Keywords
securities, small business financing, disintermediation
Abstract
Whereas the process of financial intermediation was once human capital and relationship intensive, it is now heavily influenced by technological innovation and consumer demand, factors which have tended to disrupt the monopoly power of financial intermediaries. Technological innovation alone, however, is not sufficient to replace the institutions and actors that previously dominated the market for public offerings; rather, the concept of disintermediation by definition creates a vacuum that must be filled. Law firms and other intermediaries can create additional value for their clients by assuming some or all of the tasks currently apportioned to investment bankers in the public offering process.
Theoretical models created within the field of behavioural economics are useful in guiding securities regulators, lawyers, and academics to a fuller understanding of the current limitations inhibiting the realization of a functioning disintermediated marketplace for securities. Ultimately, the argument calls for the creation of a market environment where the decreased cost component of a disintermediated offering is complemented by reputational elements that import legitimacy into the offering. As technology and the presence of other intermediaries have replicated or avoided many of the justifications for direct underwriter involvement in smaller public offerings, it remains to be considered whether such instruments and institutions are capable of nurturing and sustaining the trust-based attributes of traditional reputational intermediaries. Effective dis- intermediation in the securities markets will remain an elusive objective as long as the impediments to the development of trust remain in place.
At a broader level, a responsible approach to the access to capital problem should reflect the belief that a properly functioning market is an instrument of social control capable of influencing broader social objectives (as opposed to being an institution with an insular focus responsive only to the needs of its participants). A more efficient capital market providing enhanced access for smaller issuers can contribute meaningfully to the economic welfare of the greater society. A coherent proposal for regulatory reform and institutional development must balance the competing objectives of offering enhanced access to capital for small businesses while not exacerbating the market risk posed to investors by such developments.
A brief examination of the problem of informational asymmetry is followed by a look at the economic and regulatory costs imposed upon smaller issuers. This paper then turns to an examination of the ‘‘functional’’ inhibitors to growth posed by the role of traditional market intermediaries and reviews the concept of dis- intermediation, focusing on the promise of the Internet direct public offering as a means of achieving a functionally disintermediated securities market and the obstacles currently impeding the realization of that goal. Finally, this paper looks at the lack of trust as the ‘‘weakest link’’ in the disintermediation edifice, and proposes a work- able means for establishing trust in the disintermediated marketplace.
Recommended Citation
Jason Trainor, "The Internet Direct Public Offering: Establishing Trust in a Disintermediated Capital Market" (2003) 2:1 CJLT.
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