Coming to America? Venture Capital, Corporate Identity and U.S. Securities Law
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Description
Venture capital is all the rage. The success of Silicon Valley across all the relevant dimensions has provided a vision of gold at the end of the rainbow. A region with no significant natural resources other than nice weather and a nontrivial risk of earthquakes became the richest borough in the land. Success breeds imitation. Now, in addition to Silicon Valley, we have Silicon Alley (NY), Silicon Bog (Ireland), Silicon Wadi (Israel), Silicon Fen (Cambridge, England), Silicon Glen (Edinburgh to Glasgow, Scotland), Silicon Alps (Carinthia, Austria), among others (Silicon Wannabes 1999). Social planners everywhere ask how they can establish a venture-capital–fueled startup sector with the dynamism and success of Silicon Valley. Indeed, perhaps worrisomely, it reminds one of the ambition of every nation, fifty years ago, to build a steel industry! As the burgeoning literature on Silicon Valley and its imitators makes clear, there is no single secret of success, and no obvious way to clone it. One finds more and less successful venture-capital–fueled “clusters” around the U.S. and abroad in very different contexts. While there are significant similarities, there are also different styles. In this essay, I want to focus on two main issues that have not been addressed in the literature, both of which revolve around the IPO exit option. First, I argue that Taiwan and Israel—the two most important non-U.S. clusters—represent two interestingly different models of international VC financing. As we know, venture capital depends sensitively on the existence of an exit strategy, with the two principal exits being sale to a larger firm and going public on a market that offers sufficient amounts of capital at satisfactory valuations. As I discuss in more detail below, in Taiwan the primary IPO exit route is the local Taiwan Stock Exchange, while in Israel the primary IPO exit route is the NASDAQ. Interestingly, casual empiricism suggests that one does not observe intermediary cases where, say, half of the IPOs are on the local exchange and half on NASDAQ. This pattern is consistent with several different explanations. It could be, I argue, the result of a “separating equilibrium” in which a single market emerges as the preferred exit option. In such a circumstance, high-quality offerings are likely to congregate in a single market, while firms raising capital in other markets will be perceived to be of lower quality. It could also, however, result from simple liquidity or clientele concerns: it could be that the greatest appetite for Taiwan issues has been on the Taiwan Stock Exchange while NASDAQ valuations for Israeli startups typically trump those available on other exchanges. Figuring out which explanation is correct is important in understanding the nature of international competition among stock exchanges. Second, I argue that for countries that choose (or end up with) the NASDAQ as their primary IPO exit, U.S. securities law assists this process in some surprising and little noticed ways. Using the NASDAQ as an exit option has implications for how a company presents itself to the investor community. In particular, it provides an incentive for firms to “pass” as regular U.S. companies. U.S. securities regulation draws a distinction between U.S. companies and “foreign private issuers,” and imposes reduced disclosure obligations on the foreign firm. Although the goal of this regulatory distinction was to make U.S. listings more attractive for existing foreign firms, a happy byproduct is a mechanism for identifying oneself as “American,” even when the company’s main centers of activity are off shore. As I detail below, this is an aspect of the structure that Israeli companies liberally exploit.
Source Publication
Global Markets, Domestic Institutions : Corporate Law and Governance in a New Era of Cross-Border Deals
Source Editors/Authors
Curtis J. Milhaupt
Publication Date
2003
Recommended Citation
Rock, Edward B., "Coming to America? Venture Capital, Corporate Identity and U.S. Securities Law" (2003). Faculty Chapters. 1907.
https://gretchen.law.nyu.edu/fac-chapt/1907
