Capital Formation for a Stronger Economy: A Q&A with Nasdaq’s John Zecca

In the past 25 years, the number public companies listed on U.S. exchanges has declined, while the number of private equity-backed companies in the U.S. has increased significantly. If this trend persists, it could have detrimental effects on the overall markets, everyday Americans, and the broader American economy.

This analysis and more insights were published today in a new report from Nasdaq: Advancing the U.S. Public Markets: Unlocking Capital Formation for a Stronger American Economy. The report, which draws insights from a comprehensive survey of Nasdaq-listed companies, identifies the challenges that have led to the decline in public company listings and outlines specific and critical reforms needed to address the issue and ensure U.S. capital markets remain the global standard for economic innovation and wealth creation.

“Nasdaq has long advocated on behalf of issuers, and the urgency for solutions to these pain points extends beyond simply reforming the public company model, it is about significantly enhancing America's global competitiveness,” said Nelson Griggs, President of Nasdaq.

The public market ecosystem serves as the cornerstone of the U.S. economy, facilitating capital allocation, fostering innovation, and enabling value creation. The new report proposes critical policy reforms needed to advance the U.S. public markets and unlock capital formation for a stronger American economy.

To discuss the analysis and Nasdaq’s recommendations to help strengthen the public markets, John Zecca, Nasdaq’s Executive Vice President and Global Chief Legal, Risk, and Regulatory Officer, sat down with the Nasdaq Newsroom to discuss the new report.

Nasdaq Newsroom: What do you consider the most important takeaways from the report?

John Zecca: The report comes out at a critical time when policymakers have real concerns about the state of the public company model in the U.S. A few statistics illustrate the situation: Since 2000, the number of publicly traded companies in the U.S. has declined by about 36%, while the number of private equity-backed companies has increased by about 475%. They now outnumber public companies roughly three to one, whereas 25 years ago it was the other way around. When you look at market capitalization, a quarter of the companies valued at over $1 billion are not publicly listed.

So why does that matter? Well, because public markets are the most liquid and transparent and have a critical role in funding the growth companies that build the U.S. economy. Companies that go public grow the economy through about 47% hiring growth on average in the first three years after an IPO, and they invest on average 50% more in R&D relative to assets than their private company peers.

Perhaps even more importantly, public markets are the best wealth generator for Main Street investors trying to meet their investment and retirement needs. The later a company goes public, the more of the “hockey stick” growth is kept by the early private investors, who tend to be wealthier. So delayed listing does run the risk of increasing income disparity. From that perspective, our report sets out a path to make some long-overdue changes in public company regulation, and we hope that it can help usher in a new golden age for American capital markets.

We recommend doing it through smart regulation. The idea is to strip away useless or outdated regulation and focus on what investors really need to know and reframe the relationship between companies and their investors, making it easier and cheaper for companies to go public.

But time is of the essence if we want to reverse this trend and help the public markets flourish. So, we're working actively with policymakers and other participants to explain our ideas and promote the changes outlined in the report.

Nasdaq Newsroom: What sort of recommendations is Nasdaq making in this report?

John Zecca: Our recommendations fall into three basic categories. The first is reforming the proxy process, which is a Byzantine and very outdated technology, that's the relationship between the companies and their investors, their shareholders. The second is reducing the disclosure requirements and focusing on some core elements like materiality to reduce the regulatory burden. And the third is what we call smart regulation, which is more of a broad category that includes reform of the PCAOB, which oversees the audit process, and litigation reform and related issues. There are situations where you want to deregulate and certain situations where you want to regulate but in a smart, more flexible, more pragmatic way.

Nasdaq Newsroom: How can technology streamline and simplify regulatory processes?

John Zecca: Nasdaq is a leader in technology and in regulated markets, so it's natural that we would have thoughts on how to improve the processes here. One example is the proxy process. Usually, it's an annual process, but it's how shareholders engage with public companies and then vote on the matters that are put before them. The proxy process really hasn't changed significantly in decades. The result is an opaque and expensive process where companies really don't know who owns them, they can't communicate directly with them, and there's no lifecycle audit trail that shows the entire process of the vote from the time the shareholder votes to the time it gets to the company or the proxy agent. Technology could clearly fix that, but it will take a lot of effort to tackle the back-office inertia. Still, that's an important place where we think, with guidance from the SEC and others, there could be a reevaluation of this; and, with some investment, we could have a much better process.

Technology can also help companies develop their disclosure, especially with AI technology developing. It can also help investors digest that information. We have some products at Nasdaq that help with that, and those solutions are improving very quickly.

And, of course, we use technology to monitor our markets. I'm proud to say our team is at the cutting edge of market surveillance products, and we sell those products globally. So, we're proud of how our regulatory team can help improve the products that protect investors.

Nasdaq Newsroom: What strategies can we employ to balance oversight with accessibility to ensure investors have the necessary information to make informed decisions?

John Zecca: I think the key disclosure principle that the report notes is a return to the materiality concept. Disclosure rules have always been focused on materiality — what is important to a reasonable investor in making an investment decision. It's very important that our securities laws are not merit-based: It's not the government deciding whether an investment is good for investors or for certain types of investors. That really doesn't work. Instead, the goal has always been to get material information to the investors and let them make the right investment decision for them.

However, as the years have gone by, disclosure requirements have moved in a more prescriptive direction—as successive SECs have come along, they have added social, climate, and other prescriptive rules which then add to the complexity and the cost for the companies. In fact, they cite this as a reason for wanting to stay private because a lot of that information is very complicated to gather, and they may not even have ready access to it.

Our argument in the report is that it's time to cut through those shackles and unleash a new age of innovation. So, materiality is a north star as we try to seek that balance.

Nasdaq Newsroom: Why is Nasdaq conducting this sort of analysis and advocacy?

John Zecca: What I love about the report is it’s not just Nasdaq’s opinion. We canvassed our listed companies for their public policy priorities and asked them what their concerns were about being a public company.

When we make recommendations within the report, we are speaking from the perspective of our listed companies—and we have 4,000 around the world—and that gives us important credibility with policymakers.

We are fortunate to be in a position where our listed companies give us their frank feedback, and it’s because companies believe we'll use that information to improve capital markets. We work around the clock answering questions from issuers, putting up Q&As and guidance, so that feedback loop is what builds the basis for the data that we have in the report.

Nasdaq Newsroom: What are the risks if the advice in the report is not taken?

John Zecca: I think the biggest risk is that companies skip the public markets, and that will impact the ability of mainstream investors to save for retirement and meet their needs. They'll have fewer investment options. On top of that, the U.S. economy as a whole will be impacted if there are fewer public companies, generating fewer jobs. And the cutting-edge companies of tomorrow that need to raise capital may not have that capital and may struggle.

Without these modernization reforms, we will lose ground to other countries. If you look around the world now, the U.S. markets are the envy of the world: When I travel, I hear repeatedly that others are looking to emulate the U.S. model. And these other countries are not standing still: They are deregulating and changing their listing rules to try to draw in more companies. So, if the U.S. doesn’t act now, then we are at risk of falling behind in the global capital race.

That's the core risk, but the good news is that U.S. policymakers understand this, and they see these concerns. The new administration is very focused on improving the public company model.

That's why we believe this report outlines the right policy ideas at the right time.

Interested in learning more? Read Nasdaq: Advancing the U.S. Public Markets: Unlocking Capital Formation for a Stronger American Economy.