THE NEW PUBLIC/PRIVATE EQUILIBRIUM 

AND THE REGULATION OF PUBLIC 

COMPANIES 

Elisabeth de Fontenay and Gabriel Rauterberg 

This Symposium Article examines how the public/private 

divide works today and maps out some of the potential 

implications for major issues in securities law. Classic debates 

in securities law were often predicated on the idea that public 

companies are a coherent class of firms that differ markedly 

from private companies. For more than fifty years after the 

adoption of the federal securities laws, this view was justified. 

During that period, the vast majority of successful and 

growing private firms eventually accepted the regulatory 

obligations of being public in order to access a wider and 

deeper pool of capital, among other benefits. This was a 

descriptive reality, but it had important normative 

implications as well. An identifiable class of large, growing 

firms went public, and they generally went public for a reason 

they shared: raising capital. As a result, regulatory 

interventions imposed on the category of “public companies” 

had a coherent target. 

We argue that firms’ going public decisions are now shaped 

by a much larger and more varied set of factors. These factors 

are complex, cross-cutting, and impact firms considering going 

public in very heterogeneous ways. This complexity results 

from several developments and we emphasize two. First, it is a 

result of the fact that while the public/private divide was 

created by securities law, public and private markets now 

 
 Professor of Law, Duke Law School and Professor of Law, University of 

Michigan Law School, respectively. For comments and suggestions, thanks 

are owed to Michael Guttentag, Joan MacLeod Heminway, Elizabeth 

Pollman, Andrew Verstein, and participants at the Loyola School of Law, 

Los Angeles, faculty workshop and the Future of Securities Regulation 

conference at Columbia Law School. Our gratitude also to the wonderful 

editors of the Columbia Business Law Review. All errors are ours. 



  

1200 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021 

provide two widely different ecologies for firms, which 

profoundly shape firms’ governance as well as the issuance and 

trading of their shares. Second, long-term advances in the ease 

of capital raising in private markets have made it possible for 

firms to remain private indefinitely and have diminished or 

eliminated the capital-raising advantages of public markets. 

The result of this latter change has been rightly called a “new 

equilibrium.” In that equilibrium, fewer and older firms go 

public, while other successful firms remain private 

indefinitely. In this equilibrium, capital raising is no longer 

the primary reason firms go public. Rather, we argue, firms go 

public due to one or more of the many other features of the 

public market’s ecology. 

The normative implication of this new equilibrium is to 

reduce the coherency of the regulation of public companies. The 

benefits and costs of being public (or private) apply unevenly 

to firms eligible to go public. Instead, to a greater degree firms 

now face idiosyncratic, company-specific tradeoffs between 

being public or private, and they often go public for reasons 

unrelated to the original design of the public/private divide. 

Regulations imposed on public firms are likely to not only be 

increasingly under- and over-inclusive, but also to apply to a 

class of companies whose coherency as an economic 

phenomenon may be increasingly suspect. 

 

I.  Introduction ............................................................... 1201 
II.  Related Literature ..................................................... 1207 
III.  Securities Law Origins of the Public/Private Divide

..................................................................................... 1209 
A.  The Public/Private Divide for Operating 

Companies ........................................................... 1210 
B.  The Public/Private Divide for Funds ................. 1213 

1.  Description ..................................................... 1213 
2.  Interactions and Overlap Between the 

Company and Fund Divides ......................... 1215 
3.  An Idealized Public/Private Divide .............. 1218 

IV.  Complexity: The Public/Private Divide Offers Two 

Different Ecologies for Firms ................................... 1221 



 

No. 3:1199] THE NEW PUBLIC/PRIVATE EQUILIBRIUM 1201 

A.  The Public/Private Divide Today: Functional 

Complexity........................................................... 1221 
1.  Securities Law Rules that Turn Directly on 

the Divide ....................................................... 1224 
i.  Governance Rules .................................... 1224 
ii. Regulation Fair Disclosure (“Reg. FD”) . 1227 

2.  Devices that Turn on the Divide in Practice 1229 
i.  Control Over Shareholder Base ............. 1230 
ii.  Continuous Stock Prices ......................... 1230 
iii.  Informationally Rich Environment ........ 1231 
iv.  Aggregate Litigation ............................... 1232 

3.  Unbundling the Public/Private Divide ........ 1234 
B.  Capital Raising and Issuer Choice .................... 1236 
C.  Firms Now Face Complex, Idiosyncratic Tradeoffs 

in Determining Whether to Be Public or Private

 .............................................................................. 1238 
V.  Implications of the New Public/Private Equilibrium

..................................................................................... 1241 
VI. Conclusion .................................................................. 1243 
 

I.  INTRODUCTION 

There may be no more profound issue facing securities 

regulation than reimagining the public/private divide. The 

divide is a centerpiece of securities law. It partitions 

securities, offerings, and issuers into two halves, the private 

and public, with each side subject to distinct privileges and 

burdens.1 The issuance and trading of private companies’ 

 

1 Despite its defining role, for a long time, scholars failed to directly 

analyze how the public/private divide worked and should work. In 

extraordinarily prescient articles, Hillary Sale, Donald Langevoort, and 

Robert Thompson observed the stresses that divide was encountering and 

asked how it might be reimagined. See Hillary A. Sale, The New “Public” 

Corporation, 74 LAW & CONTEMP. PROBS. 137, 138–41 (2011); Donald C. 

Langevoort & Robert B. Thompson, “Publicness” in Contemporary Securities 

Regulation After the JOBS Act, 101 GEO. L.J. 337 (2013). See also Onnig H. 

Dombalagian, Principles for Publicness, 67 FLA. L. REV. 649 (2016); Hillary 

A. Sale & Robert B. Thompson, Market Intermediation, Publicness, and 

Securities Class Actions, 93 WASH. U. L. REV. 487, 538 (2015); Robert B. 



  

1202 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021 

shares is restricted, but private firms’ regulation is otherwise 

light, while public companies’ shares enjoy free issuance and 

trading, but are subject to extensive mandatory disclosure. 

Both public and private companies are of great consequence. 

In the United States, the 6 million private firms and 3,600 

public companies each account for roughly half of total sales, 

pretax profits, and non-residential fixed investment.2 The 

divide has existed since the beginning of federal securities 

regulation, even as its details have shifted along the way. 

So why rethink the divide? There are old and new 

motivations. A familiar one centers on the perceived decline of 

public firms. The number of U.S. public companies has fallen 

from a peak of 8,025 in 1996 to 3,600 in 2020.3 Given that the 

U.S. economy and global listings grew substantially during 

that period, there is a case for a substantial “gap” in the 

number of America’s public companies.4 This decline is often 

 

Thompson & Donald C. Langevoort, Redrawing the Public-Private 

Boundaries in Entrepreneurial Capital Raising, 98 CORNELL L. REV. 1573, 

1574, 1578–79 (2013). For an excellent overview of the securities law details 

of the divide, see Edward F. Greene et al., The Need for a Comprehensive 

Approach to Capital Markets Regulation, 2021 COLUM. BUS. L. REV. 714. 
2 The number of private firms is taken from the Statistics of U.S. 

Businesses. See 2018 SUSB Annual Data Tables by Establishment 

Industry, U.S. CENSUS BUREAU, 

census.gov/data/tables/2018/econ/susb/2018-susb-annual.html (last 

updated Oct. 8, 2021) (on file with the Columbia Business Law Review); see 

also John Asker, Joan Farre-Mensa & Alexander Ljungqvist, Corporate 

Investment and Stock Market Listing: A Puzzle?, 28 REV. FIN. STUD. 342, 

345 (2015). The number of public companies is taken from a recent Morgan 

Stanley report. See MICHAEL J. MAUBOUSSIN & DAN CALLAHAN, MORGAN 

STANLEY, PUBLIC TO PRIVATE EQUITY IN THE UNITED STATES: A LONG-TERM 

LOOK 3 (2020), 

https://www.morganstanley.com/im/publication/insights/articles/articles_p

ublictoprivateequityintheusalongtermlook_us.pdf [https://perma.cc/57BV-

42HL]. 
3 Craig Doidge, G. Andrew Karolyi & René M. Stulz, The U.S. Listing 

Gap, 123 J. FIN. ECON. 464, 464 (2017); Mauboussin & Callahan, supra note 

2. 
4 Doidge et al., supra note 3. It is highly controversial as to whether 

this gap in nominal listings actually constitutes an economic problem. See, 

e.g., B. Espen Eckbo & Markus Lithell, Merger-Driven Listing Dynamics 24, 

26 (Eur. Corp. Governance Inst., Fin. Working Paper No. 752/2021, 2021), 



 

No. 3:1199] THE NEW PUBLIC/PRIVATE EQUILIBRIUM 1203 

attributed to increasing regulation imposed on public 

companies, under the theory that firms need to access public 

markets but cannot do so because of the high costs of being 

public.5 A newer reason is that while the costs of being public 

may have increased, as importantly, the costs of staying 

private have decreased.6 In particular, private capital markets 

have grown enormously. The traditional balance of capital 

raising has reversed itself, with companies raising more funds 

in private markets every year since 2009 and twice as much 

in private markets than public markets in 2017.7 This growth 

is not merely or fundamentally the story of a small number of 

highly valued venture-backed firms. Rather, it is decades in 

the making and affects the structure of the entire economy.8 

Alongside these changes, developments in capital markets 

during the last two decades have also made for an increasingly 

hazy border between the private and public markets. Private 

markets have grown increasingly complex and sophisticated. 

 

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3547581# (on file with 

the Columbia Business Law Review) (arguing that the listing gap 

disappears after accounting for M&A transactions involving public 

acquirers, and suggesting that there is little evidence of a recent decline in 

public firms’ contribution to the U.S. economy). 

5 Doidge et al., supra note 3, at 465–66, is sometimes cited as refuting 

the view that recent public company regulation materially deters IPOs 

because it shows that the decline of IPOs precedes the adoption of new 

regulation. See Michael Ewens & Joan Farre-Mensa, The Deregulation of 

the Private Equity Markets and the Decline in IPOs, 33 REV. FIN. STUD. 5463, 

5464 (2020) This interpretation is probably overstated, as recent evidence 

suggests. See Michael Ewens, Kairong Xiao & Ting Xu, Regulatory Costs of 

Being Public: Evidence from Bunching Estimation 3–5 (Nat’l Bureau of 

Econ. Rsch., Working Paper No. 29143, 2021), 

https://www.nber.org/papers/w29143 (on file with the Columbia Business 

Law Review). 
6 Elisabeth de Fontenay, The Deregulation of Private Capital and the 

Decline of the Public Company, 68 HASTINGS L.J. 445, 448 (2017); Ewens & 

Farre-Mensa, supra note 5, at 5463–64. 

7 SCOTT BAUGUESS, RACHITA GULLAPALLI & VLADIMIR IVANOV, U.S. SEC. 

& EXCH. COMM’N, CAPITAL RAISING IN THE U.S.: AN ANALYSIS OF THE MARKET 

FOR UNREGISTERED SECURITIES OFFERINGS, 2009‐2017, at 7–9, 8 fig.1, 9 tbl.1 

(2018). 
8 Id. at 3–4. 



  

1204 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021 

Mutual funds invest in mature private companies,9 secondary 

markets for private company stock grow larger and more 

liquid,10 and the size and social impact of some private firms 

rivals that of major public companies.11 Public markets reflect 

increasing pressure to permit governance paradigmatic of 

late-stage private companies,12 as well as changing 

technologies for going public, such as primary and secondary 

direct listings or SPACs.13 Many of these trends are 

longstanding, even as their magnitude has grown. And so 

these reasons, old and new, motivate regulators, academics, 

and market participants to question the public/private divide. 

