How can it be that less regulation will result in greater transparency and public inspection? Regulation results in greater supervision, only if it applies to all players in the market. In a situation in which regulation exists only for some of the players in the market, a ‘regulation gap’ occurs that results in companies naturally moving to areas with less regulation, so we end up with a market with many regulators and few companies, and some regulation over an increasing number of companies.
This is exactly what is happening in Israel’s capital market. The tremendous regulation gap between public and private companies, coupled with media exposure and increased other financing, non-public, options resulted in a significant decline in the number of public companies and commercial turnover while posing a tremendous challenge to the continued existence of the Israeli stock market as a meeting place between entrepreneurs and investors, and as a source of growth, innovation and employment.
A world without stock markets? | photo: fotolia
Many began deliberating on the justification of the existence of stock markets around the world, due to increased profitability of hedge funds and private equity, which offers private companies financing options that do not involve public exposure and exceptional regulation. In the United States as well, we see a sharp decrease in the number of initial offerings and see companies such as Uber become companies with tremendous market value, without having to go through a public offering, something that was not possible in the past.
The argument of “the end of the era of stock markets” is being raised by elements attempting to justify and conceal the warped data of the Israeli stock exchange, which suffers from a lack of IPOs. The allegation is wrong, and the Israeli stock market was clearly ready to exchange the data on IPOs in Israel with any other stock market in the world. Although this claim is designed to conceal the inability of decision-makers to spearhead a move to rehabilitate the Israeli stock market, it raises questions about the future of the public channel: why should a private company go public? What advantages does the general public gain from a functioning stock market? If there is no financing issue, and companies vote with their feet and prefer other financing options, why should we intervene? Why insist on the existence of an Israeli stock market?
It is important to understand the stock market’s role, its economic contribution and the importance of the public channel. The stock exchange is the best mechanism in which the public can share profits of the business sector, and the investment in the stock market is what investment in long-term savings is based. In addition, the stock market has a significant public advantage – it forces public companies to operate with transparency, and to report to investors all significant events.
Consider a reality without a stock market, in which all companies are private companies and there is no requirement to report to investors and to the public. Would the public be more or less exposed to interested party transactions, to backdoor transactions with no public supervision? Without the public channel, the level of transparency would significantly decline.
Haim Toledano is an online capital market trading expert