New Opportunities, New Risks: SEC Weighs Expanding Access to Private Offerings

Welcome to the January 2019 edition of our newsletter!  In this issue, we’ll examine a recent proposal by securities regulators to allow greater investment in private companies.

SEC Considers Effort to Bring Private Company Investments to the Investing Public

In recent remarks to The Wall Street Journal, U.S. Securities and Exchange Commission Chairman Jay Clayton said he wanted to change existing rules so smaller investors – typically ignored by private companies in favor of large private equity firms – could participate in, and be more attractive to the offerors of, private investment offerings.  Existing rules only allow persons with household income of $300,000 or more to participate, using this benchmark as a measure of financial sophistication and understanding of risk.  In the article, Clayton was described as wanting to change the rules to make such offerings more accessible, but didn’t detail exactly what he wanted, instead noting that the commission would issue a “concept release” on the topic in the coming months as a means of gaining public comment.

Caveat Emptor: Risks Abound in Private Investment Offerings

As the Journal article notes, the private investment market has exploded in the past five years – and with it, the risk to “mom and pop” investors whose retirement savings Clayton seeks to bolster with his proposal.  The Journal cited an earlier analysis it conducted which found that such offerings are typically brokered by smaller firms targeting older investors, which can be a recipe for fraud and abuse.  Although the burden may fall on investors or their families to vet advisers in such instances, perhaps an increased level of disclosure can be added to the offerings as part of expanding access, as a means of regulators mandating greater transparency of what the “less sophisticated” investors would be buying.  As the concept release comes out and comments made, investors and their advisers should be wary and proceed cautiously to take advantage of previously walled-off markets without risking their savings needlessly.