In this Symposium Article, we sketch one way in which we 

believe the public/private divide should be rethought. In 

particular, we argue that the calculus facing firms between 

being public or private has grown more idiosyncratic, making 

the concept of “public companies” a less coherent one. Classic 

debates in securities law were often predicated on the idea 

that public companies are a coherent class of firms that differ 

markedly from private companies. Indeed, for more than fifty 

years after the adoption of the federal securities laws, this 

view was justified. During that period, the vast majority of 

successful and growing private firms eventually accepted the 

 

9 See, e.g., Sergey Chernenko, Josh Lerner & Yao Zeng, Mutual Funds 

as Venture Capitalists? Evidence from Unicorns, 34 REV. FIN. STUD. 2388 

(2021). 
10 See, e.g., Darian M. Ibrahim, The New Exit in Venture Capital, 65 

VAND. L. REV. 1, 3, 16 (2012). 
11 See, e.g., Matt Levine, SoftBank Has a Bigger, Weirder Vision, 

BLOOMBERG: OP. (May 3, 2019, 12:00 PM), 

https://www.bloomberg.com/opinion/articles/2019-05-03/softbank-has-a-

bigger-weirder-vision [https://perma.cc/S447-WTY6]. 
12 See, e.g., Gabriel Rauterberg, The Separation of Voting and Control: 

The Role of Contract in Corporate Governance, 38 YALE J. ON REG. 1124, 

1129–31 (2021) (exploring the role of shareholder agreements in post-IPO 

firms); Jordan Schoenfeld, Contracts Between Firms and Shareholders, 58 

J. ACCT. RSCH. 383, 385–86 (2020) (exploring firm-shareholder contracting 

in public companies). 
13 See, e.g., A Current Guide to Direct Listings, GIBSON DUNN (Jan. 8, 

2021), https://www.gibsondunn.com/wp-content/uploads/2021/01/a-current-

guide-to-direct-listings-january-2021.pdf [https://perma.cc/DLE8-FBVD]. 



 

No. 3:1199] THE NEW PUBLIC/PRIVATE EQUILIBRIUM 1205 

regulatory obligations of being public in order to access a 

wider and deeper pool of capital, among other benefits.14 This 

was a descriptive reality, but it had important normative 

implications as well. An identifiable class of large, growing 

firms went public, and they generally went public for a reason 

they shared: raising capital.15 As a result, regulatory 

interventions imposed on the category of “public companies” 

had a coherent target. 

We argue that firms’ going public decisions are now shaped 

by a much larger and more varied set of factors. These factors 

are complex, cross-cutting, and impact firms considering 

going public in very heterogeneous ways. This complexity 

results from several developments, and we emphasize two. 

First, it is a result of the fact that while the public/private 

divide was created by securities law, public and private 

markets now provide two widely different ecologies for firms, 

which profoundly shape firms’ governance as well as the 

issuance and trading of their shares. Second, as noted, long-

term advances in the ease of capital raising in private markets 

have diminished or eliminated the capital-raising advantages 

of public markets. As Donald Langevoort predicted,16 this vast 

growth in capital raising in private markets has made for an 

“issuer choice”17 regime, in which large, successful private 

 

14 de Fontenay, supra note 6. 
15 Id. 
16 Donald Langevoort, The Regulation of Primary Markets, in 

SECURITIES MARKET ISSUES FOR THE 21ST CENTURY 101, 122, 127 (Merritt Fox 

et al. eds. 2018) (“[P]robably the most conceptually interesting subject in 

securities law . . . is it possible—indeed desirable—that a large segment of 

economically important firms in the American economy stay private, 

perhaps indefinitely, yet with easy access to large amounts of capital?”). 
17  “Issuer choice” refers the ability of issuers to decide under which 

regulatory regime they fall. See Merritt B. Fox, Retaining Mandatory 

Securities Disclosure: Why Issuer Choice Is Not Investor Empowerment, 85 

VA. L. REV. 1335, 1337–39 (1999) (arguing against issuer choice); Paul G. 

Mahoney, Mandatory Disclosure as a Solution to Agency Problems, 62 U. 

CHI. L. REV. 1047, 1093 (1995) (noting ways in which federal securities 

regulation always offered some optionality as to regulatory environment). 

This Article uses the term to describe the choice issuers have between 

staying private or going public. 



  

1206 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021 

firms can remain private indefinitely while still enjoying 

growth. The result of this latter change has been rightly called 

a “new equilibrium.”18 In that equilibrium, fewer and older 

firms go public, and firms’ decisions between the public or 

private ecologies is no longer principally driven by capital 

raising.19 We argue that firms primarily go public due to one 

or more of the many other features of the public market’s 

ecology. 

In developing this argument, we aim to synthesize a large 

and sprawling literature that addresses the public/private 

divide in order to show that it now consists of two complex and 

multidimensional ecologies that differ along a host of different 

economically important axes. Of course, capital raising was 

never the sole determinant of firms’ going-public decisions—a 

large literature spanning multiple markets and nations has 

documented the many determinants of firms’ decisions to 

cross the public/private divide.20 But with the astonishing 

growth in capital raising in private markets, the remaining 

determinants of firms’ decisions have become more varied and 

idiosyncratic. 

How the public/private divide works matters to the success 

of the regulation of public and private companies. The 

normative implication of this new equilibrium is to reduce the 

coherency of the regulation of public companies. The benefits 

and costs of being public (or private) no longer apply 

consistently to firms eligible to go public (or remain private); 

instead, to a greater degree firms now face idiosyncratic, 

company-specific tradeoffs, and they often go public for 

 

18 Ewens & Farre-Mensa, supra note 5, at 5498. 
19 Id. at 5506. 
20 Global evidence suggests that the principal determinants of firms’ 

decisions to go public vary enormously. See, e.g., Marco Pagano, Fabio 

Panetta & Luigi Zingales, Why Do Companies Go Public? An Empirical 

Analysis, 53 J. FIN. 27, 27–30 (1998) (finding that Italian firms go public to 

alter their capital structure and benefit from misvaluation of their sector); 

Michelle Lowry, Micah S. Officer & G. William Schwert, The Variability of 

IPO Initial Returns, 65 J. FIN. 425, 463 (2010) (finding capital demands and 

investor sentiment predict firms’ IPO decisions); Sreedhar T. Bharath & 

Amy K. Dittmar, Why Do Firms Use Private Equity To Opt Out of Public 

Markets?, 23 REV. FIN. STUD. 1771, 1776–80 (2010) (collecting sources). 



 

No. 3:1199] THE NEW PUBLIC/PRIVATE EQUILIBRIUM 1207 

reasons unrelated to the original design of the public/private 

divide. Regulations imposed on public firms are likely to not 

only be increasingly under- and over-inclusive, but also to 

apply to a class of companies whose coherency as an economic 

phenomenon seems increasingly fraught. 

This Article proceeds as follows. Part II briefly surveys 

some of the relevant literature. Part III describes the legal 

architecture of the public/private divide established by 

securities law as well as the separate divide established by 

investment fund regulation and emphasizes how the two 

interact. It also notes how the growth of capital raising in 

private markets has led to an issuer choice regime for large 

private firms. Part IV explores the complexity and many 

determinants of the widely distinct, if also overlapping, 

ecologies of public and private markets. Alongside the 

distinctions created and contemplated by legal design, a 

number of other differences have grown more significant. Part 

V considers some of the normative implications of these 

changes. We then conclude. 

II.  RELATED LITERATURE 

Given the public/private divide’s foundational role in 

securities law, a large literature has developed around it—one 

far too large to discuss comprehensively. But three facets of 

that literature are especially relevant here. One facet 

theorizes the public/private divide itself. Pioneered by Donald 

Langevoort, Robert Thompson, and Hilary Sale, this 

literature seeks to both rationalize and question the structure 

of how the public and private are divided and the nature of 



  

1208 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021 

the dividing line itself.21 Where should that line be drawn?22 

And should it be one line between two fundamentally different 

alternatives,23 several distinct regulatory classifications,24 or 

a continuum of regulatory treatment?25 

Another facet of the literature addresses the soundness of 

the policy interventions imposed on those firms classified as 

public or private. One of securities law’s core debates explored 

the desirability of the mandatory disclosure regime that is the 

centerpiece of the regulation of public issuers and offerings.26 

 

21 See, e.g., Sale, supra note 1, 138–41; Langevoort & Thompson, supra 

note 1; Sale & Thompson, supra note 1; see also Joan MacLeod 

Heminway, Crowdfunding and the Public/Private Divide in U.S. Securities 

Regulation, 83 U. CIN. L. REV. 477, 481–84 (2014) (applying the framework 

developed by Langevoort, Sale, and Thompson to crowdfunding); Jill E. 

Fisch, The Mess at Morgan: Risk, Incentives and Shareholder 

Empowerment, 83 U. CIN L. REV. 651, 654 (2015) (arguing that efforts to 

deploy corporate governance to shape corporation’s social role are 

misguided). 
22 See, e.g., Michael D. Guttentag, Patching a Hole in the JOBS Act: 

How and Why to Rewrite the Rules That Require Firms to Make Periodic 

Disclosures, 88 IND. L.J. 151, 195–211 (2013) (proposing modifications to 

federal periodic disclosure regime structure); A. C. Pritchard, Revisiting 

“Truth in Securities” Revisited: Abolishing IPOs and Harnessing Private 

Markets in the Public Good, 36 SEATTLE U. L. REV. 999, 1002 (2013) 

(proposing to re-design the public/private divide with trading volume or 

market capitalization triggering the transition between public and private 

markets). 
23 See, e.g., Usha R. Rodrigues, The Once and Future Irrelevancy of 

Section 12(G), 2015 U. ILL. L. REV. 1529, 1561 (discussing trading volume 

as a trigger for public status). 
24 See, e.g., Langevoort & Thompson, supra note 1, at 342. 

25 Jeff Schwartz, The Twilight of Equity Liquidity, 34 CARDOZO L. REV. 

531, 579 (2012). 
26 Roberta Romano, Empowering Investors: A Market Approach to 

Securities Regulation, 107 YALE L.J. 2359, 2373–80 (1998) (arguing that 

mandatory disclosure rules do not contribute to investor welfare and that 

corporate firms have other incentives to disclose information); Fox, supra 

note 17, at 1340–42 (advocating for the present mandatory disclosure 

regime); Merritt B. Fox, The Issuer Choice Debate, 2 THEORETICAL INQUIRIES 

L. 563, 568–571 (2001) (arguing against an issuer choice regime and for 

mandatory disclosure laws) [hereinafter Fox, Issuer Choice]; John C. Coffee, 

Jr., Market Failure and the Economic Case for a Mandatory Disclosure 

System, 70 VA. L. REV. 717, 721–23 (1984) (arguing for mandatory 



 

No. 3:1199] THE NEW PUBLIC/PRIVATE EQUILIBRIUM 1209 

A generation later, progress has been made, but basic 

questions remain as to the optimal design of a disclosure 

regime, both in terms of whom it should apply to and its 

content.27 

A last and sprawling facet of the literature explores the 

effects of differences in public and private markets on the 

operation of firms.28 This literature addresses issues as varied 

as the determinants of whether firms go public or not,29 and 

the effects of being private or public on innovation,30 issuer 

malfeasance,31 and corporate time-horizons.32 

III.  SECURITIES LAW ORIGINS OF THE 
PUBLIC/PRIVATE DIVIDE 

In this Part, we describe the original securities law 

distinctions at the heart of the public/private divide. Current 

debates center on the legal distinction between public and 

private operating companies, which we describe in Section 

III.A. What is often missed in these debates, however, is that, 

in practice, the public/private divide for operating companies 

is also profoundly affected by the public/private divide for 

investment funds, which we describe in Section III.B. Finally, 

in Section III.C, we engage in a thought experiment, 

imagining how an idealized version of the public/private 

 

disclosure to promote market efficiency and suggesting an investor-oriented 

mandatory disclosure system). 
27 See Guttentag, supra note 22. 
28 Asker et al., supra note 2, at 344–45 (finding that short-termism 

distorts the investment decisions of public firms); Eric L. Talley, Public 

Ownership, Firm Governance, and Litigation Risk, 76 U. CHI. L. REV. 335, 

336 (2009) (analyzing and empirically exploring how litigation risk might 

affect firms’ going private decisions in comparison with governance 

changes); Elizabeth Pollman, Private Company Lies, 109 GEO. L.J. 353, 359–

360 (2020) (exploring information asymmetry and securities fraud in the 

context of private markets and proposing an enforcement regime). 

