SEC Chairman Wants to Let More Main Street Investors In on Private Deals
Jay Clayton outlines overhaul plans in interview, says changes could happen ‘pretty quickly’
By
Dave Michaels
Updated Aug. 30, 2018 2:38 p.m. ET
NASHVILLE, Tenn.—The Securities and Exchange Commission wants to make it easier for individuals to invest in private companies, including some of the world’s hottest investments, which have been out of reach for many people, the agency’s chairman said in an interview.
SEC Chairman Jay Clayton, a Trump appointee wrestling with how to boost flagging interest in public markets, said the commission also wants to take steps to give more individual investors a shot at companies that have for years avoided going public.
Companies including Uber Technologies Inc. and Airbnb Inc., have shunned the public markets in favor of private investors such as venture capitalists. For decades, regulators have typically walled off most private deals from smaller investors, who must meet stringent income and net worth requirements to participate because of the added risk private investing holds.
Mr. Clayton said the SEC is now weighing a major overhaul of rules intended to protect mom-and-pop investors, with the goal of opening up new options for them.
“The private markets are awash in capital these days,” Mr. Clayton said Wednesday in Nashville, where he spoke to groups of entrepreneurs and business-school students. “The question is, who is participating?”
Private firms have grown outside of the glare faced by public companies such as Tesla Inc.,whose founder Elon Musk recently set off a firestorm by tweeting that he planned to take his company private. Mr. Musk has complained that public markets encourage short-term thinking and routinely sparred with short sellers betting against his company’s stock. His plan, which has since been abandoned, has triggered an SEC probe into whether his tweet was misleading. Mr. Clayton declined to discuss Tesla.
Privately sold securities, mostly off the radar of federal regulators, are increasingly how money is raised from venture capitalists in Silicon Valley and other innovation hotbeds because they are lightly regulated and don’t require regular scrutiny from regulators and investors. Those markets also have traditionally been a major source of fraud afflicting small investors.
President Trump also has pressured the SEC to consider the balance between public and private markets, using Twitter two weeks ago to call on the SEC to study letting public firms report earnings every six months, instead of quarterly.
“I’m not wedded to a particular result, but I think we should look at it,” Mr. Clayton said in the interview, conducted Wednesday. He said that the commission is studying the move, and added that even if companies reported earnings less frequently they would still update investors on important trends for the business.
Adjusting the rules affecting private markets also could offer Mr. Clayton, a former Wall Street deals lawyer, a way to make good on his goal to help small investors access more high-quality investments for retirement or other needs.
The SEC plans to issue a lengthy paper in the coming months—known as a “concept release”—that will seek public comment on how to revamp the capital-raising process, including by expanding access to private stock sales.
After that, “I think you could move pretty quickly on this kind of thing,” Mr. Clayton said.
Allowing more people to easily invest in private firms would help address “the massive capital gap in the middle of the country” where there are few venture capitalists and founders have trouble getting cash, said Patrick Henshaw, a vice president at Cintrifuse, a public-private partnership in Cincinnati that connects the city’s major corporations with startups.
The chance to devote part of an individual portfolio to private companies would give investors more diversification and the chance to benefit when firms go public, said Lonne Jaffe, a managing director at Insight Venture Partners, a venture-capital and private-equity firm. It also could lead to a marginally lower cost of capital for the companies, since they would be able to tap another channel of funding, he said.
“I don’t think it’s going to be game-changing,” Mr. Jaffe said. “But you are now exposed to an additional equity instrument you could not have gotten until they became public.”
The paper will discuss helping businesses make sense of the patchwork of fundraising methods allowed by Congress in recent years. Some of those measures made it easier for Silicon Valley stalwarts to stay private longer. Others permitted crowd-funding and “mini-IPOs,” a type of stock sale that allows businesses to tap retail investors but requires they provide them with periodic disclosures and audited financial statements.
