Handbook on Law, Innovation and Growth
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Handbook on Law, Innovation and Growth

Edited by Robert E. Litan

A central goal of any economy is to achieve rapid and sustained growth. This cannot happen without continued innovation. This landmark Handbook brings together many of the world’s legal scholars to examine features of the legal infrastructure that affect both innovation and growth. Individual chapters explore different legal subject areas, in most cases offering recommendations for rule changes that could accelerate growth, primarily in the context of the US economy. The introductory chapter provides a framework for these discussions and explains why it is time for legal scholarship and research to move in that direction.
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Chapter 4: Securities Litigation and Innovation

Richard A. Booth


Richard A. Booth When a growing business seeks new capital, one of the most important issues for a potential investor is the exit strategy. While a new investor may be satisfied in some cases with the prospect of return from cash flow, in most cases investors will want the business to be sold or to make a public offering by which investors may tag along and sell their own shares. For the entrepreneur, the prospect of selling the business may not be attractive. Thus, the possibility of going public may be quite important even at a very early stage in the life of a business, even though most businesses are ultimately sold. But going public is expensive and fraught with risks. Aside from out-of-pocket expenses such as legal and accounting fees – and not to mention management distraction – a business that makes a public offering realizes only about 75 cents per dollar of value because of underwriting and pricing discounts. Moreover, once the business is publicly held, the cost of compliance with Securities and Exchange Commission (SEC) regulations is significant. As for risk, being publicly held means that the company is exposed to stockholder litigation based on a variety of federal causes of action. Indeed, it is likely that if there is any sudden decrease (or even increase) in stock price, the company will become the target of a securities fraud class action based on the theory that the news could and should have been disclosed earlier. In 2008, there were...

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