Some Improvement in U.S. Public Equity Capital Market Competitiveness

Posted by Hal Scott, Harvard Law School, on Wednesday January 2, 2013 at 8:56 am
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Editor’s Note: Hal Scott is the director of the Program on International Financial Systems at Harvard Law School and the director of the Committee on Capital Markets Regulation. This post is based on a statement from the committee, available here.

The Committee on Capital Markets Regulation (CCMR), an independent and nonpartisan research organization dedicated to improving regulation and enhancing the competitiveness of U.S. public equity capital markets, today released data from the third quarter of 2012. According to the new study, U.S. capital markets reversed the second quarter downgrade and showed slightly improved competitiveness, though most measures of competitiveness still fall short of historical averages. Hal S. Scott, Director of the Committee said, “While foreign companies continue to prefer non-U.S. financial markets for raising capital outside their home markets, and regulatory reform is still needed, this quarter’s data offers a promising sign that competitiveness can be restored to U.S. markets.”

Of the global initial equity offerings conducted outside a company’s home market, 18.3% of these IPOs, by value, were listed on a U.S. exchange. While this measure is at its highest level over the past five years, the U.S. share of this volume remains well below its historical average of 28.7% (1996-2006). These percentages include all IPOs by foreign companies listed on either U.S. public markets or issued through private Rule 144A offerings. Excluding global IPOs that use the Rule 144A markets, the percentage of global IPOs listed on a U.S. exchange rises to 55.9%. However, the total value of these IPOs has decreased from $79.8 billion in 2010 and $39.3 billion in 2011 to only $9 billion thus far in 2012.

U.S. public equity markets also showed modest improvement as foreign companies that choose to raise equity capital in the U.S. through initial offerings scaled back their reliance on private markets. Of the total volume of foreign equity issued as initial offerings in the U.S. through the third quarter of this year, 78.6% was conducted through private Rule 144A offerings rather than public offerings. [1] This represents a small reduction from the 82.5% reliance on private markets seen in 2011 and is the lowest level since 70.2% in 2009. However, despite the small improvement, this measure remains much larger than its historical average of 64.1% (1996-2006), indicating a continued aversion to U.S. public equity markets for initial offerings. Rule 144A markets are not subject to SEC regulation, including Sarbanes-Oxley, and are limited to large institutions. Higher use of these markets reflects a negative opinion of U.S. public markets.

Furthermore, the U.S. markets failed to attract the largest global IPOs, as only 2 of the 20 largest offerings this year have been conducted in the U.S. The U.S. has averaged five such offerings each year in the past (1996-2006). This continues the trend of the past five years, with the US annually attracting at most 3 of the largest 20 global IPOs.

However, the U.S. share of equity raised in public markets, through both IPOs and secondary offerings, has steadily grown since 2009, reaching a peak this year at 53.6%. This data uses Thomson’s databases to compare equity raised in U.S. public markets with those in all non-U.S. public markets. This measure reflects the relative attractiveness of U.S. markets to both domestic and foreign companies.

Lastly, the share of U.S. IPOs listed only on foreign exchanges has dropped from a high of 20% in 2008 and 5-6% in recent years to 1% through the Q3 2012. This is in line with the historical average of 1.3%. Companies’ willingness to completely forego U.S. markets indicates a strong concern with the burdens of listing on the U.S. public market.

The CCMR believes that measures suggested in its 2006 Interim Report, which include improving shareholder rights, creating clearer and fairer enforcement mechanisms, and adopting coordinated and risk-based regulations, must be taken to continue to restore U.S. competitiveness. The CCMR also urges regulators implementing the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act to minimize, to the extent possible, adverse competitive impacts, particularly in areas where the U.S. regulatory approach differs significantly from that taken in other markets.

The third quarter competitiveness measures update can be found at:


[1] Rule 144A equity offerings are commonly either bundled with debt or other non-U.S. equity or issued directly through American Depository Receipts (ADRs). The aggregate level of Rule 144A offerings is estimated from the publication of issued ADRs from the primary depository bank, the Bank of New York Mellon. The Bank of New York Mellon market share of newly issued Rule 144A equity has ranged between 54% and 68%. Because our estimate does not include direct issuance of Rule 144A equity, it significantly understates the size of this market.
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