29 Ewens et al., supra note 5, at 5–6. 
30 See, e.g., Shai Bernstein, Does Going Public Affect Innovation?, 70 J. 

FIN. 1365, 1365, 1367–68 (2015). 
31 Pollman, supra note 28. 
32 Asker et al., supra note 2, at 344. 



  

1210 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021 

divide could work. That idealized picture will prove a useful 

contrast to how we think the public/private divide actually 

works today, which we explore in Parts IV and V. 

A.   The Public/Private Divide for Operating Companies 

Although the public/private divide now pervasively 

characterizes capital markets in the U.S., it originally began 

as a legal distinction.33 That divide was first constructed and 

mandated by the federal securities laws almost ninety years 

ago, in the wake of the Great Depression.34 Since the 

public/private divide was established, both the lines of 

demarcation and their consequences have periodically shifted. 

Yet the regulatory divide itself persists, and it profoundly 

shapes market activity. 

Arguably, the best known of the public/private divides is 

the distinction between public and private issuers.35 The 

 

33 Indeed, the public/private divide established by the Securities Act of 

1933 and the Exchange Act of 1934 (together, the “Securities Acts”) actually 

encompasses a set of four distinctions between “public” and “private”: (1) 

companies, (2) securities, (3) offerings of securities; and (4) trading markets. 

These distinctions arise by operation of the Securities Act of 1933 

(“Securities Act”), Pub. L. No. 73-22, 48 Stat. 74 (codified as amended at 15 

U.S.C. §§ 77a–77aa), and the Securities Exchange Act of 1934 (“Exchange 

Act”), Pub. L. No. 73-291, 48 Stat. 881 (1934) (codified as amended at 15 

U.S.C. §§ 78a–78qq), as well as the respective regulations thereunder. The 

Exchange Act imposes disclosure and other requirements on a specific set 

of companies (“public companies”), and the Securities Act requires 

disclosure in connection with specific securities offerings (“public 

offerings”). See The Laws That Govern the Securities Industry, U.S. SEC. & 

EXCH. COMM’N, https://www.investor.gov/introduction-investing/investing-

basics/role-sec/laws-govern-securities-industry [https://perma.cc/JK6V-

74PJ] (last visited Oct. 15, 2021). Finally, the two statutes combine to create 

two different securities trading environments (the “public” and “private” 

markets). See de Fontenay, supra note 6, at 452–53. 
34 de Fontenay, supra note 6, at 452–53; see also Paul G. Mahoney, The 

Political Economy of the Securities Act of 1933, 30 J. LEGAL STUD. 1 (2001) 

(describing the origins of the federal securities laws). 
35 As discussed infra in Section II.B., there is a separate regulatory 

framework and public/private divide for companies that are investment 

funds. 



 

No. 3:1199] THE NEW PUBLIC/PRIVATE EQUILIBRIUM 1211 

Securities Act of 1933,36 together with the Securities 

Exchange Act of 1934,37 sought to ensure that companies 

whose securities were issued to or traded by the general public 

disclosed sufficient information for investors to make good 

decisions about whether, how much, and when to invest.38 

There are three basic criteria or “triggers” for when an 

operating company becomes “public” under the securities laws 

and subject to the obligations of public status: (1) they offer to 

sell their securities to the general public;39 (2) they grow large 

enough that their assets or shareholders of record exceed 

specified thresholds;40 or (3) at least one class of their 

securities is traded on a national securities exchange.41 We 

loosely refer to companies subject to these disclosure burdens 

as “public” companies. In this sense, these three triggers 

define the public/private divide. 

The centerpiece of the obligations imposed on public 

companies by the Securities Acts is a mandatory disclosure 

system.42 The disclosure obligations of public companies are 

substantial. Public firms must provide not only financial 

statements, but also detailed information about governance, 

 

36 Securities Act of 1933 (Securities Act), Pub. L. No. 73-22, 48 Stat. 74 

(codified as amended at 15 U.S.C. §§ 77a–77aa). 
37 Securities Exchange Act of 1934 (Exchange Act), Pub. L. No. 73-291, 

48 Stat. 881 (1934) (codified as amended at 15 U.S.C. §§ 78a–78qq). 
38 See Stephen M. Bainbridge, Mandatory Disclosure: A Behavioral 

Analysis, 68 U. CIN. L. REV. 1023, 1023 (“Congress intended the securities 

laws to ‘substitute a philosophy of full disclosure for the philosophy of caveat 

emptor[.]’”). 

39 See Securities Act § 77e(c) (prohibiting the sale of any security unless 

a registration statement is effective); id. § 77d(2) (declaring that the 

prohibition does not apply to “transactions by an issuer not involving any 

public offering”). 
40 Section 12(g) of the Exchange Act, as amended by the JOBS Act, 

requires a company to register its securities under the Exchange Act if it 

has ten million dollars or more in total assets and a class of equity securities 

“held of record” by 2000 or more persons (or 500 or more persons who are 

not “accredited investors”). See Exchange Act § 78l(g)(1)(A). 
41 See id. § 78l(d). 
42 See Bainbridge, supra note 38, at 1023–24 (“Mandatory disclosure is 

a—if not the—defining characteristic of U.S. securities regulation.”). 



  

1212 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021 

operations, and risks to investors.43 Public company 

disclosure is required both upon the occurrence of notable 

events in the company’s life (including securities issuances, 

entry into transactions and other materials contracts, and 

major governance changes) and on a periodic basis (including 

every quarter and prior to every annual shareholders’ 

meeting).44 The disclosure and associated regulatory burdens 

on public companies are significant, and the aggregate out-of-

pocket costs of being a public company have been estimated at 

an additional $2.5 million per year.45 For the most part, 

“private” companies avoid all public disclosure requirements 

under the federal securities laws.46 Given that the disclosure 

and other securities law burdens on public companies have 

increased significantly over time, while private company 

burdens have long remained a null set,47 the public/private 

divide has become only sharper since its inception—at least, 

when it is conceived of solely as a legal distinction. 

At the same time, the composition of public and private 

companies has shifted, with the number of public companies 

in the U.S. economy shrinking significantly over the past 

twenty-five years.48 The average public company today is 

 

43 These disclosure requirements are found in Sections 12 and 13 of the 

Exchange Act and the SEC rules that implement it. See 15 U.S.C. §§ 78l, 

78m (2018); 17 C.F.R. § 229.301 (2021). 
44 See 15 U.S.C. § 78m. 
45 See Alix Stuart, The True Costs of Being Public: More Than You 

Think, CFO (Nov. 18, 2011) https://www.cfo.com/credit-capital/2011/11/the-

true-costs-of-being-public-more-than-you-think/ [https://perma.cc/A4RK-QUVG] 

(reporting on the results of a survey by Ernst & Young). Note that the $2.5 

million in additional costs also includes items that are not directly related 

to compliance with the securities laws, such as $1.5 million in added costs 

of attracting and retaining management and board members. See id. 
46 Zoeanna Mayhook, Privately-Held Companies: Legislation, 

Regulation, and Limited Dissemination of Financial Information, 47 DTTP 

28, 28 (2019). 
47 Id. at 28–32 (detailing changes in federal disclosure requirements 

over time). 
48 See supra notes 3–4; Xiaohui Gao, Jay R. Ritter & Zhongyan Zhu, 

Where Have All the IPOs Gone?, 48 J. FIN. & QUANTITATIVE ANALYSIS 1663 

(2013) (documenting and explaining the long-term decline in initial public 

offerings by U.S. firms). 



 

No. 3:1199] THE NEW PUBLIC/PRIVATE EQUILIBRIUM 1213 

considerably older and larger in terms of market 

capitalization than it was three decades ago, and, overall, the 

number of public companies has shrunk relative to the 

number of private companies.49 The plausible explanations for 

this development are many and varied, as both sides of the 

public/private company divide have experienced major 

changes in recent decades. Most notably, (1) public-company 

disclosure and other regulatory burdens have increased; (2) 

capital raising by private firms has grown significantly;50 and 

(3) the requirements for when private companies must become 

public companies have been materially loosened.51 

B.   The Public/Private Divide for Funds 

1.  Description 

As they exist today, public and private markets are a 

product not only of the public/private divide for companies, but 

also of the distinct public/private divide for funds. This 

Section describes the public/private divide that investment 

fund regulation creates for funds and how it interacts with the 

public/private divide created by securities law. The 

interaction of these two bodies of securities law plays a key 

role in explaining (1) which companies tend to fall on each side 

of the divide, (2) how companies behave on each side, 

including how they are governed and financed, (3) what 

 

49 MICHAEL J. MAUBOUSSIN, DAN CALLAHAN & DARIUS MAJD, CREDIT 

SUISSE, THE INCREDIBLE SHRINKING UNIVERSE OF STOCKS: THE CAUSES AND 

CONSEQUENCES OF FEWER U.S. EQUITIES, 2 exhibit 1 (2017), 

https://www.cmgwealth.com/wp-

content/uploads/2017/03/document_1072753661.pdf?mod=article_inline 

[https://perma.cc/8LQK-DJ8M] (showing the increase in age and market 

capitalization and the decrease in number of U.S. listed companies). 
50 de Fontenay, supra note 6. 

51 See Jumpstart Our Business Startups Act, Pub. L. No. 112-106, 126 

Stat. 306 (2012) (codified as amended at 15 U.S.C. 78l(g)(1)) (modifying 

Section 12(g)(1) of the Exchange Act to increase the number of shareholders 

of record beyond which a firm must register under the Exchange Act from 

500 to 2,000). 



  

1214 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021 

information is available about these companies, and (4) how 

their securities are traded. 

Investment funds (or simply “funds”) are pools of capital, 

typically raised from many institutional or individual 

investors, which are then used to make investments at the 

direction of the fund’s investment manager(s).52 Mutual 

funds, exchange-traded funds (“ETFs”), real estate 

investment trusts (“REITs”), hedge funds, private equity 

funds, and venture capital funds are all different types of 

investment funds.53 These funds are typically distinguished 

based on what types of assets they invest in and whom they 

admit as investors.54 In recent decades, as banks and other 

financial institutions have declined in importance, investment 

funds have assumed a dominant role in providing capital to 

both public and private companies. It is estimated, for 

example, that approximately 80% of the stock of U.S. public 

companies is held by institutional investors, most of which are 

investment funds.55 Investment funds have become so 

dominant in U.S. corporate finance and financial markets 

generally that our age has been described as “the empire of 

the fund.”56 

 

52 See John Morley, The Separation of Funds and Managers: A Theory 

of Investment Fund Structure and Regulation, 123 YALE L.J. 1228, 1232. 
53 Id. at 1231, 1234–36. 
54 WILLIAM A. BIRDTHISTLE, EMPIRE OF THE FUND: THE WAY WE SAVE 

NOW 6 (2016). 
55 See 80% of Equity Market Cap Held by Institutions, PENSIONS & INVS. 

