The market is typically off-limits to ordinary investors, but that could change
The Uber company logo is displayed on a screen at the New York Stock Exchange during morning trading on February 14, 2024 in New York City. (Michael M. Santiago/Getty Images)
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}When you think of startups like Uber or Airbnb that turned into large companies, wouldn’t it have been nice to invest in them during their early days? But unless you had access to the private market, that wasn’t an option. Ordinary investors — known as retail investors — are generally not permitted to invest in private companies that issue stock, or in venture capital/private equity funds that invest in these companies. The restriction is largely meant to protect retail investors from private market risks like low liquidity and the chances of a startup folding. Instead, wealthier individuals who qualify as accredited investors are able to invest in the private market, as regulators generally deem that they are in a better position financially or informationally to handle these risks.The rules could change under the Trump administration, particularly if Trump’s nominee to lead the Securities and Exchange Commission, Paul Atkins, is confirmed. But before you get excited about finding the next Ubers of the world, it’s important to recognize the risks that could come from any changes in the current setup. Private market returns sometimes — but certainly not always — exceed public market performance. With greater risk can come greater reward. Plus, companies are staying private for longer and the number of private equity-backed companies is growing, which potentially furthers the wealth gap, given that high-income individuals have access to investments that the general public does not. Broadening accessThe exact ways the SEC could expand access to the private market remains to be seen, but looking at past changes and statements could provide some clues.In the previous Trump administration, the SEC “definitely had more of a lenient stance and was more pro-capital formation and allowing greater access to the market, including private markets,” said Amy Lynch, founder and president of FrontLine Compliance. Under SEC chair Jay Clayton, for example, the SEC made some changes to the definition of an accredited investor to enable qualification based on professional experience, rather than just net worth or income. The next SEC could go even further, Lynch said. “They could once again change the definition of an accredited investor to allow even more individuals to qualify,” Lynch said.For example, the SEC could change the definition of an accredited investor to allow those who have professionally managed accounts to invest in private offerings, similar to what was initially proposed in 2019 but didn’t make it into the final rule changes in 2020, she said. The SEC could also could give companies more leeway in terms of how and to whom they can of
