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Effective Capital Formation and Allocation will Drive Our Economic Recovery from the Pandemic!

By Michael Aiello – CEO & Managing Partner

The United States capital markets went on quite a roller coaster ride over the past 15 months. 2020 started out great and then the Pandemic hit in March. By Springtime stocks sold off precipitously and investors lost trillions in value. But, for those who were able to hang in there, with ongoing Government stimulus support and vaccines rolling out, the Dow, S&P 500 and other indices ended the year at record levels. NASDAQ and technology stocks did particularly well with Initial Public Offering (IPO) and Special Purpose Acquisition Company (SPAC) transactions helping to launch many new publicly traded companies.  The rally has continued in 2021 with major indices recently reaching new highs.

The Securities and Exchange Commission (SEC), the principal regulator of our capital markets, has a three-part mission: to protect investors, maintain fair, orderly, and efficient markets, and to facilitate capital formation. Most businesspeople are familiar with the first two parts of the SEC’s mission, but the capital formation piece is not as well understood.

What exactly does that term mean? At the most fundamental level, it relates to how new businesses and ideas get financed. When the most innovative strategies and concepts have access to capital, good things happen! Jobs get created and the quality of our life improves. If capital flows to organizations that don’t have great ideas or aren’t very good at executing their business plans, those investments fall on fallow fields and get wasted. Effective and efficient “capital allocation” is critical to the smooth functioning of our overall economy. The United States capital markets system is widely regarded as the best in the world and our rigorous and demanding standards regarding accounting and financial reporting provide investors and creditors with decision-useful information needed to make informed judgments on how to best allocate capital in a fashion that benefits our economy and society.

In a 2019 speech, Martha Miller, who serves as the SEC’s “Advocate for Small Business Capital Formation” discussed her office’s role and objectives, which include:

• Identifying problems that businesses have with securing access to capital.
• Analyzing the potential impact on businesses and their investors of proposed SEC rules and regulations.
• Assisting businesses and their investors in resolving significant problems they may have with the SEC.

Based on the sizzling hot market for IPO’s in 2020, which raised in excess of $167 Billion for new public companies, the SEC’s focus on capital formation seems to be working well and former SEC Chair Jay Clayton deserves some credit for that. Let’s hope his successor, Gary Gensler, who was recently appointed by the Biden Administration, can continue that track record!

At Centri, we are very focused on helping facilitate efficient capital formation and allocation. Our partners and professionals play an important role in helping companies navigate the complex accounting rules and disclosure requirements emerging growth companies and more mature organizations need to comply with to satisfy the robust requirements the SEC has in place when companies access the public markets to raise capital. These rules are intended to protect investors while simultaneously ensuring they are provided with useful information needed to make effective capital allocation decisions in a transparent manner.

We take our responsibilities seriously and recognize the important role we play in the capital allocation process. Our team is proud of the work we do every day to serve our clients and keep this system functioning efficiently and effectively.

The last 15 months have been a challenging time for all of us as the Pandemic raged and we worked through periods of social and political unrest. Let’s hope things get better as we begin to return to normalcy and that America’s capital markets continue to function efficiently and help our Economy thrive, create new jobs and return to pre-pandemic levels!