(Apr. 25, 201, 1:00 AM), 

https://www.pionline.com/article/20170425/INTERACTIVE/170429926/80-

of-equity-market-cap-held-by-institutions [https://perma.cc/CRQ2-KR7B]; see also 

John C. Coates, IV, The Future of Corporate Governance Part I: The Problem 

of Twelve 13 (Harv. Pub. Law Working Paper No. 19-07, 2018), 

https://ssrn.com/abstract=3247337 (on file with the Columbia Business Law 

Review) (estimating that 20-30% of the stock of U.S. public companies is 

owned solely by indexed funds—that is, funds that passively track a 

specified market index—and noting that three indexed fund providers 

(Vanguard, State Street, and BlackRock) on their own controlled 

approximately 15% of the stock of companies in the S&P 500 in 2017). 
56 See BIRDTHISTLE, supra note 54. 



 

No. 3:1199] THE NEW PUBLIC/PRIVATE EQUILIBRIUM 1215 

Operating companies and investment funds are subject to 

distinct securities laws, and each body of law constructs a 

different public/private divide.57 Funds are governed by the 

Investment Company Act of 1940 (“ICA”), which defines their 

divide.58 Similar to the framework for operating companies, 

funds on the public side—commonly known as “registered” 

funds—are permitted to raise capital from virtually anyone, 

including retail investors, and are subject to extensive 

disclosure requirements under the ICA.59 Private investment 

funds, by contrast, may generally raise capital only from large 

institutional investors or from a very limited number of 

investors,60 and they face extremely limited disclosure 

obligations.61 

2.  Interactions and Overlap Between the 

 

57 See John Morley, Why Do Investment Funds Have Special Securities 

Regulation?, in RESEARCH HANDBOOK OF MUTUAL FUNDS 9, 9 (William A. 

Birdthistle & John Morley eds. 2018). That funds are governed by their own 

securities law, and have their own public/private divide, are foundational 

issues, but until recently they were largely overlooked by the scholarly 

literature. For leading work on these issues, see id. 9–21; see also Allen 

Ferrell & John D. Morley, The Regulation of Intermediaries, in SECURITIES 

MARKET ISSUES FOR THE 21ST CENTURY, supra note 16, at 313, which also 

provides an elegant overview of current fund regulation and open questions 

regarding it. 

58 Investment Company Act of 1940, 15 U.S.C. §80a-6(c) (2018). 
59 Morley, supra note 57, at 13–14. 
60 Specifically, the ICA exempts from public registration those funds 

whose investors are all “qualified purchasers” or funds with fewer than 101 

investors. Investment Company Act § 80a-3(c)(1)–(c)(7) (exempting issuers 

from “investment company” status if the issuer’s securities are owned by 

100 persons (or fewer) or if all securities are held by qualified purchasers); 

17 C.F.R. § 270.2a51-1(h) (2021) (defining “qualified purchaser”). 
61 Private Equity Funds, U.S. SEC. & EXCH. COMM’N, 

https://www.investor.gov/introduction-investing/investing-

basics/investment-products/private-investment-funds/private-equity 

[https://perma.cc/GBY2-JQLU] (last visited Oct. 16, 2021). 



  

1216 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021 

Company and Fund Divides 

It is worth considering the regulatory framework for funds 

in greater detail, as it ultimately shapes in what they invest.62 

Consider first the investment restrictions imposed on public 

funds such as mutual funds and ETFs. Public funds’ 

investment portfolios are subject to strict diversification and 

liquidity requirements.63 Public funds wishing to invest in 

corporate securities must therefore invest almost exclusively 

in those that can be bought and sold in a large, continuous 

trading market. In practice, as we shall see, those will tend to 

be the equity and debt securities of public companies. 

Private funds, by contrast, face no such constraints on 

their investment portfolios, and therefore do not require the 

near-perfect liquidity and easy diversification of a securities 

market with an enormous volume of trading. To the contrary, 

they are at liberty to make a very small number of highly 

illiquid investments.64 The purpose of leveraged buyout funds, 

for example, is to acquire controlling stakes in companies as 

 

62 Beyond the disclosure obligations described above, public funds face 

significant constraints on their investment portfolios, their governance, and 

their compensation models, none of which are imposed on private funds. 

Among other things, the ICA requires public funds (1) to constrain leverage, 

(2) avoid incentive compensation, and (3) provide frequent redemptions. On 

the first point, the ICA only permits open-end mutual funds to become 

indebted to banks, 15 U.S.C. § 80a-18(f)(1)); prohibits issuing debt 

securities, id. 80a-18(a)); and requires that total assets must always equal 

or exceed bank loan principal by a ratio of 3 to 1, id. 80a-18(f)(1)). On the 

second point, Provisions of the Investment Advisers Act (“IAA”) only permit 

adviser performance fees if the fee is symmetric with poor performance 

punished to the same extent good performance is rewarded, and 

performance is based on a benchmark. Investment Advisers Act of 1940, 15 

U.S.C. § 80b-5(b)(2) (2018). The ICA prohibits mutual funds from issuing 

shares for services. Investment Company Act, 15 U.S.C. §80a-22(g). Finally, 

on the third point, see Sections 2(a)(32) (defining redeemable security as a 

security whose holder, upon presenting it to the issuer, is entitled its 

proportionate share of net assets) and 22(e) of the Investment Company Act 

(constraining the suspension of registration rights). Investment Company 

Act §§ 80a-2(a)(32), 22(e). 
63 See I.R.C. §§ 851, 852 (2018). 
64 U.S. SEC. & EXCH. COMM’N, IMPLICATIONS OF THE GROWTH OF HEDGE 

FUNDS 7 (2003) 



 

No. 3:1199] THE NEW PUBLIC/PRIVATE EQUILIBRIUM 1217 

their sole investments over such funds’ typical ten-year life 

span.65 

All this explains in part why public funds such as mutual 

funds and ETFs invest overwhelmingly in public companies 

with exchange-traded stock,66 while private funds such as 

private equity, leveraged buyout funds, and venture capital 

funds make highly illiquid investments in private 

companies.67 This, then, is the fundamental way in which the 

public/private divide for funds interacts with and shapes the 

public/private divide for operating companies—by structurally 

biasing the universe of prospective shareholders for 

companies on each side of the public/private divide. Public 

companies will be financed primarily by public funds, while 

private operating companies will be financed primarily by 

private funds. 

To be clear, there is no securities law restriction 

whatsoever on private funds investing in public companies, 

and there is no direct prohibition on public funds investing in 

private companies—the legal constraints on public funds 

operate indirectly through the diversification and liquidity 

requirements, as we have seen. Although hedge funds are set 

up as private funds, their equity investments are 

overwhelmingly in public company stocks,68 while some open-

end mutual funds have recently made major investments in 

large private companies.69 Yet by dollar volume, the 

overwhelming preponderance of investment by private funds 

is in private companies and by public funds in public 

 

65 See Steven N. Kaplan & Per Strömberg, Leveraged Buyouts and 

Private Equity, 23 J. ECON. PERSP. 121, 123 (2009). 
66 See Concept Release on Harmonization of Securities Offering 

Exemptions, Securities Act Release No. 10,649, Exchange Act Release No. 

86,129, Investment Company Release No. 33,512, 84 Fed. Reg. 30,460, 

30,515 (proposed June 26, 2019) (noting that “registered investment 

companies” such as mutual funds and ETFs are limited in their ability to 

invest in private companies). 

67 See Ann-Kristin Achleitner & Christoph Kaserer, Private Equity 

Funds and Hedge Funds: A Primer 9, 11 (Ctr. For Entrepreneurial & Fin. 

Studs., Working Paper 2005-03, 2005). 
68 See id. 
69 Chernenko et al., supra note 9, at 2370. 



  

1218 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021 

companies.70 The two divides both interact and overlap. It 

would not matter if registered funds invested overwhelmingly 

in public companies and private funds in private companies, 

if those funds did not fundamentally differ in how they 

affected the companies they own. But, as we will argue in Part 

III, they do. 

3.  An Idealized Public/Private Divide 

To grasp how the public/private divide actually works, it is 

illuminating to contrast it with an idealized, simple version of 

how a public/private divide could in principle work. In this 

simple version, few regulatory requirements are imposed on 

private companies beyond the anti-fraud rule, while an 

extensive disclosure regime is imposed on public companies. 

However, private firms are severely restricted in their ability 

to raise capital from third parties. Public firms, by contrast, 

may sell their securities to anyone, and thus can access a 

substantially cheaper and deeper pool of capital than private 

firms.71 In this simple framework, firms are founded and 

 

70 Why do private funds typically invest in private companies and 

public funds in public companies? Registered funds must offer daily 

redemption. A registered fund that invested in illiquid securities would be 

exposed to a run. See Holger Spamann, Indirect Investor Protection: The 

Investment Ecosystem and Its Legal Underpinnings 27 (Eur. Corp. 

Governance Inst., Law Working Paper No. 594/2021, 2021), 

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3707249 (on file with 

the Columbia Business Law Review); see also 17 C.F.R. § 270.22e-4(b)(1)(iv) 

(2021) (restricting open-end mutual funds from holding more than 15% of 

their portfolio in assets without an available quotation). Conversely, a fund 

structured to specialize in investing in illiquid securities would choose not 

to be a registered fund. SIMPSON THACHER, REGISTERED FUNDS ALERT 6–7 

(2020), stblaw.com/docs/default-

source/Publications/registeredfundsalert_september2020.pdf (on file with 

the Columbia Business Law Review) (discussing lack of registered funds’ 

investment in illiquid private corporate equities). 
71 Historically,  

[c]ompanies that went public took on the obligation of 

publicly disclosing substantial amounts of information 

and, in return, were permitted to solicit the largest (and 

therefore cheapest) source of capital: the general public. 

Conversely, private companies were restricted to raising 



 

No. 3:1199] THE NEW PUBLIC/PRIVATE EQUILIBRIUM 1219 

begin operating as private companies. Some of those firms fail, 

others succeed moderately, and all of those firms can and do 

remain private. Highly successful, large private firms, 

however, almost inevitably require access to the broader 

world of capital available in public markets. Thus, they almost 

invariably go public. 

In this idealized version, a firm’s decision to cross the 

public/private divide is a near-mechanical result of that firm 

growing to a certain size and needing to meet its 

accompanying capital-raising needs. Successful firms facing 

the decision between going public and staying private do 

encounter a tradeoff, which is that being public offers cheaper 

capital but higher regulatory costs. That tradeoff is relatively 

simple to evaluate, however, and it applies fairly uniformly 

across the broad set of private firms successful enough to 

contemplate going public.72 

This vision is worth considering because it shows how the 

answers to foundational questions about the public/private 

divide might change with time. Consider three basic questions 

about the public/private divide: (1) How does the divide work? 

(2) How does the tradeoff facing firms work? (3) How should 

we judge the divide’s success? 

We have already described how the divide works in this 

simple model as well as the effects of the tradeoff facing firms 

determining whether to be public or private. The divide 

creates a set of capital-raising benefits and costly regulatory 

mandates that arise as a kind of rite of passage for successful 

firms. The tradeoff is a calculation that pits these costs and 

benefits against each other in a fairly uniform way for firms. 

