The following briefly reviews the history of securities exchanges, the establishment of the first U.S. federal securities law, touches on the regulatory burden that is currently imposed on Broker-Dealers, and references the exciting outgrowth of recent legislation authorizing Crowdfunding.
While privately placed Securities represent, arguably, the oldest and least efficient form of investment banking, this very large portion ($2 trillion+) of the capital markets is now rapidly evolving because of developments in information technology. Internet-based Crowdfunding represents a major advance in private Capital formation, though it is a long way from reaching its potential for both Issuers and Investors.
Modern banking can be traced to 14th century banking houses in Italy, most famously the Medici. “Bank” derives from “banco” which, in Italian, translates as “bench.” This is where early financiers transacted money lending and investment activities. It was during this time that the first government and corporate Securities were created and began to trade. As all transactions at that time were private, Investors relied heavily upon the integrity of the banking houses to provide credible disclosures. While accounting standards and extensive government regulations now underpin Securities transactions, reputational integrity is still fundamental to investment banking.
The first stock exchange activity involving public Securities occurred in Holland in the 17th century. In the U.S., the Buttonwood Agreement of 1792 led to what became the New York Stock Exchange (NYSE), which grew rapidly with the expansion of railroads and the broader U.S. economy in the 19th century. Until the crash of 1929, the sale of Securities was self-regulated by the Securities industry.
Soon after the crash, the Securities Act of 1933 (the “Act”) was enacted, mandating public registration for corporate Securities, followed by the Securities Exchange Act of 1934 which created the Securities Exchange Commission (the “SEC”) to oversee all Securities activity. In 1938, the Maloney Act amendments to this Act mandated the creation of what is now the Financial Industry Regulatory Authority (“FINRA”), the Self-Regulatory Organization (“SRO”) that directly oversees all Securities Broker-Dealers and their Registered Representatives. Other Federal regulation has expanded significantly over the years, in particular, the Dodd-Frank Act in 2010 following the 2008-2010 “melt down” of the financial markets.
Though Securities can be placed privately and be exempt from SEC registration under Section 4(a)(2) of the Act, the SEC provides “safe harbor” guidelines for such Offerings within Regulation D (“Reg D”), which are heavily relied upon. Reg D was adopted in 1982 and then revised in 2013 to address equity Crowdfunding activities.
The administrative burden resulting from the above regulations has largely contributed to a significant decline in the number of Securities Broker-Dealers in the U.S. There are about 30% fewer firms than in 2007. Given that regulatory oversight and control of commercial banks have also increased dramatically over this period, smaller companies in the U.S. now have less access to Capital than during any period since the late 1940’s.
Notwithstanding the above, the future is bright for investment banks able to adapt to the opportunities created by Crowdfunding provisions within the JOBS Act of 2012 and through continual advances and the intelligent uses of information technology (internet, social media, etc.).