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US lawmakers, regulators push to open up private markets as companies evade IPOs

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US lawmakers, regulators push to open up private markets as companies evade IPOs

Lawmakers in Washington, D.C., want to further open the private markets' doors to allow more investors in, but critics caution that these efforts could also have repercussions.

Amid a boom in private capital around the world, companies have eschewed the public markets in favor of remaining private for longer. That has created a dynamic in the U.S. where only accredited investors — mostly institutions and high-net-worth individuals — can participate in the increasingly lucrative stock offerings that private companies conduct to raise capital.

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Various stakeholders in Washington, D.C., want to open up the private markets for more investors as companies continue to enter the public markets later in their growth cycles.
Source: Associated Press

Now, in a push to allow more investors to buy stock in companies like Robinhood Markets Inc., The We Co. and Airbnb Inc. before they hit the public markets, lawmakers and regulators are ramping up their yearslong effort to update the definition of an accredited investor.

"What seems to be happening right now is a movement toward expanding the definition somewhat," said Duke University law professor Elisabeth de Fontenay, who specializes in corporate law and finance, in an interview. "It's a wealth test, rather than a sophistication test. There's some potential unfairness there."

Under federal securities laws, an individual accredited investor is generally defined as having a net worth of at least $1 million, not including the value of their primary residence, or an annual income consistently exceeding $200,000, or $300,000 when combined with their spouse.

To expand that definition, Rep. French Hill, R-Ark., has floated reintroducing the Fair Investment Opportunities for Professional Experts Act. The draft bill, which previously passed the House with bipartisan support, would expand the accredited investor definition to include licensed and registered individual brokers and investments advisers, as well as individuals who the Securities and Exchange Commission has determined have the appropriate education or job experience, even if they do not meet the wealth or income thresholds. The bill would also link those standards to inflation, something much of Wall Street and Washington, D.C., have signaled support for given that those figures were set in the early 1980s.

An SEC analysis recently found that there are 16 million U.S. households that meet the current accredited investor definition.

As Wall Street's top securities regulator, the SEC has been looking into the definition of an accredited investor for the better part of a decade. The agency issued a 211-page concept release in June that requested industry feedback on ways to "expand investment opportunities while maintaining appropriate investor protections and to promote capital formation." In the release, the SEC asked for comments on whether the accredited investor definition is appropriate or an "undue obstacle" to capital formation and investor access.

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The accredited investor definition has caught the attention of SEC Chairman Jay Clayton, whose agency requested industry feedback on possible changes to the definition earlier in 2019.

Source: Associated Press

SEC Chairman Jay Clayton has been pushing to open up investment opportunities in the private markets for some time now while companies continue to delay their initial public offerings.

"One of the things I like in our public markets is Main Street investors, they invest right alongside the institutions," Clayton said at a recent CNBC conference. "Can we replicate that in our private markets?"

A spokesperson for Clayton declined to comment beyond the concept release.

The regulator is more likely than Congress to take the lead on changing the accredited investor definition, Anna Pinedo, a partner at law firm Mayer Brown, said in an interview. That is in part because there is still lingering uncertainty about doing so among some Democrats in Congress, as seen at a Sept. 11 House Financial Services Committee subcommittee hearing.

Citing infamous blood-testing company Theranos Inc., Rep. Katie Porter, D-Calif., expressed concern about the lack of disclosure requirements private companies have to comply with versus their publicly traded counterparts. Theranos' top executives have been accused of faking blood tests to mislead investors and customers about the success of the company's work.

"If we lived in a perfect world, we would not need to have these kinds of disclosures," Porter said. "But we don't live in that world."

In the private markets, companies are not required to make any uniform disclosures to their investors unless there is a unique agreement between the two sides. But those agreements tend to take place with larger institutional investors, not individuals.

The "information asymmetry" between the public and private markets is at least in part why former Nasdaq Inc. CEO and current Virtu Financial Inc. Chairman Robert Greifeld says individual investors who place a stake in a private company need to know they could lose their money.

"Even if you are knowledgeable and trained, absent the information, you'd still be walking around blindly," Greifeld said in an interview.