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Should middle class investors be able to get a piece of high-flying private startups like Uber or AirBnb?
For most investors, such private offerings are currently off limits. The only way to be part of the wealth-creating machine of Silicon Valley is to wait for the IPO. But under the anti-regulatory push of the Trump administration, change may be coming.
What’s at stake is the definition of the so-called “accredited investor.” The criteria for eligibility have been tweaked over the years, but today they include having a minimum of a million dollar net worth (not including one’s primary residence), or showing at least three years of income exceeding $200,000 ($300,000 with a spouse). SEC Chairman Jay Clayton is proposing that the SEC consider modernizing the definition of an accredited investor in such a way that would significantly lower the bar — potentially opening up huge new markets for retail investors currently shut out of the start-up ecosystem.
Clayton’s announcement echoes a chorus of voices expressing concern that the reduction in the number of public companies has restricted investment opportunities for Main Street, even as Wall Street thrives.
Shouldn’t the playing field be leveled? As fast-growing startups stay private for longer, shouldn’t we allow everyone to catch a ride on the next billion-dollar unicorn? If only accredited investors can participate in private market offerings, isn’t this one more example of the elite having special advantages while the rest of America watches helplessly from the sidelines?
Of course, that doesn’t seem fair. But the reality is that sometimes the best place to be is on the sidelines. Prudent regulation and restriction of access can sometimes be a good thing for fair markets and investor protection. Even as someone who believes strongly in free market principles, I fear that changing the existing policy would be misguided at best; tragically wrong at worst.
Private markets may offer more pain than gain for Main Street. The oft-quoted statistic that 90 percent of startups fail may be inaccurate; the actual number is likely closer to 60 percent. But 60 percent should still give regulators pause. Not every Silicon Valley start-up succeeds, even the promising ones. After all, this isn’t AT&T or Microsoft we are talking about, with their relatively safe dividends and long track records. The recent down rounds among once-celebrated start-ups should remind us that even professional venture capitalists with great track records get it wrong quite often. Are we really expecting everyday investors to do better?
The most relevant issue here, however, isn’t investing savvy or market intelligence. It’s the ability to absorb losses. Presumably, an accredited investor can lose their investment without losing their shirt. Investing in the “hope stocks” of promising but unproven (and often unprofitable) companies is not a game to be played with a retirement account, or money you’re not prepared to lose. The health technology company Theranos, which is dissolving in ignominy even as I write this, fleeced wealthy investors of hundreds of millions. No one needs to cry for Rupert Murdoch or Betsy Devos or other members of the 1 percent who watched their money burn up in that Silicon Valley flameout.
But what happens when it’s the hard-earned savings of the middle class?
I’m not pretending that the government can — or should — protect investors from everything. Markets always involve risk. Public markets, with their financial disclosures and built-in safeguards, evolved for a reason. I’m a staunch advocate of the clarity and transparency that public listings bring to the world of investing. The IPO market is healthy and strong right now, with opportunities to invest in many promising companies whose financials are subject to the more disciplined scrutiny of the public market spotlight. No one is expecting every retail investor to carefully peruse the required SEC financial disclosure forms before purchasing stock in a newly minted Nasdaq company like Dropbox, Roku, or Stitch Fix. But they still benefit immensely from an investing climate in which many analysts are intensively researching and reporting on each of them. Whether or not you believe in efficient market theory — the notion that prices in public markets reflect a full accounting of all existing information — there is little doubt that public valuations include significantly more diversity of expert opinion than private valuations.
I fear this will end in tears. Well-meaning companies that demonstrate some potential and promise will be showered with capital from Main Street investors armed with too much hope and too little information. I think the risk in the SEC’s proposition outweighs the reward. A good regulatory environment should encourage our animal spirits, not let loose the wolves.
Mr. Greifeld is the chairman of Virtu Financial Inc, the former chairman and chief executive of Nasdaq Inc. and a CNBC contributor.