Republicans and businesses initially hailed the new public fundraising channels. But they have barely been used in comparison to private offerings, according to SEC data.
Since 2015, companies have raised about $90 million using equity crowdfunding and $1 billion under the “mini-IPO” rule, known as Regulation A+. More than $1.7 trillion was raised during just 2017 through private stock and debt deals.
Mr. Clayton noted the attraction of private offerings at several stops in Nashville, where he spoke to a conference of entrepreneurs at the Wildhorse Saloon, a live-music venue that typically hosts country-music bands and line-dance lessons.
“There are complex offerings where you need a lawyer of the type that I was in the private sector, but you shouldn’t have to hire a high-powered Wall Street lawyer to conduct every private placement,” he told Launch Tennessee’s 36|86 Entrepreneurship Festival, named for the coordinates of Nashville.
Private securities, which can include stakes in anything from an apartment complex or oil well to a biotech company, can offer investors higher returns than publicly traded stocks and bonds. But there is typically less information available about the firms, increasing risks for investors.
Securities firms with a higher number of troubled brokers are more likely to sell private stakes in companies, often targeting seniors, an analysis this year by The Wall Street Journal found.
Rules aim to protect individual investors from such riskier deals. Those who meet certain wealth or income standards—such as household income of $300,000—can participate.
Those investors still must be given lengthy questionnaires and disclosures, steps that promising startups typically find too cumbersome given the limited dollars typically offered by a single person. Instead, startups can tap much more money at one time by targeting a few venture capitalists or corporations.
The SEC hopes to streamline that process and create more “accredited” investors, such as by allowing in people who don’t meet the income or wealth thresholds but have professional licenses or advanced education, Mr. Clayton said.
Mr. Clayton said his thinking evolved about giving small investors better access to the private market as he spent more time at the agency. He said the changes wouldn’t take away investor protections and would result in people getting access to higher-quality deals.
“It came from doing the job and recognizing that for retail investors the opportunity set beyond the public market is pretty low and pretty costly. And pretty risky,” he said. “But people want that.”
Jay Clayton outlines overhaul plans in interview, says changes could happen ‘pretty quickly’
By
Dave Michaels
Updated Aug. 30, 2018 2:38 p.m. ET
NASHVILLE, Tenn.—The Securities and Exchange Commission wants to make it easier for individuals to invest in private companies, including some of the world’s hottest investments, which have been out of reach for many people, the agency’s chairman said in an interview.
SEC Chairman Jay Clayton, a Trump appointee wrestling with how to boost flagging interest in public markets, said the commission also wants to take steps to give more individual investors a shot at companies that have for years avoided going public.
Companies including Uber Technologies Inc. and Airbnb Inc., have shunned the public markets in favor of private investors such as venture capitalists. For decades, regulators have typically walled off most private deals from smaller investors, who must meet stringent income and net worth requirements to participate because of the added risk private investing holds.
Mr. Clayton said the SEC is now weighing a major overhaul of rules intended to protect mom-and-pop investors, with the goal of opening up new options for them.
“The private markets are awash in capital these days,” Mr. Clayton said Wednesday in Nashville, where he spoke to groups of entrepreneurs and business-school students. “The question is, who is participating?”
Private firms have grown outside of the glare faced by public companies such as Tesla Inc.,whose founder Elon Musk recently set off a firestorm by tweeting that he planned to take his company private. Mr. Musk has complained that public markets encourage short-term thinking and routinely sparred with short sellers betting against his company’s stock. His plan, which has since been abandoned, has triggered an SEC probe into whether his tweet was misleading. Mr. Clayton declined to discuss Tesla.
Privately sold securities, mostly off the radar of federal regulators, are increasingly how money is raised from venture capitalists in Silicon Valley and other innovation hotbeds because they are lightly regulated and don’t require regular scrutiny from regulators and investors. Those markets also have traditionally been a major source of fraud afflicting small investors.
