Fair and efficient capital markets are a cornerstone of American's drug development ecosystem. Here in the United States, 70% of innovative clinical programs taking place are driven by small companies. All told, the journey to develop and secure approval of a new medicine is estimated to cost $2.6 billion — a heavy lift for a pre-revenue startup with no products yet on the market. Due to the large amounts of capital necessary for innovative biomedical research, which includes all the trial and error and research failures that occur along the way, growing biotech companies often turn to the public markets for financing.
More and more biotech companies are going public earlier in their growth phase, allowing everyday Americans to benefit from opportunities to invest in a diverse range of potentially high-growth companies. The initial public offering market in 2018 was among the strongest of the past decade. Specifically in the biotech and pharma sectors, we experienced a robust IPO pipeline, with 66 companies going public on Nasdaq, raising a total of $7.3 billion. Yet, young biotech companies quickly discover that the odds are stacked against them — with certain short sellers aiming to drive down their stock prices by disseminating spurious information and analysis about a company's prospects ... all while hiding in the dark.
When used appropriately, short selling can support America's capital markets by facilitating price discovery, enhancing market liquidity and promoting market efficiency. However, the lack of transparency in short-selling positions forces the market to speculate on the extent and motives of short activities and limits companies' abilities to engage with investors. It may also give rise to possibly abusive trading behavior that could make investors wary about providing the capital necessary to fund research and development.
Even worse, when unscrupulous short sellers make false claims about biotech firms in order to profit financially, they divert investment from potentially life-saving research and development and unfairly harm the investors who make that research possible. The fact that these trading strategies take place in the dark erodes investor confidence in the fairness and integrity of our capital markets. Market participants deserve to know if someone making negative claims about a company has a large short position against the company. That critical information gives other investors the ability to evaluate the validity of claims being made as is required when entities take a significant long position. Disclosure is a bedrock tenet of the Securities and Exchange Commission's approach to capital markets regulation, so it is even more shocking that the SEC has not yet acted to implement disclosure requirements for investors shorting a stock.
The late Supreme Court Justice Louis Brandeis once said, "Sunlight is said to be the best of disinfectants," and we agree. Better disclosure of short-selling positions would enable investors to thoughtfully consider the claims being made by individuals who have profit at stake in influencing their behavior. It would allow issuers the opportunity to better engage their shareholder base and address both legitimate and unfounded investor concerns. And it would equip regulators with the tools necessary to identify potentially abusive trading behaviors, address misleading claims disseminated through new media and better enforce market abuse rules.
Congress should enact sensible transparency requirements for short positions to address current gaps in the disclosure framework, root out market abuse and restore confidence in the integrity of our public markets.