A muffled big bang

THE capital market that is commonly thought to be the most developed in the world is, if you are being kind, in flux or, if you are not, in a mess. A stock-exchange blow-up has raised fresh questions about the reliability of America's equities markets. More significantly, laws that govern how firms can raise money are on the verge of a profound revision.

First, the exchange snafu. A few years ago the temporary collapse of a trading venue in Lenexa, Kansas would not have been much noticed. Back then the Better Alternative Trading System (BATS) exchange was just a set of computer algorithms in the head of a man named Dave Cummings, who first computerised his own wheat-trading business and then expanded to accommodate equities.

Now BATS is a big provider of market liquidity. On March 23rd a coding error at the exchange disrupted trading in firms whose ticker symbols ran from A to BFZZZ. That, unfortunately, was enough to capture both the world's most valuable listed company—Apple's stock slumped by 9% before circuit-breaker rules caused trading to be suspended—and, more embarrassingly, the shares of BATS itself on their very first day of trading.

Strikingly, the appeal of BATS as a venue for trading appears undamaged. By March 27th the exchange's market share had recovered to 11%, two-thirds of that commanded by the far-better-known NASDAQ, and, when measured separately, close to that of the venerable New York Stock Exchange and its Archipelago affiliate. The glitch could have a more lasting effect on BATS's plans to become a place where firms can list shares. The exchange operator quickly decided to pull its own offering, and its credibility as a venue for initial public offerings (IPOs) is hurt. But memories in this business are short and a more salient issue is the attractiveness of any exchange as a venue for raising capital.

Smaller firms in particular list less than they did. According to Jay Ritter of the University of Florida, an average of 165 companies with less than $50m in inflation-adjusted annual sales went public in America each year between 1980 and 2000. In 2001-2011 the average fell by more than 80% (see chart).

That has got the lawmakers moving. On March 27th Congress sent a bill titled the JOBS Act to President Barack Obama for signing. In 22 pages—the equivalent of a blog post for a legislative branch with a propensity to expand any idea to Proustian lengths—the JOBS act creates routes for firms to circumvent or modify rules introduced as far back as the 1930s. The idea is to enable companies to raise money in a number of new ways while reducing compliance costs.

Congress seems to have been moved in part by the appealing title—at a time of high unemployment, no one wants to vote against an act with “jobs” in the title, even if it is actually short for “Jumpstart Our Business Start-ups Act”. But there is also a growing realisation that piling on regulations—from the Sarbanes-Oxley act after Enron to the more recent monstrosity that is the Dodd-Frank act—does nothing to revive the economy's animal spirits.

Predictably, many of the people responsible for those earlier rules, notably Eliot Spitzer, a former New York attorney-general (and disgraced governor), have expressed outrage. Mary Schapiro, chairman of the Securities and Exchange Commission, the agency responsible for securities regulation, wrote a letter full of objections. Mr Obama is ambivalent, but more likely to sign the bill than not, if only because a dynamic market for new firms would provide a whiff of hope and change.

The act will certainly make markets more friendly to firms. The most publicised components of the bill allow them to “crowdsource” slivers of equity from retail investors online; reduce regulatory requirements for companies with under $1 billion in revenues; and enable firms to stay private even as the number of owners expands to 2,000 (the prior limit was 500).

Title IV, the chapter devoted to “small company capital formation” adjusts Regulation A, a component of securities law that dates back to its earliest days, to allow firms to remain nominally private, meaning they face only minimal disclosure standards, and still raise up to $50m annually in shares that are transferable. Restrictions on circulating information on securities issuance will be loosened, as will the freedom of investment-bank analysts to provide reports on (and implicitly tout on behalf of) clients. That will mean more dubious research, but could also create more interest in the stocks of smaller firms and a profitable mechanism to take them public.

Collectively, all these rules will create a looser environment for raising equity. The law's precise impact will be felt in two phases, says Reena Aggarwal of the McDonough School of Business at Georgetown University. There will be an initial spike in fundraising activity; and there will be a longer-term effect, determined by whether the grey areas created under the law encourage viable enterprises to grow (in which case the exemptions will expand) or produce a result like London's AIM market for smaller companies. Its looser listing standards prompted an initial flurry of interest but have since delivered poor returns for investors unable to distinguish between hype and substance.