Should the SEC Make Private Investment Opportunities More Accessible to Retail Investors?
Written by Jasmin Sethi for SCA client, Morningstar.
The SEC has published a concept release soliciting comment on whether it should expand opportunities for individual investors to access exempt offerings, and whether regulatory changes should be created as part of making these private investments, i.e. investment opportunities in private companies and private funds, more broadly available.
We believe that if the SEC moves forward with broadening private investment opportunities, regulatory change will be required.
Here, we take a look at the current state of exempt offerings and our view on their potential expansion.
Private investment opportunities are not widely accessible today
Currently, investments in exempt vehicles such as private equity funds, hedge funds, and startup companies are typically limited to accredited investors and institutions. Accredited investors are individuals who:
Have a net worth (excluding their primary residence) exceeding $1 million individually or jointly with a spouse, or
Surpass an income threshold of $200,000 for the last two years for an individual and $300,000 for a couple.
In practice, most individuals do not seek out these private investment opportunities or even know about them, since their main investments tend to be through their retirement accounts.
While individuals could technically access such opportunities through an IRA, they have generally not been available in defined-contribution plans. This is due to the operational difficulties for recordkeepers in managing valuation, liquidity, and other issues, as well as a lack of clarity around how such investments might satisfy the prudent investor standard of the Employee Retirement Income Security Act.