President Trump also has pressured the SEC to consider the balance between public and private markets, using Twitter two weeks ago to call on the SEC to study letting public firms report earnings every six months, instead of quarterly.
“I’m not wedded to a particular result, but I think we should look at it,” Mr. Clayton said in the interview, conducted Wednesday. He said that the commission is studying the move, and added that even if companies reported earnings less frequently they would still update investors on important trends for the business.
Adjusting the rules affecting private markets also could offer Mr. Clayton, a former Wall Street deals lawyer, a way to make good on his goal to help small investors access more high-quality investments for retirement or other needs.
The SEC plans to issue a lengthy paper in the coming months—known as a “concept release”—that will seek public comment on how to revamp the capital-raising process, including by expanding access to private stock sales.
After that, “I think you could move pretty quickly on this kind of thing,” Mr. Clayton said.
Allowing more people to easily invest in private firms would help address “the massive capital gap in the middle of the country” where there are few venture capitalists and founders have trouble getting cash, said Patrick Henshaw, a vice president at Cintrifuse, a public-private partnership in Cincinnati that connects the city’s major corporations with startups.
The chance to devote part of an individual portfolio to private companies would give investors more diversification and the chance to benefit when firms go public, said Lonne Jaffe, a managing director at Insight Venture Partners, a venture-capital and private-equity firm. It also could lead to a marginally lower cost of capital for the companies, since they would be able to tap another channel of funding, he said.
“I don’t think it’s going to be game-changing,” Mr. Jaffe said. “But you are now exposed to an additional equity instrument you could not have gotten until they became public.”
The paper will discuss helping businesses make sense of the patchwork of fundraising methods allowed by Congress in recent years. Some of those measures made it easier for Silicon Valley stalwarts to stay private longer. Others permitted crowd-funding and “mini-IPOs,” a type of stock sale that allows businesses to tap retail investors but requires they provide them with periodic disclosures and audited financial statements.
Republicans and businesses initially hailed the new public fundraising channels. But they have barely been used in comparison to private offerings, according to SEC data.
Since 2015, companies have raised about $90 million using equity crowdfunding and $1 billion under the “mini-IPO” rule, known as Regulation A+. More than $1.7 trillion was raised during just 2017 through private stock and debt deals.
Mr. Clayton noted the attraction of private offerings at several stops in Nashville, where he spoke to a conference of entrepreneurs at the Wildhorse Saloon, a live-music venue that typically hosts country-music bands and line-dance lessons.
“There are complex offerings where you need a lawyer of the type that I was in the private sector, but you shouldn’t have to hire a high-powered Wall Street lawyer to conduct every private placement,” he told Launch Tennessee’s 36|86 Entrepreneurship Festival, named for the coordinates of Nashville.
Private securities, which can include stakes in anything from an apartment complex or oil well to a biotech company, can offer investors higher returns than publicly traded stocks and bonds. But there is typically less information available about the firms, increasing risks for investors.
Securities firms with a higher number of troubled brokers are more likely to sell private stakes in companies, often targeting seniors, an analysis this year by The Wall Street Journal found.
Rules aim to protect individual investors from such riskier deals. Those who meet certain wealth or income standards—such as household income of $300,000—can participate.
Those investors still must be given lengthy questionnaires and disclosures, steps that promising startups typically find too cumbersome given the limited dollars typically offered by a single person. Instead, startups can tap much more money at one time by targeting a few venture capitalists or corporations.
The SEC hopes to streamline that process and create more “accredited” investors, such as by allowing in people who don’t meet the income or wealth thresholds but have professional licenses or advanced education, Mr. Clayton said.
Mr. Clayton said his thinking evolved about giving small investors better access to the private market as he spent more time at the agency. He said the changes wouldn’t take away investor protections and would result in people getting access to higher-quality deals.
“It came from doing the job and recognizing that for retail investors the opportunity set beyond the public market is pretty low and pretty costly. And pretty risky,” he said. “But people want that.”