 

capital primarily from insiders and financial institutions, 

without publicity and subject to severe limitations on 

subsequent transfers of their securities⎯effectively 

precluding any sort of market for private company equity. 

de Fontenay, supra note 6. 
72 Our contention is not that the regulatory costs and capital-raising 

benefits of being public would apply in the same way to firms. Regulatory 

costs are more likely to be largely fixed, Ewens, supra note 5, while the 

benefits of capital raising are more likely to scale with the size of a firm. 

Rather, it is that the factors important to this tradeoff are the same for IPO-

eligible companies. 



  

1220 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021 

What constitutes success for this divide? Presumably, this 

public/private divide is a success if the mandatory regulations 

imposed on public firms appropriately mitigate market 

failures made more probable (or significant) when a firm is 

public.73 Therefore, such regulations should target market 

failures likely to accompany firms with a broad and diffuse 

shareholder base, such as managerial agency costs stemming 

from collective action problems among shareholders.74 

This view of how the public/private equilibrium works is a 

positive theory, dedicated to describing and explaining firm 

behavior. But it has clear normative implications as well. 

Because an identifiable class of firms will go public for the 

same basic reason, regulatory interventions targeting public 

firms have a coherent target. 

In the next Part, we argue that a much broader set of legal, 

economic, and social factors have developed downstream from 

the public/private divide that securities law established in the 

1930s. The result is two broadly distinct public and private 

ecologies. These two ecologies differ along a large number of 

economically consequential dimensions that are materially 

important to the decisions firms make about being public or 

private as well as any social welfare analysis of the 

consequences of those decisions. Even as these ecologies have 

developed, moreover, the original driving force for going 

public—capital raising—has materially diminished.75 As 

noted, considerably more capital is now raised in exempt than 

registered offerings.76 As a result, firms no longer share one 

leading reason for going public. Instead, we argue that the 

factors that are now material to firms’ decisions are many, 

complex, and often cross-cutting. The cumulative effect is that 

 

73 It is not our contention that the world was ever so simple or that 

securities scholars or regulators took it to be. Instead, we think this simple 

picture offers a useful contrast. We will argue that the public/private divide 

works today as a vastly complex and varied set of institutions, many of 

which are more important to firms’ decisions than the legal rules that define 

the public/private divide and its obligations. 
74 Asker et al., supra note 2, at 355. 
75 de Fontenay, supra note 6, at 448. 
76 BAUGUESS ET AL, supra note 7. 



 

No. 3:1199] THE NEW PUBLIC/PRIVATE EQUILIBRIUM 1221 

IPO-eligible firms do not encounter one going public versus 

staying private tradeoff, but many, firm-specific tradeoffs. 

We begin by describing the complex and multi-dimensional 

character of today’s public and private ecologies, drawing 

extensively on prior work discussing one or more of these 

dimensions. This sets the stage for discussing how features of 

these ecologies shape different firms’ private/public decisions. 

 IV. COMPLEXITY: THE PUBLIC/PRIVATE 
DIVIDE OFFERS TWO DIFFERENT ECOLOGIES 

FOR FIRMS 

In this Part, we describe the complexity of the 

public/private ecosystems today. The complexity results from 

the interaction of many different features of markets, 

including corporate governance, securities markets, and 

investment management regulation. This interaction, and the 

accretion of decades of practices and institutional features, 

suggest that despite its prominence, it is not at all clear how 

the public/private divide today actually works. 

A.   The Public/Private Divide Today: Functional 
Complexity 

As the securities laws designed it, the public/private divide 

is a set of criteria that defines the divide and a set of different 

burdens and privileges that accompany falling on one side or 

the other. In this Section, we discuss the many economically 

and socially consequential features of capital markets that 

seem to also turn on the divide. In the face of these many 

features, it becomes plausible that the public/private divide is 

no longer principally a matter of the features initially 

designed by securities law. While the Securities Acts created 

the public/private divide almost nine decades ago,77 it has 

become much more than originally envisioned. The 

public/private divide of today is best conceptualized as a hazy 

 

77 Supra note 34 and accompanying text. 



  

1222 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021 

division between two different ecologies—complex systems 

characterized by complicated interactions.78 

Below we describe—and attempt to explain—some of the 

most salient features of the private and the public ecologies, 

and how they interact. First, we discuss key rules and 

regulations that turn directly on the divide established by 

securities law. Second, we describe features that turn on the 

public/private divide in practice but that are not directly 

entailed by any legal requirements; they are downstream of 

law. Table 1 summarizes these differences. 

 

 

 

 

Table 1: Key Differences Between Average Public and 

Private Companies 

  PUBLIC 

COMPANIES 

PRIVATE 

COMPANIES 

Distinctions 

imposed by 

law 

Mandatory 

Disclosure 

Rules 

Substantial periodic 

and episodic 

disclosure79 

No mandatory 

disclosure80 

Governance 

Rules 

Extensive regulation 

of (1) shareholder 

voting, (2) tender 

offers, (3) internal 

financial controls, (4) 

board composition, 

and (5) disclosure 

and process 

surrounding 

executive 

compensation81 

No comparable 

requirements 

under state law82 

 

78 For a compelling example of ecological analysis of public markers, see 

Spamann, supra note 70. 
79  See infra note 105 and accompanying text. 
80 See infra note 106 and accompanying text. 
81 See infra Section IV.A.1.a. 
82 See infra Section IV.A.1.a. 



 

No. 3:1199] THE NEW PUBLIC/PRIVATE EQUILIBRIUM 1223 

Reg. FD Prohibition on 

selective disclosure 

by companies83 

Selective 

disclosure 

permitted84 

Distinctions 

that arise in 

practice 

Ownership 

(shareholder 

base) 

Dispersed, mostly 

passive shareholder 

base85 

Small shareholder 

base, selected by 

insiders and 

composed 

primarily of active 

investors86 

Trading 

environment 

Continuous stock 

prices87 

 

 

 

 

 

Market approaches 

informational 

efficiency88 

Little or no 

trading; valuation 

occurs only upon 

major corporate 

events (capital 

raising, 

acquisition, etc.)89 

 

Market is not 

informationally 

efficient90 

Information 

environment 

Very rich set of 

regularly updated, 

publicly available 

information, as a 

result of (i) 

mandatory 

disclosure, (ii) 

analyst reports, 

media, and other 

market research, 

and (iii) stock 

Very limited 

information, not 

only for the 

general public but 

also for investors92 

 

83 See infra notes 115–118 and accompanying text. 
84 See infra note 119 and accompanying text. 
85 See infra note 123 and accompanying text. 
86 See id. 
87 See infra note 126 and accompanying text. 
88 See infra Section IV.A.1.b. 
89 See infra note 128 and accompanying text. 
90 See infra Section IV.A.1.b. 
92 See infra Section IV.A.2.c. 



  

1224 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021 

prices91 

Governance Centralized, 

professional 

management by a 

board of directors 

appointed each year 

by shareholders and 

including several 

independent 

directors93 

Management 

mostly by largest 

shareholders; 

governance and 

control rights 

established in 

connection with 

major corporate 

transactions, 

rather than on a 

yearly basis94 

Regulation 

and 

Enforcement 

Aggregate 

shareholder 

litigation (e.g., class 

actions) common95 

Relatively little 

shareholder 

litigation96 

 

1.  Securities Law Rules that Turn Directly on the 
Divide 

Securities law’s public/private divide was designed to 

impose disclosure obligations on public issuers. We begin by 

discussing the range of other rules that now also turn directly 

on securities law’s public/private divide. 

i.  Governance Rules 

Traditionally, corporate governance has been a matter of 

state law.97 Under the “internal affairs doctrine,” the law of a 

 

91 See infra Section IV.A.2.c. 
93 See Del. Code. Ann. tit. 8, § 141 (2021) 
94 See Rauterberg, supra note 12, at 1133–36 (describing how 

shareholder agreements often determine control of private firms). 

95 See infra Section IV.A.2.d. 

96 See infra Section IV.A.2.d. 

97 Stephen M. Bainbridge, The Creeping Federalization of Corporate 

Law, REGUL., Spring 2003, at 26, 26 (“For over 200 years, corporate 

governance has been a matter for state law.”). 



 

No. 3:1199] THE NEW PUBLIC/PRIVATE EQUILIBRIUM 1225 

firm’s state of incorporation governs the relationships among 

the firm, its directors and officers, and its shareholders.98 As 

a result, matters such as shareholder voting, board action, and 

fiduciary duties are governed by state corporate statutes and 

common law.99 For public companies, however, federal law 

has progressively layered over a partly superseding corporate 

governance regime by way of amendments to the securities 

laws.100 This includes: (1) an extensive regulatory regime 

governing almost every aspect of shareholder voting (referred 

to as the “federal proxy rules”), (2) rules governing a 

prominent form of acquisition (the tender offer),101 (3) 

requirements of internal financial controls and certification, 

(4) board composition requirements, and (5) executive 

compensation reforms.102 This “federalization” of corporate 

governance has accelerated over the last two decades, 

primarily in response to major scandals or crises involving 

public companies.103 

 

98 See RESTATEMENT (SECOND) OF CONFLICTS OF LAWS §§ 302 cmt. a 

(1971); see also Cort v. Ash, 422 U.S. 66, 84 (1975). 

99 RESTATEMENT (SECOND) OF CONFLICTS OF LAWS §§ 302 cmt. a, 303–309 

(1971). 

100 For an analysis of federal incursions into corporate governance, see 

Eric L. Talley, Corporate Inversions and the Unbundling of Regulatory 

Competition, 101 VA. L. REV. 1649, 1694–97 (2015). 
101 Aspects of federal tender offer regulation do apply to tender offers 

in private markets. See Dawn Belt, Pre-IPO Liquidity for Late Stage Start-

Ups, LEXIS PRACTICE ADVISOR (2020), 

https://assets.fenwick.com/legacy/FenwickDocuments/Pre-IPO-Liquidity-

for-Late-Stage-Start-Up.pdf [https://perma.cc/6XN5-MW4P]. 
102 For a detailed description of these provisions, see Talley, supra note 

100. 
103 See id. at 1693 (arguing that the separation between corporate and 

securities law “began disintegrating substantially after the bursting of the 

dot-com bubble”). The extent of this displacement is controversial. For 

instance, fiduciaries duties—perhaps the heart of corporate law—remain 

largely if not wholly a creature of state law. See Roberta Romano, The 

Market for Corporate Law Redux 47, 60, (Eur. Corp. Governance Inst., Law 

Working Paper No. 270/2014, 2014), 

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2514650 (on file with 

the Columbia Business Law Review). 



  

1226 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021 

As a result, two similar corporations, one public and the 

other private, will be subject to very different corporate 

governance mandates. Because Delaware is the dominant 

state for incorporations,104 it is useful to compare its 

requirements to the federal regime for public companies. 

