The Securities and Exchange Commission wants to make it
easier for individuals to invest in private companies, including some of the
world’s hottest startups, the agency’s chairman said in an interview.
SEC Chairman Jay Clayton, a Trump appointee wrestling
to boost flagging interest in public markets, said the commission also
wants to take steps to give more individual investors a shot at companies that
have been out of their reach because they haven’t gone public.
Companies including Uber Technologies Inc. and Airbnb Inc.
have shunned the public markets in favor of private investors such as venture
capitalists. For decades, regulators have typically walled off most private
deals from smaller investors, who must meet stringent income and net-worth
requirements to participate because of the added risk private investing holds.
Mr. Clayton said the SEC is now weighing a major overhaul
of rules intended to protect mom-and-pop investors, with the goal of opening up
new options for them.
“The private markets are awash in capital these days,” Mr.
Clayton said Wednesday in Nashville, where he spoke to groups of entrepreneurs
and business-school students. “The question is, who is participating?”
Private firms have grown outside the glare faced by public
companies such as Tesla Inc.,whose
founder Elon Musk recently set off a firestorm by tweeting that he planned to
take his company private. Mr. Musk has complained that public markets encourage
short-term thinking and routinely sparred with short sellers betting against
his company’s stock. His plan, which
has since been abandoned, has triggered
an SEC probe into whether his tweet was misleading. Mr. Clayton
declined to discuss Tesla.
President Trump also has pressured the SEC to consider the
balance between public and private markets, using Twitter two weeks ago to call
on the SEC to study letting public firms report earnings every six
months, instead of quarterly.
“I’m not wedded to a particular result, but I think we
should look at it,” Mr. Clayton said in the interview, conducted Wednesday. He
said that the commission is studying the move, and added that even if companies
reported earnings less frequently they would still update investors on
Private securities, mostly off the radar of federal
regulators, are usually sold to sophisticated investors such as venture
capitalists. There is typically less information available about the firms,
increasing risks for investors.
Those markets also have traditionally been a major source
of fraud afflicting small investors. Securities firms with a higher number of
troubled brokers are more likely to sell private stakes in companies, often
targeting seniors, an
analysis this year by The Wall Street Journal found.
Rules aim to protect individual investors from riskier
private deals. Only those who meet certain wealth or income standards—such as
household income of $300,000—can participate.
Adjusting the rules could offer Mr. Clayton, a former Wall
Street deals lawyer, a way to make good on his goal to help small investors
access more high-quality investments for retirement or other needs.
The SEC plans to issue a lengthy paper in the coming
months—known as a “concept release”—that will seek public comment on how to
revamp the capital-raising process, including by expanding access to private
After that, “I think you could move pretty quickly on this
kind of thing,” Mr. Clayton said.
If more retail investors got access to companies before
they launched an initial public offering, the move would create another
alternative for companies that already have ample access to private cash, and a
possible new avenue for brokers’ commissions.
One sign of how much the private market has ballooned: In
2013, tech company SurveyMonkey touted
its plans to raise $800 million via debt and equity as “one of the
largest capital raises by a privately held U.S. internet company.”
Since then, the market has seen an influx of funds
targeting later-stage private companies.Soft Bank Group Corp. ,
for instance, continues to pour money into unicorns—startups worth more than $1
billion—through its $92
billion tech-focused Vision Fund.
In the U.S., more than $1.7 trillion was raised in 2017
through private stock and debt sales.
To be sure, public market activity has grown this year
after several slow years. This year, 158 companies have gone public on U.S.
exchanges, raising $43.1 billion—up 36% from last year, when 112 companies
raised $31.6 billion, according to Dealogic.
A move to allow more participants in private markets could
benefit regions of the U.S. where venture capitalists are fewer in number.
“There is a massive capital gap in the middle of the country,” said Patrick
Henshaw, a vice president at Cincinnati public-private partnership Cintrifuse
who attended a Nashville conference where Mr. Clayton spoke.
The chance to devote part of an individual portfolio to
private companies would provide an investor more diversification and the chance
to benefit when firms go public, said Lonne Jaffe, a managing director at
Insight Venture Partners, a venture-capital and private-equity firm.
Mr. Clayton noted the attraction of private offerings at
several stops in Nashville, where he spoke to a conference of entrepreneurs at
the Wildhorse Saloon, a live-music venue that typically hosts country-music
bands and line-dance lessons.
“There are complex offerings where you need a lawyer of the
type that I was in the private sector, but you shouldn’t have to hire a
high-powered Wall Street lawyer to conduct every private placement,” Mr.
Clayton told Launch Tennessee’s 36|86 Entrepreneurship Festival, named for the
coordinates of Nashville.
Investors in private deals must be given lengthy
questionnaires and disclosures, steps that promising startups typically find
too cumbersome given the limited dollars typically offered by a single person.
Instead, startups can tap much more money at one time by targeting a few
venture capitalists or corporations.
The SEC hopes to streamline that process and create more
“accredited” investors, such as by allowing in people who don’t meet income or
wealth thresholds but have professional licenses or advanced education, Mr.
Mr. Clayton said his thinking about private markets evolved
as he spent more time at the SEC. He said the changes wouldn’t take away
investor protections and would result in people getting access to
“It came from doing the job and recognizing that for retail
investors the opportunity set beyond the public market is pretty low and pretty
costly. And pretty risky,” he said. “But people want that.”
here for the original article from The Wall Street Journal.