Written Testimony before the United States House of Representatives Committee on Financial Services Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets, 'Examining Private Market Exemptions as a Barrier to IPOs and Retail Investment'

22 Pages Posted: 14 Oct 2019

Date Written: September 11, 2019

Abstract

The SEC’s “Concept Release on Harmonization of Securities Offering Exemptions” seeks public comment on various items, including proposals (1) to expand or create new registration exemptions, (2) to loosen the restrictions on the secondary trading of private securities, and (3) to relax the standards for what constitutes an “accredited investor.” Such proposals would have the primary aim and effect of allowing small-dollar retail investors to invest directly in private securities.

Proposals to usher retail investors into the private markets espouse two laudable goals: (1) remedying a perceived inequality of opportunity for retail investors and (2) encouraging efficient capital raising. It is my view, however, that these proposals fail on both counts, and would in fact exacerbate the very problems they purport to address.

The notion that retail investors are “missing out” on the opportunity to invest in private securities is based on faith, rather than data. The available research suggests that they would do materially worse on average in the private markets than in the public markets. Nor would direct retail investment in the private markets be good for capital allocation: given the current glut of capital, firms that still cannot attract capital from institutional investors are the smallest firms with the very worst prospects.

There is considerable room for disagreement over whether public companies and the public markets are subject to too much regulation. The same cannot be said for whether increasing retail-investor presence in the private markets would be good for investors or for capital allocation.

If Congress and the SEC are concerned about shrinking investment opportunities for retail investors, the solution lies not in throwing retail investors to the wolves in the private markets, but rather in ensuring a healthy pipeline of companies going and remaining public.

Keywords: retail investors, private capital, public companies

JEL Classification: K22

Suggested Citation

de Fontenay, Elisabeth, Written Testimony before the United States House of Representatives Committee on Financial Services Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets, 'Examining Private Market Exemptions as a Barrier to IPOs and Retail Investment' (September 11, 2019). Available at SSRN: https://ssrn.com/abstract=3462768 or http://dx.doi.org/10.2139/ssrn.3462768

Elisabeth De Fontenay (Contact Author)

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

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