Federal law now requires that public companies provide 

substantial mandatory disclosure to shareholders around 

voting, shareholder proxy access, independent board and 

board committee members, and ex ante controls and 

compliance to prevent misconduct, alongside ex post 

enforcement.105 

In contrast, Delaware law has remained largely silent on 

each of these matters, allowing private companies to gravitate 

toward the opposite pole, if they wish. Private companies can 

largely forgo disclosure to their shareholders, whether in 

connection with shareholder votes or otherwise: Their only 

mandatory obligation is to respond to certain specific 

shareholder requests for information.106 Second, regulation of 

the substance and process of takeovers is left to the common 

law, which tends to steer clear of bright-line rules in this 

context.107 Third, private companies, including those financed 

by private equity or venture capital funds, can have boards 

composed solely of insiders and sometimes do.108 Finally, 

 

104 William J. Carney, George B. Shepherd & Joanna Shepherd Bailey, 

Lawyers, Ignorance, and the Dominance of Delaware Corporate Law, 2 

HARV. BUS. L. REV. 124, 126 (2012). 
105 See JAMES D. COX, SECURITIES REGULATION: CASES AND MATERIALS 

597–98, 601–02, 956, 959 (7th ed. 2013) (discussing each of these features 

of public-company regulation under the federal securities laws). 
106 See Del. Code. Ann. tit. 8, § 220 (2021) (delineating shareholders’ 

rights to inspect the corporation’s “books and records”). Even then, 

shareholders must first demonstrate that they have a proper purpose for 

requesting the information (other than for the stockholder list). See id. § 

220(b). 
107 See James D. Cox & Randall S. Thomas, Delaware’s Retreat: 

Exploring Developing Fissures and Tectonic Shifts in Delaware Corporate 

Law, 42 DEL. J. CORP. L. 323, 324–26 (2018) (describing the role of the 

Delaware courts in mergers and acquisitions law). 
108 Michael Ewens & Nadya Malenko, Board Dynamics over the Startup 

Life Cycle 32, 46 tbl.2 (Nat’l Bureau of Econ. Rsch., Working Paper No. 



 

No. 3:1199] THE NEW PUBLIC/PRIVATE EQUILIBRIUM 1227 

Delaware’s corporate statute simply does not address internal 

controls. This leaves fraud or misconduct in private companies 

to be dealt with ex post and indirectly through shareholder 

lawsuits alleging breach of directors’ and officers’ fiduciary 

duties to the corporation.109 

ii.  Regulation Fair Disclosure (“Reg. FD”) 

For public companies whose stock is traded in a liquid 

market, new information about the firm rapidly affects its 

stock price as market actors incorporate the information into 

their trading.110 If material information moves stock prices, it 

signals that the market is working well: In an informationally 

efficient market, a company’s stock price should reflect all 

available information about the firm.111 Yet, such efficiency 

also creates a profit opportunity for those who acquire 

material information about the company before the rest of the 

market.112 Concerns about the potential inefficiency or 

unfairness of such profit opportunities have led to prohibitions 

on insider trading.113 

But what happens when companies voluntarily disclose 

material nonpublic information selectively to specific market 

actors, because they believe that doing so will benefit the 

 

27769, 2020), http://www.nber.org/papers/w27769 (on file with the 

Columbia Business Law Review). 
109 See Donald C. Langevoort, Caremark and Compliance: A Twenty-

Year Lookback, 90 TEMP. L. REV. 727, 734 (2018) (describing how the 

Delaware common law has shaped corporate compliance). 
110 See Ronald J. Gilson & Reinier H. Kraakman, The Mechanisms of 

Market Efficiency, 70 VA. L. REV. 549, 565–67 (1984). 
111 Id. at 554–57 
112 Id. at 554, 556. 
113 Insider trading consists of trading on the basis of material nonpublic 

information in violation of a relationship of trust and confidence, whether 

by (1) corporate insiders (such as directors, officers, and large stockholders), 

(2) tippees of corporate insiders who were given the information in a quid 

pro quo, and (3) anyone who misappropriated the information in breach of 

a duty to whomever was in possession of that information and their tippees. 

See Merritt B. Fox, Lawrence R. Glosten & Gabriel V. Rauterberg, Informed 

Trading and Its Regulation, 43 J. CORP. L. 817, 863–68 (2018) (Overviewing 

the regulation of insider trading). 



  

1228 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021 

company? Corporate management routinely meets privately 

with corporate analysts and large shareholders. It is almost 

inevitable that these meetings will involve management 

sharing information or insights that are not yet public, and 

which may sometimes be material. This was a long-accepted 

practice in corporate America.114 

In exchange for this access to management, corporate 

analysts might produce more favorable reports on the 

company, and large shareholders might be more supportive of 

management’s plans or provide useful guidance to 

management.115 Despite these perceived benefits to the 

corporation, the SEC ultimately determined that much 

selective disclosure should be prohibited. In 2000, the SEC 

adopted Regulation Fair Disclosure (“Reg. FD”), which 

prevents selective disclosure of corporate information.116 

Under Reg. FD, if a public company has material information 

that it discloses to a particular broker-dealer, investment 

fund, or investment adviser, it must instead disclose that 

information to everyone (with some exceptions).117 Selective 

disclosure of material nonpublic information to any 

shareholder is also generally prohibited if it occurs “under 

circumstances in which it is reasonably foreseeable that the 

 

114 See Selective Disclosure and Insider Trading, Securities Act Release 

No. 7881, Exchange Act Release No. 43,154, Investment Company Act 

Release No. 24,599, 65 Fed. Reg. 51,715, 51,716 (Aug. 24, 2000) (to be 

codified at 17 C.F.R pts. 240, 243, 249) (stating in the final rulemaking for 

Reg. FD that “many issuers [were] disclosing important nonpublic 

information, such as advance warnings of earnings results, to securities 

analysts or selected institutional investors or both, before making full 

disclosure of the same information to the general public”). 
115 Id. at 51,716–17. 
116 See Regulation FD, 17 C.F.R. § 243.100–103 (2021). 
117 Selective Disclosure and Insider Trading, 65 Fed. Reg. at 51,735. 

For an insightful argument of the consequences of Reg. FD for private and 

public companies’ management of their cash holdings, see Joan Farre-

Mensa, The Benefits of Selective Disclosure: Evidence from Private Firms 

(Harv. Bus. Sch. Working Paper No. 15-095, 2017), 

https://ssrn.com/abstract=1719204 (on file with the Columbia Business Law 

Review). 



 

No. 3:1199] THE NEW PUBLIC/PRIVATE EQUILIBRIUM 1229 

person will purchase or sell the issuer’s securities on the basis 

of the information.”118 

Once again, the contrast with private companies is 

striking. There is no prohibition whatsoever under state or 

federal law on selective disclosure by private companies. In 

fact, selective disclosure of material information is the 

norm.119 Take a venture capital-financed private company, for 

example. Venture capital funds typically negotiate for the 

contractual right to obtain certain disclosures from the 

company and will often receive more information than is 

contractually required.120 Further, fund investors in startups 

are often entitled to designate one or more directors to the 

corporate board,121 in which case the fund will enjoy a steady 

stream of access to nonpublic information from the firm. Yet 

other shareholders of the company, such as employees 

compensated with restricted stock or options, may receive no 

disclosure whatsoever.122 

2.  Devices that Turn on the Divide in Practice 

Some of the most important features of the public and 

private company ecologies are not directly imposed by law. 

Rather, they reflect practices that are indirectly a 

consequence of the legal architecture of the public/private 

divide. Nonetheless, these features now represent some of the 

most fundamental differences between public and private 

companies observed in practice, including differences in (i) 

ownership, (ii) governance, (iii) the informational 

 

118 17 C.F.R. § 243.100(a)(2)(iv). 
119 Farre-Mensa, supra note 117, at 1, 3. 
120 Model Legal Documents NAT’L VENTURE CAP. ASS’N (“Information 

and Observer Rights”), http://nvca.org/resources/model-legal-documents/ 

(on file with the Columbia Business Law Review) (select “Investors’ Rights 

Agreement (Updated August 2021)”). 
121 Brian J. Broughman & Jesse M. Fried, Carrots and Sticks: How VCs 

Induce Entrepreneurial Teams to Sell Startups, 98 CORNELL L. REV. 1319, 

1329–30 (2012). 
122 See Pollman, supra note 28, at 374 (2020) (discussing the paucity of 

information disclosure required under the securities laws for employees 

receiving equity compensation in private companies). 



  

1230 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021 

environment, (iv) trading, and (v) regulation and enforcement. 

We discuss these differences below. 

As with any ecology, however, the relationships among the 

various organisms (or “stakeholders,” in our context) are 

generally reciprocal and circular. Because all five features 

listed above interact with each other, it is difficult to discuss 

them in isolation. As a result, we also describe some—though 

by no means all—of the ways in which they are connected to 

one another. 

i.  Control Over Shareholder Base 

For companies that choose to take on the disclosure 

requirements and other obligations tied to going public, one 

countervailing benefit is public companies’ ability to raise 

capital from anyone and to have their securities traded on a 

national securities exchange. In practice, then, a public 

company will tend to have a more dispersed and diverse 

shareholder base.123 Further, the company itself will typically 

not seek to limit or maintain control over the identity or 

actions of its shareholders. Private companies, by contrast, 

tend to maintain tight control over their shareholder base, 

often through restrictions contained in a shareholders’ 

agreement.124   

ii.  Continuous Stock Prices 

Public companies typically seek to maintain a highly liquid 

trading market for their stock.125 This allows them to access 

the widest possible shareholder base, and therefore to achieve 

the lowest cost of capital. It also enables them to reconcile the 

interests of shareholders with different time horizons. In turn, 

liquidity requires that the stock be continually tradable, and 

that the pricing be publicly available. Continuous stock prices 

 

123 de Fontenay, supra note 6. 
124 See Rauterberg, supra note 12, at 1126–27. 
125 See supra note 60 and accompanying text. 



 

No. 3:1199] THE NEW PUBLIC/PRIVATE EQUILIBRIUM 1231 

are therefore a defining feature of public companies, even 

though they are not required by rule or regulation.126 

Yet private companies face significant restrictions on the 

trading of their securities. Other than the very largest private 

companies (referred to as “unicorns”), private companies 

typically do not enjoy meaningful secondary trading of their 

stock.127 Valuations of the firm (and therefore of its stock) only 

tend to occur when the firm accepts new financing or when the 

company is acquired.128 For this reason, it is usually inapt 

even to refer to the “stock price” of a private company. 

iii.  Informationally Rich Environment 

The active secondary market for public companies’ stock 

reflects extensive and continually updated information. In 

addition to the disclosure required of public companies under 

the securities laws, information is also generated and rapidly 

disseminated through the continuous stock prices discussed 

above,129 as well as the combination of stock analyst reports, 

media coverage, and publicly available data sets that have 

developed around public companies and publicly-traded stock. 

Most importantly, the combination of continuous stock 

prices and copious, widely available information ensures that 

the market for publicly-traded stock is a relatively efficient 

 

126 RICHARD A. BREALEY ET AL., PRINCIPLES OF CORPORATE FINANCE 448 

(12th ed. 2017) (demonstrating that shareholders with diverse time 

horizons will want corporate managers to maximize the firm’s current stock 

price, assuming that the stock trades in a liquid and informationally 

efficient market). 

127 See COX ET AL., supra note 105, at 276–77 (noting the many 

restrictions typically placed on the trading of privately issued securities). 
128 See David F. Larcker et al., Cashing It In: Private-Company 

Exchanges and Employee Stock Sale Prior to IPO, HARV. L. SCH. F. ON CORP. 

GOVERNANCE & FIN. REGUL. (Oct. 9, 2018) (“[E]mployees who sell equity 

awards in private-company securities that are not registered with the SEC 

might not get a ‘fair’ price for their investment, based on previous funding 

valuations or what they would get through an IPO or acquisition.”); see also 

Elizabeth Pollman, Information Issues on Wall Street 2.0, 161 U. PA. L. REV. 

179, 203, 209 (2012) (noting that the market for private company stock 

remains largely illiquid). 
129 See supra Section IV.A.2.b. 



  

1232 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021 

one—by which we mean that stock prices rapidly incorporate 

material information, due to the trading of informed market 

participants, and change accordingly.130 Market efficiency in 

turn affects the governance and ownership characteristics of 

public companies in a number of ways, such as by allowing for 

purely passive investors like index funds. 

