the directors and was particularly careful in the selection of the members of the compensation committee. The new regulations have sparked jealousy rather than restraint.

This spiraling upward trend has gone out of control.

I agree with Mr. Buffett's views and concerns, which is also why the SEC held a roundtable earlier this year. This roundtable brought together companies, investors, law firms, and compensation consultants to discuss the current state of the agency's executive compensation disclosure rules and potential reforms. What surprised me was that the participants unanimously felt that the length and complexity of executive compensation disclosures limited their practicality and insights for investors. We need to reassess these and other disclosure requirements of the SEC, and this roundtable was one of the initial steps I took to ensure that the principle of “substance” becomes a core objective of the SEC's disclosure system.

Regarding the SEC's information disclosure rules, another priority of mine is to adjust the requirements based on the size and stage of development of the company. It is particularly important to balance the information disclosure obligations with the company's ability to bear compliance burdens when the information disclosure rules directed by Congress to the SEC may disproportionately affect certain companies. Of course, this approach is not a new concept. As early as 1992, during my first tenure at the SEC, the Commission tailored information disclosure requirements for smaller public companies for the first time. Twenty years later, Congress passed the bipartisan Jumpstart Our Business Startups (JOBS) Act, which provides certain newly public companies with an “IPO (Initial Public Offering) on-ramp,” allowing them to delay compliance with some of the SEC's information disclosure requirements.

It is time to revisit these proven and worthy concepts for promotion. As part of this work, the SEC should seriously consider distinguishing the thresholds between “large” companies (which must comply with all SEC disclosure rules) and “small” companies (which only need to comply with some rules). The last comprehensive reform of these thresholds occurred in 2005. This neglect of regulatory maintenance has led to companies with market capitalizations as low as $250 million being subjected to the same disclosure requirements as companies with market capitalizations a hundred times greater.

For newly listed companies, the SEC should consider improving the “IPO grace period” established by Congress in the “Entrepreneur Access to Capital Act.” For example, allowing companies to stay in the “grace period” for at least a few years, instead of forcing them to exit in the first year after the IPO, can provide greater certainty for companies and encourage more companies to go public, especially small companies.

American entrepreneurs have created the most vibrant economy in history by taking companies public and sharing profits with employees, depositors, and investors. This collaborative relationship is worth revitalizing. If we want the next generation of innovators to choose our public markets, we need to tailor our disclosures based on the size and stage of a company; these disclosures should be market-driven; and within the scope set by the SEC, they should be based on substantive content rather than arbitrary social or political purposes.

Of course, the reform of information disclosure is just one of the three pillars of my plan to revitalize the glory of IPOs. The second pillar is to depoliticize shareholder meetings, refocusing them on voting for board elections and significant corporate matters. Finally, we must also reform the legal environment for securities litigation to eliminate frivolous lawsuits while preserving avenues for shareholders to raise reasonable demands. The SEC has been working hard to implement this plan and looks forward to sharing the progress made with everyone as soon as possible.

Raising funds through an IPO should not be the privilege of a few “unicorn” companies. An increasing number of public offerings are concentrated in a handful of companies, which often belong to only one or two industries. Our regulatory framework should provide IPO opportunities for companies at various stages of development and from diverse industries, especially those aimed at raising funds for the company rather than merely providing liquidity for insiders.

Outlook for the Future of the U.S. Capital Markets

The reform measures I just outlined are a valuable and necessary starting point. They will help capital flow more quickly and freely to its highest and best use, which is where human initiative and creativity lie. They will also help guide the SEC back to the fundamental financial principles upon which its mission is based.

But this is just the first step in a broader effort aimed at returning the power of the entire United States to its citizens, rather than to regulatory agencies.

As we look forward to the 250th anniversary of the founding of the United States, let us remember that no country has ever granted individuals such a degree of autonomy, nor has any country reaped such rich rewards as a result. However, even though history and evidence affirm this truth, there are still some people in our society who begin to question whether the capital market is still the most reliable engine for upward mobility. They argue that capital allocation driven by political power is superior to allocation by free market forces. They call for the “seizure of the means of production.” They often claim through cleverly rhymed slogans that government decisions are more efficient and just than those made by the public. They ask, “Can capitalism help people transcend the limitations of their origins or backgrounds?” Can it embody our highest values?

I personally believe that capital can achieve this - history has already proven it. Because the best state of capital is a tool for individuals to mobilize the resources of a free society and pursue common prosperity. It enables us to create value for others by creating our own value. In fact, our market is a venture of profound moral significance, as it is a mutually beneficial endeavor. Because every transaction has the potential to benefit both parties. Because our market affirms the dignity of the human spirit and unleashes the potential for human creation, construction, innovation, and flourishing, which is unmatched by any other choice.

This is precisely why the work of the SEC is so crucial. Because when our capital markets are strong, they can enhance people's sense of dignity on a global scale. No force is more capable of helping people escape poverty, broaden pathways to opportunity, or address society's most challenging issues than capital investment made through capital markets.

In the coming months, we will advance the various reforms I discussed today and several other reforms with the urgency and caution they deserve. We will work closely with Congress and the government. We will listen carefully to the opinions of market participants and investors. We will proceed steadily, with confidence, adhering to sound principles and clear mandates. But most importantly, we will push forward with reforms with the determination that a nation eager for prosperity deserves.

Conclusion

In the end, I believe our capital markets are not just financial mechanisms — they are, in essence, a reflection of our national character. This character inspires generation after generation of Americans to take risks and reap rewards, to innovate continuously, never stopping, firmly believing that the future is in our own hands.

As we approach the 250th anniversary of the founding of the United States, the question before us is not whether our entrepreneurs have the ability to revitalize our capital markets, but whether we, as regulators, have the determination to do so.

As the SEC welcomes a new day under the leadership of President Trump, I am pleased to report that we have indeed done it.

Indeed, I firmly believe that we can safeguard the future of the capital markets, allowing them to continue thriving for the next 250 years and beyond. I believe that we will rediscover the spirit of enterprise that Hamilton envisioned, which will surely become the source of our strength. Furthermore, I believe that we will ensure the American story is continued not only through memory and speeches but also through the courage of those determined to write its new chapters.

Thank you very much for taking the time today. All the audience members have been very patient and tolerant. I look forward to our upcoming work. Thank you.