Regulators are looking into creating more access to the private markets for investors, according to Marcus New, CEO of Pre-IPO Marketplace InvestX.
He said there’s quite a bit of tailwinds behind the regulators in terms of wanting to expand and open up the private markets.
The growing demand of retail investors’ appetite to access the private markets has pushed regulators to broaden access.
“Regulators are looking at ways to make sure that certain participants in the marketplace like retail investors, or less experienced investors, don’t get taken advantage of by institutional investors,” he said.
The private markets are raising more money than the public markets and the late-stage private markets are merging towards the public markets in terms of liquidity, participation and regulation, New said.
One of the challenges in the private markets is that information is scarce, which means that certain people have information and have an advantage over others.
“Regulators are looking to address some of these issues,” he said.
Another challenge is price discovery, New said, adding that the regulators are concerned that some institutional investors have an advantage over others.
“There needs to be some minimal disclosure in place and the regulators are going to address that. It doesn’t have to be a level of disclosure as public companies have under Regulation FD (Fair Disclosure),” New said.
Congress and the Commission have steadily relaxed restrictions around private markets in a manner that has spurred their dramatic growth, according to Commissioner Allison Herren Lee at the US Securities and Exchange Commission (SEC).
As a result, an ever-increasing amount of capital is raised in these markets each year, with private offerings accounting for approximately 70% of new capital raised in 2019.
“The vast amount of capital in these markets, attributable in part to policy choices made by the Commission over the past few decades, has also created new, but no longer rare or mythical, kinds of businesses known as Unicorns – private companies with valuations of $1bn or more,” she said.
Commissioner Lee said that investors may lack adequate information about the business and operations of these companies.
“While large sophisticated investors have some ability to obtain disclosure, they sometimes almost inexplicably fail to do so,” she added.
She added that investors and the public are increasingly left in the dark when it comes to ever-expanding segments of the economy.
This has implications for the future vitality of the private markets (which depend in many ways on the transparency and discipline of public markets) and it has implications for optimizing capital allocation across both markets, Commissioner Lee said.
“Time and again, we take regulatory action on the grounds that it may encourage companies to go public. But if that is a legitimate goal of the securities laws, then we should also work to ensure that the boundaries between public and private markets are sensibly drawn and maintained, and that the incentives for going public remain balanced,” she said.
New said he doesn’t quite agree with Commissioner Lee’s comment that investors are increasingly left in the dark.
“Because there is a lot of insatiable demand for it, there is a potential that some can get taken advantage of,” he said.
“I think that there is a kind of a medium ground that the regulators can go to, which would be some basic level of annual financial disclosure, so it’s not burdensome upon the private company and doesn’t have anything that takes away some of their competitive advantage,” he added.