The information environment for private companies is 

strikingly different. As discussed, private companies may 

forgo virtually all disclosure regarding their operations, 

governance, and financial condition to the public and 

regulators, and may even refrain from disclosing much to 

some or many of their own shareholders, unless the latter 

specifically contract for disclosure rights.131 Among other 

things, this poses significant valuation and monitoring 

challenges for private companies, whose ownership is largely 

limited to insiders and active shareholders with large stakes 

in the firm.132 

iv.  Aggregate Litigation 

A final explanation for why public and private companies 

differ in their governance and behavior has to do with the 

amount and types of litigation that each face, respectively. 

Public companies are frequent targets of aggregate litigation, 

including shareholder claims in the form of class action 

lawsuits under the federal securities laws or state corporate 

law.133 This is so for several reasons. First, the 

 

130 See de Fontenay, supra note 6, at 485 (“At a minimum, there is 

overwhelming evidence that stock prices on the major exchanges change 

virtually instantaneously in response to salient new investment 

information.”). 
131 Supra note 119 and accompanying text. 
132 See Thomas J. Chemmanur & Paolo Fulghieri, A Theory of the 

Going-Public Decision, 12 REV. FIN. STUDS. 249, 250 (1999) (“In the case of 

public firms, the required capital is generated (in general) by selling shares 

to a large number of investors, whereas with private firms, much of the 

external financing is provided by one large investor (often a venture 

capitalist) or a small group of large investors (‘angels’).”). 
133 See Emily Strauss, Is Everything Securities Fraud? 3 (Duke L. Sch. 

Pub. L. & Legal Theory Series, Working Paper No. 2021-04, 2021), 



 

No. 3:1199] THE NEW PUBLIC/PRIVATE EQUILIBRIUM 1233 

informationally rich environment of public companies does 

much of the legwork for plaintiffs’ lawyers: they can generally 

expect to learn of misconduct within the company (and the 

surrounding details) in due course, or they can pour over a 

company’s securities filings to find discrepancies between the 

company’s voluminous disclosures and subsequent events, 

regardless of whether there is any harm to the company’s 

shareholders.134 Second, the relatively efficient market for 

publicly-traded securities eases the task of proving damages. 

If a company experiences an abnormally large stock price 

decline following the announcement of corporate misconduct 

or the correction of a prior misstatement, for example, the 

plaintiffs can simultaneously use it as evidence of both 

causation and amount of damages.135 Third, plaintiffs are not 

required to prove reliance on a company’s misconduct or 

misstatement if the stock is deemed to trade in an efficient 

market, under the “fraud-on-the-market” doctrine.136 Finally, 

the large and dispersed shareholder base of most public 

companies137 makes for a ready class of plaintiffs: Individual 

shareholders with small holdings have no reputation to 

protect from sanction by firms. 

In private companies, by contrast, shareholders may not 

learn of corporate misconduct or potential fiduciary duty 

breaches until there is nothing left for plaintiffs to recover.138 

Obtaining the information necessary to bring a claim and 

prove damages can be an exceptionally difficult task. More 

importantly, perhaps, private-company shareholders tend to 

be insiders or large stockholders, as we have seen, such that 

they actively participate in the firm’s governance and are 

 

http://dx.doi.org/10.2139/ssrn.3664132 (on file with the Columbia Business 

Law Review). 
134 Id. at 3–4. 
135 Jill E. Fisch, Jonah B. Gelbach & Jonathan Klick, The Logic and 

Limits of Event Studies in Securities Fraud Litigation, 96 TEX. L. REV. 553, 

562 (2018). 
136 John C.P. Goldberg & Benjamin C. Zipursky, The Fraud-on-the-

Market Tort, 66 VAND. L. REV. 1755, 1759 (2013). 
137 de Fontenay, supra note 6. 
138 Pollman, supra note 28, at 390. 



  

1234 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021 

therefore less likely to sue. Even where they are otherwise 

inclined to sue, large stockholders may be dissuaded from 

doing so out of concern for their reputation or their 

relationship with the company.139 

3.  Unbundling the Public/Private Divide 

It is worth noting that while the public and private 

markets ecologies differ along a host of dimensions, the border 

between them has also become increasingly blurry in recent 

years. In a sense, capital markets have seen the “unbundling” 

of the package of traits associated with public and private 

markets. The paradigmatic public company, for instance, 

bundles together centralized management, an independent 

board, extensive disclosure, dispersed share ownership by 

passive investors, and so forth.140 In contrast, the 

paradigmatic large private company bundles together 

shareholder control, ownership by a small number of insiders 

and active shareholders, a thin information environment, and 

an illiquid secondary market.141 

Yet these two paradigms have become increasingly 

disaggregated in recent years. As a result of (i) continued 

deregulation of private capital raising and of trading in 

private securities, (ii) increased competition among private 

funds, and (iii) the relative scarcity of high-return 

opportunities in today’s low-interest-rate environment, we 

increasingly see characteristics of private markets entering 

the public markets, and vice versa.142   

Consider first governance devices associated with private 

markets that have migrated to public markets. First, 

corporate founders and insiders increasingly succeed in 

retaining control of public companies, through strategies such 

as adopting dual class stock structures in connection with an 

 

139 David Rosenberg, The Two “Cycles” of Venture Capital, 28 J. CORP. 

L. 419, 421 (2003) (discussing how reputation explains the absence of 

litigation in the venture capital industry). 
140 de Fontenay, supra note 6. 
141 Id. 
142 See id. 



 

No. 3:1199] THE NEW PUBLIC/PRIVATE EQUILIBRIUM 1235 

IPO.143 Dual class public companies behave very differently 

from the classic public company paradigm in which a widely 

dispersed set of passive shareholders leaves management 

effectively in control of the firm.144 Second, private investment 

funds that have historically been confined to private markets 

are operating in public markets to a greater degree. Private 

equity leveraged buyout funds, for example, now make 

minority investments in public companies through PIPE 

transactions.145 Further, where they retain stakes in public 

companies, either through PIPEs or following the IPO of one 

of their portfolio companies, they increasingly seek to impose 

private company governance devices, such as shareholders’ 

agreements.146 Third, the surge in popularity of SPACs 

suggests strong appetite among large funds and institutional 

investors for a form of publicly-traded private equity.147 More 

generally, both SPACs and direct listings reveal private 

companies’ desire to go public other than through the 

traditional channel of an underwritten initial public offering. 

In the other direction, public market features are 

appearing in private markets. First, some of the largest 

private companies now allow their stock to be traded in 

secondary markets, even in the absence of ongoing 

 

143 Jill E. Fisch & Steven Davidoff Solomon, The Problem of Sunsets, 99 

B.U. L. REV. 1069–70 (2019). 
144 Id. at 1065. 
145 See Frequently Asked Questions About PIPEs, MORRISON & 

FOERSTER, https://media2.mofo.com/documents/faqspipes.pdf 

[https://perma.cc/JQC3-ZFX4] (last visited Oct. 17, 2021) (defining PIPE 

transactions and detailing the increase in such transactions); Ari B. Blaut 

et al, Market Trends 2020/21: PIPEs, LEXIS PRACTICAL GUIDANCE (May 18, 

2021), https://www.sullcrom.com/files/upload/Market-Trends-

2020_21_%20PIPEs.pdf [https://perma.cc/ENB9-E44C] (detailing 59% 

increase in number of PIPE deals from 2019 to 2020 and an 110% increase 

in total volume of deals). 
146 See Rauterberg, supra note 12, at 1129–1130. 

147 See Michael Klausner, Michael Ohlrogge & Emily Ruan, A Sober 

Look at SPACs 13, 18 (Eur. Corp. Governance Inst., Fin. Working Paper No. 

746/2021, 2021), 

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3720919 (on file with 

the Columbia Business Law Review) (discussing popularity of SPACs). 



  

1236 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021 

disclosure.148 Second, some mutual funds have begun 

investing a small portion of their assets in mature venture-

backed private companies with high valuations.149 This is 

notable because mutual funds are open to retail investors and 

have therefore traditionally invested exclusively in public 

markets. In addition, attempts have been made to create 

diversified portfolios of private company stocks, though the 

possibility of indexing appears to be a long way off.150   

Each of these developments puts pressure on the 

regulatory divide between public and private companies and 

warrants a careful restatement of the goals motivating the 

public/private divide and a clear-eyed assessment of whether 

such goals are being achieved. As we will see, however, the 

functional complexity of the public/private divide translates 

into considerable normative complexity too, when the task 

turns to assessing the divide and considering regulatory 

changes.151 

B.   Capital Raising and Issuer Choice 

Several years ago, Donald Langevoort, perhaps the leading 

theorist of the public/private divide, suggested that “the most 

conceptually interesting subject in securities law” was the 

question whether it was “possible—indeed desirable—that a 

large segment of economically important firms in the 

American economy stay private, perhaps indefinitely, yet with 

 

148 See Elizabeth Pollman, Information Issues on Wall Street 2.0, 161 

U. Pa. L. Rev. 179, 193–199 (2012). 
149 Jeff Schwartz, Should Mutual Funds Invest in Startups? A Case 

Study of Fidelity Magellan Fund’s Investments in Unicorns (and Other 

Startups) and the Regulatory Implications, 95 N.C. L. REV. 1341, 1348–50, 

1359–60 (2017). 
150 See, e.g., THE PRIVATE SHARES FUND, PROSPECTUS (2021), 

https://privatesharesfund.com/downloads/prospectus/ 

[https://perma.cc/9YD2-DE74] 
151 For an important example of re-thinking the basic framework of the 

public/private divide from the vantagepoint of the securities laws, see 

Guttentag, supra note 22. 



 

No. 3:1199] THE NEW PUBLIC/PRIVATE EQUILIBRIUM 1237 

easy access to large amounts of capital?”152 In essence, 

Langevoort was suggesting that capital markets in the United 

States had or would soon come to sustain a state of affairs in 

which successful, growing private firms could access sufficient 

capital while operating as public or private companies. 

Empirical research since then suggests that we have 

indeed arrived at this state of affairs, and that private 

companies now enjoy an issuer choice regime—an 

environment in which a successful large firm can successfully 

operate in public or private markets, making the choice 

between them truly optional.153 As a result, private companies 

decide to go public only if—and only when—it is privately 

desirable for them to do so, based on their own balancing of 

the costs and benefits of being a public company. 

A major cause of this state of affairs was the growth in the 

availability of capital in private markets, where capital 

raising now far outstrips public markets. 

Second, and relatedly, the increasing availability of private 

capital seems to have lessened companies’ desire to go or 

remain public.154 Several factors, including the removal of 

various state-level restrictions on private issuers’ securities 

offerings, led to increases in the supply of private capital.155 

This increased supply, in turn, enables late-stage private 

firms to grow to a size, levels of employment, and levels of 

revenue, which few private firms could previously obtain.156 

The product of this issuer choice regime is that fewer highly-

 

152 Donald Langevoort, The Regulation of Primary Markets, in 

SECURITIES MARKET ISSUES FOR THE 21ST CENTURY, supra note 16, at 122. 

153 Ewens & Farre-Mensa, supra note 5, at 5467–68. See, e.g., Romano, 

supra note 26 (advocating for more issuer and investor choice in securities 

regulation); John C. Coates IV, Private vs. Political Choice of Securities 

Regulation: A Political Cost/Benefit Analysis, 41 VA. J. INT’L L. 531, 543–49 

(2001) (noting that certain key features of the securities regulatory regime 

are subject to issuer choice). 
154 See de Fontenay, supra note 6 (arguing that the deregulation of 

private capital raising over the last few decades has contributed 

significantly to the decline in U.S. public companies); Ewens & Farre-

Mensa, supra note 5, at 5467. 
155 Id. at 5467 
156 Id. at 5468. 



