Many investors may have dreamed of such "if only" investments. If only I had invested in peloton. Or Uber. Or Lyft.
However, this is not possible for most people – and not just because they do not have a million dollars to realize a billion dollar idea. Under applicable law, only individuals with an annual income of at least $ 200,000 or assets of $ 1 million (outside of residence) are "accredited investors" or investors qualified to invest in private securities.
Now the country's leading securities regulator is considering how ordinary people can get into companies before going public.
Jay Clayton, chairman of the Securities and Exchange Commission, has argued that smaller investors should not be excluded from these "potentially attractive" investments.
How this could be fixed is not entirely clear. One option would be to allow private investments in funds with a cut-off date, an investment fund whose investment mix is shifting as retirement approaches.
However, such a change would be both complicated and risky. Other regulators, scientists, and consumer advocates argue that smaller investors could easily get over their heads. "These investments are complex, opaque, and often involve risks that most investors are unable to absorb," said Andrea Seidt, Ohio's securities officer.
The Commission took its most concrete step in this direction last month. It passed a proposal – in a 3-to-2 vote – that would give brokers and investment advisers access even if they failed to meet the income and wealth thresholds. The same applies to certain “knowledgeable employees” of a private fund, including venture capital, private equity or hedge funds.
This part of the proposal was not particularly controversial. But Mr. Clayton said he expected "more in this area" in the coming months.
"I believe it is our duty to examine whether we can improve opportunities for Main Street investors in the private markets while maintaining strong and adequate investor protection," said Mr. Clayton recently before Congress.
Why does this idea prevail now? This is partly due to how the investment landscape has changed in recent decades. There are only about half as many public companies in the United States today than in the late 1990s. And promising start-ups tend to stay privately with elite investors for longer Capture even more of the biggest wins.
There are reasons why companies choose to stay private – including the more relaxed rules they face when compared to listed companies. These have to provide information so that investors can assess their value.
This lack of disclosure is just one of the reasons why consumer lawyers and others are skeptical of this idea. They also refer to high fees for private investment funds and the low chances of smaller investors to access the next Google or Facebook early.
And in the end it may not even be worth the effort. Overall, private fund performance doesn't look much better than your standard mutual fund.
Private equity funds achieved a return of 13.3 percent in 2018 and a return of 11.6 percent after fees in the last 10 years that ended in September 2018. This is clear from PitchBook's most recent benchmark data for the private market. Investors who held mutual funds specializing in small and medium-sized companies achieved a return of 14.3 percent in 2018 and a return of 9.4 percent in the same period of 10 years.
However, the spread between the best-performing and worst-performing private equity funds was much wider than that of standard mutual funds: the best-performing private equity funds achieved at least 16.2 percent over this 10-year period, while the lower quartile achieved at least 5.2 percent (the bottom 10 percent had negative returns). In the world of mutual funds, the worst and best funds ranged from 9.8 percent (for the bottom 25 percent) to 12.2 percent (for the top 25 percent).
The S. admitted that there was no complete picture of how investors developed privately Investments that are also known as tax-exempt offers.
"It is difficult to carry out a comprehensive market-wide analysis of the profits and losses of investors in exempt offers because the availability of data on the performance of these investments is significantly restricted." Commission wrote.
The opacity of the private market also increases the risk of fraud.
Ms. Seidt, the Ohio Securities Commissioner, told the S.E.C. Investor Advisory Committee in November that more than 100 government measures across the country have included private offerings in the past two years. More than a thousand investors had total losses in excess of $ 100 million, she said. And that was only a partial snapshot.
"These private offers have been and are the most common source of government enforcement action," she told the committee. Before she passed any rules, she said the S.E.C. needs to do research that illustrates how safe it would be to pack private investment into a fund.
Even building such an investment vehicle would be a challenge because private investments can pay off so quickly.
Some funds that are open to average investors already hold small shares in private companies. Mutual funds may use up to 15 percent of their assets in illiquid securities, including private companies, but often invest much less because these investments cannot be easily sold. This is a problem for funds as they need to have enough flexibility to pay shareholders out in cash.
For example, the $ 44 billion Fidelity Growth Company Fund, which includes companies like Allbirds, Peloton and Sweetgreen, had less than 3 percent of its assets privately held as of October 31.
It would also be difficult – and expensive – for investors to properly diversify their portfolios, said Elisabeth de Fontenay, a professor at Duke University School of Law who specializes in corporate finance.
"Financial theory suggests that private investors should invest in broadly diversified index funds, and there is no way to do it in private markets," she said. Creating a fund of private equity funds would help, she said, but "the fees involved are likely to outperform returns."
Even if the regulators no longer open the door to private markets, more investors are already pushing their way through.
The thresholds that regulators set to determine who qualified for access to the private market were never linked to inflation. Last month's proposal did not suggest any change. The $ 200,000 annual income requirement set in 1982 would be $ 538,000 today, while the $ 1 million threshold is now $ 2.7 million.
At that time, an estimated 1.6 percent of American households were, according to the S.E.C. qualified as accredited investors. Suggestion. By 2019, it was around 13 percent of all households.
When regulators voted last month on the proposal to allow certain investment professionals to access private markets, Allison Mister Lee, a Democrat who voted no, said she believes the definition of accredited investor already includes too many people.
"It seems that the failure to update these thresholds is less about giving American investors access to lucrative private markets," she said at the meeting, "rather than giving private markets access to potentially vulnerable American investors. "