  

1238 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021 

valued private firms choose to go or remain public—thus the 

observed decline in the share of public companies.157 The 

remaining universe of public companies is smaller and older. 

In sum, the growth of private capital led to an issuer choice 

environment for firms because private market financing was 

a viable substitute for public markets financing; in this “new 

equilibrium,” fewer and older firms go public.158 

C.   Firms Now Face Complex, Idiosyncratic Tradeoffs 
in Determining Whether to Be Public or Private 

In this Section, we argue that the tradeoffs that private 

firms face in determining whether to go public (or that public 

firms face in contemplating going private) have become 

increasingly firm-specific and idiosyncratic. This is partly due 

to the diminishing importance of capital raising as the leading 

attraction of going public. Private firms can now raise 

enormous sums, funding growth that previously would have 

been possible only for public companies.159 As importantly, 

however, successful private firms differ considerably along the 

other dimensions that empirical research suggests are 

important to firms’ going public decisions. 

The going-public versus staying-private tradeoff facing 

firms becomes profoundly firm-specific because the principal 

attractions of being public are now many, distinct, and apply 

to firms heterogeneously. What may be a core attraction of 

going public for one large and successful private firm may be 

insignificant to another successful, growing private company. 

For instance, a prominent survey of CFOs suggests that 

the most common reasons for firms to go public are to (1) 

create public stock for use in acquisitions, (2) establish a 

 

157 See de Fontenay, supra note 6 (arguing that the deregulation of 

private capital raising over the last few decades has contributed 

significantly to the decline in U.S. public companies); Ewens & Farre-

Mensa, supra note 5, at 5467. 
158 Id. at 5467, 5498, 5506. 
159 Id. at 5466; BAUGUESS ET AL., supra note 7. 



 

No. 3:1199] THE NEW PUBLIC/PRIVATE EQUILIBRIUM 1239 

market stock price, and (3) enhance a firm’s reputation.160 

Other commonly cited reasons for going public include 

allowing major pre-IPO investors to liquidate part or all of 

their ownership position.161 To motivate the idea that firms 

face idiosyncratic tradeoffs because the determinants of 

decisions to go public (or private) apply heterogeneously to 

them, consider a few illustrations. 

While it may be surprising that a leading attraction of 

going public is creating an acquisition currency, evidence 

suggests that newly public firms are, on average, aggressive 

acquirers.162 IPOs are more common in industries with a high 

degree of M&A, but newly public firms also conduct far more 

acquisitions than private companies of similar size and 

maturity.163 For instance, research in financial economics 

documents both that newly public firms are prolific acquirers 

and that the torrid pace of post-IPO firm acquisitions is due 

in part to the industries in which those firms are 

concentrated.164 

Conversely, Ewens and Farre-Mensa explore why firms 

choose to remain private.165 They investigate a preference 

among founders for control, studying whether the size of 

founders’ initial equity stake influences firms’ later decisions 

 

160 James C. Brau & Stanley E. 

Fawcett, Initial Public Offerings: An Analysis of Theory and Practice, 61 

J. FIN. 399, 407 tbl.II (2006). As an example of how reputation’s importance 

may differ among firms, firms that make consumer-facing products would 

arguably benefit more from the additional publicity of being a public 

company than a firm that makes intermediate products in a supply chain. 
161 Id.; MAUBOUSSIN & CALLAHAN, supra note 2, at 4. 
162 See Ugur Celikyurt, Merih Sevilir & Anil Shivdasani, Going Public 

to Acquire? The Acquisition Motive in IPOs, 96 J. FIN. ECON. 345, 346 (2010). 
163 Id. 
164 Id. at 351 (“[A] substantial portion of the M&A activity of IPO firms 

is due to industry-level M&A activity, perhaps because firms go public to 

exploit industry-level M&A opportunities.”). 
165 Ewens & Farre-Mensa, supra note 5, at 5498–500; see also Brau & 

Fawcett, supra note 160, at 401 (separately researching why firms choose 

to remain private). 



  

1240 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021 

to go public.166 Ewens and Farre-Mensa suggest that as 

founder control increases, founders use that control to delay 

or prevent startups’ exit to public markets.167 As part of this, 

they buttress the central point for our argument, which is that 

the size of founders’ initial control stakes differs considerably 

across late-stage startups.168 

In a vein that cleaves closer to the original design of the 

federal securities laws, recent empirical evidence suggests 

that increasing the disclosure obligations imposed on private 

companies increases their propensity to go public.169 In 2007, 

Congress passed the Food and Drug Administration 

Amendments Act (FDAAA).170 The FDAAA requires all 

biopharmaceutical companies, whether private or public, to 

publicly disclose material information, including results, of all 

clinical trials in Phase II or further.171 Yet, the FDAAA does 

not simply automatically induce firms that are subject to it to 

go public, nor does it mechanically and uniformly increase the 

likelihood of subject firms going public. Instead, well-designed 

research exploring its effects finds that the FDAAA increases 

the propensity of subject firms to go public in distinctively 

asymmetric ways. Firms with an extensive drug development 

portfolio were significantly affected by the law and were much 

more likely to go public, and firms obviously differ 

significantly in this respect.172 

 

166 Ewens & Farre-Mensa, supra note 5, at 5498–500; see also Brau & 

Fawcett, supra note 160, at 403 tbl.I, 422, 423 tbl.VIII, 424. Founders’ initial 

equity stakes are obviously endogenous, but Ewens and Farre-Mensa 

employ a plausible instrumental variables approach based on exogeneous 

variation in the supply of financing to address this issue. Ewens & Farre-

Mensa, supra note 5, at 5498–500. 
167 Id. at 5502. 
168 Id. at 5494 fig.7, 5498–5502. 
169 Cyrus Aghamolla & Richard T. Thakor, Do Mandatory Disclosure 

Requirements for Private Firms Increase the Propensity of Going Public?, J. 

ACCT. RSCH., July 2021, at 4–5. 
170 Pub. L. 100-85, 121 Stat. 823 (2007) 
171 Id. (codified in 42 U.S.C. § 282(j)(2)(A)) Aghamolla & Thakor, supra 

note 169, at 3 (discussing details of law). 
172 Aghamolla & Thakor, supra note 169, at 4. 



 

No. 3:1199] THE NEW PUBLIC/PRIVATE EQUILIBRIUM 1241 

 V.  IMPLICATIONS OF THE NEW 
PUBLIC/PRIVATE EQUILIBRIUM 

We have argued that two sets of developments in capital 

markets have undermined the coherency of the concept of 

public companies. One development has been the increasing 

complexity of the public and private market ecologies. The 

securities laws established important differences for public 

and private issuers, but alongside those necessitated by law, 

public and private markets now differ along a host of other 

important dimensions as well. A second development has been 

the growth of private capital markets, which has led to an 

issuer choice regime in which successful private firms can 

remain private indefinitely. A significant result of these 

changes is that firms now face a more complex calculus 

between going public and staying private that differs 

considerably from the tradeoff originally contemplated by the 

securities laws.173 

This is a descriptive picture, but it has implications for 

policy too. One implication of these changes for securities law 

is that the category of public companies makes relatively less 

sense. The reason for this lies in the issuer choice regime in 

which firms’ decisions regarding whether to be public or 

private are driven by varied and different considerations. This 

change matters to securities regulation because its core rules 

impose mandatory regulations on public companies. 

Consider the following way to rationalize the mandatory 

regulation of public companies. Defenders of the mandatory 

disclosure system imposed on public companies have 

sometimes argued that it mitigates the under-production of 

socially useful information by firms.174 The logic runs thus: 

 

173 See infra Section IV.C. 
174  See Fox, Issuer Choice, supra note 26, at 568–71, 585–90. Other 

defenders of mandatory disclosure have focused on how it mitigates a 

specific set of market failures involving firms with dispersed ownership. 

This is a seemingly plausible way to rationalize the operating company 

divide whose triggers turn on the number of shareholders of record or on 

offering securities to the general public. For a powerful defense of 

mandatory disclosure along functional lines, see Guttentag, supra note 22; 



  

1242 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021 

Many parties benefit from the information revealed by firms 

through public disclosure, including that firm’s investors, 

customers, suppliers, and competitors. Yet the firm itself only 

internalizes some of these benefits from the information it 

discloses. Thus, firms will under-produce information from a 

social perspective, if left to their own devices. The magnitude 

of these spillovers also might be thought to roughly track the 

size of a firm. Thus, a distinct regime of regulation should 

apply to large firms. This argument rationalizes the distinct 

treatment of “private” and “public” firms.175 

But the changes in capital markets that we sketch weaken 

the appeal of this view of the public/private divide. Why? 

Because as the reasons for going and staying public fragment, 

it becomes less likely that the underlying market failure 

targeted by the mandatory treatment is correlated with a firm 

being public. Returning to the previous paragraph, it becomes 

less likely that firms that produce important informational 

spillovers will happen to be public, rather than private. Of 

course, an issuer choice regime does not completely 

undermine the logic of the mandatory interventions imposed 

on a specific set of public companies. Public companies, on 

average, remain much older, larger, and more profitable than 

private companies. Our point is simply that an issuer choice 

regime, in which issuer choices are motivated by many and 

different factors, means that the firms that ultimately choose 

to become public are likely to have less in common. 

As a result, if we want to continue to impose mandatory 

rules on public companies, it is worth reconsidering the 

triggers for when companies cross the public/private divide. 

Under the status quo—where the fundamental triggers for 

being public have given rise to an issuer choice regime, and 

where issuers’ choices are driven by complex and 

heterogeneous features of public and private markets—the 

case for mandatory regulation of public companies has 

weakened. If the public/private tradeoff has become 

 

Michael D. Guttentag, Accuracy Enhancement, Agency Costs, and 

Disclosure Regulation, 3 REV. L. & ECON. 611, 625–27 (2007). 
175 John C. Coffee, Jr. provided a powerful early defense of the United 

States’ mandatory disclosure regime. Coffee, supra note 26. 



 

No. 3:1199] THE NEW PUBLIC/PRIVATE EQUILIBRIUM 1243 

profoundly idiosyncratic, then it makes mandatory regulation 

that turns on the current public/private divide less likely to be 

apt and less likely to be appropriately tailored to a market 

failure associated with that divide. It is worth emphasizing 

that we do not think this problem is fatal to the basic vision of 

public markets as subject to mandatory regulation, nor do we 

necessarily favor eliminating the mandatory regulation 

imposed on public markets. 

But for these reasons we do conclude that the 

public/private divide in securities regulation is overdue for a 

fundamental reexamination. This rethinking must address 

not simply where to draw the line between public and private 

companies, but also whether to draw a line at all—and if so, 

on what basis—and how to regulate firms on each side of the 

divide. Crucially, these questions must be answered 

simultaneously—rather than serially as they often have been 

over the last several decades—considering the unavoidable 

connections between securities regulation and firms’ 

governance, capital structure, trading environment, and 

information environment. Viewed in that light, the task faced 

by Congress and the SEC in reassessing the public/private 

divide is even more difficult than we imagined. 

VI.  CONCLUSION 

How the public/private divide works shapes the success of 

how we regulate public and private companies. While the 

original architecture of the divide was designed by securities 

law, two rich ecologies have developed around that legal 

design that cause public and private markets to differ along a 

host of dimensions. The broad availability of capital in private 

markets has created an issuer choice regime in which firms’ 

decisions regarding whether to be public or private are 

influenced in idiosyncratic ways by different aspects of these 

ecologies. The normative implication of these changes is to 

reduce the coherency of the regulation of public and private 

markets.