The SEC’s Small Business Capital Formation Advisory Committee and the Asset Management Advisory Committee (“AMAC”) recently met to discuss the changing dynamics in Pre-IPO investing. Some prevalent trends were addressed, and recommendations made. The biggest take away – this is on the SEC’s radar and breaking down the regulatory barriers of entry is inevitable.
The growing demand of retail investors’ appetite to access the private markets has pushed regulators to broaden access. Considerable wealth has been generated by some of our country’s most dynamic private companies, and in turn their investors.
Crossover investor impact on the VC ecosystem:
There has been a big trend with “crossover investors” increasing their investing activity in late-stage, Pre-IPO rounds. A crossover investor is a public equity investor, such as such as a Mutual Fund, Hedge Fund and others that traditionally focus on public companies. As companies have delayed entering the public market, skilled crossover investors have increasingly turned to private deals as an investment strategy, entering the company at the Pre-IPO stage and seeing it through the IPO’s. With nearly $60 billion of venture capital in 2020—accounting for 36% of total deal value – attributed to crossover investors, these investors are making an impact on the VC ecosystem and changing the dynamic of capital raising and the exit strategies leading up to public offerings. Last year 74% of IPOs by count and 77% by value included crossover investment in Pre-IPO rounds. i
Progress for the retail investor:
The AMAC approved a report to recommend extending retail investors access to private-equity, private-debt and real-estate vehicles. The report authored by AMAC on private investments stated, “[w]e believe that the SEC should consider how to amend the regulatory framework to provide wider access to private investments by retail investors whilst maintaining appropriate safeguards.” ii The recommendation doesn’t change the rules, it provides support for the broader push by regulators to extend access, a change long sought after by asset managers.
Currently, investments in private funds are limited to institutional and high net worth investors. Retail investors, that do not meet the requirements of accredited investors, are precluded from investing in this burgeoning asset class. There has been a push by the regulatory bodies to increase access for retail investors, with the pretense that the current rules deprive most people of access to significant investment opportunities. The qualifications for accredited investors have been evolving to allow more retail investors access to private placements.
Gary Gensler, SEC Chairman, told the Senate Banking Committee on September 14th, “I believe we can enhance disclosures [of private funds], better enabling pensions and others investing in these private funds to get the information they need to make investment decisions. Ultimately, every pension fund investing in these private funds would benefit if there were greater transparency and competition in this space.” iii
It’s evident that the SEC is listening to the stories on the ground and regulatory momentum is there. The Committees will continue to explore ways that more investors might participate in and benefit from the innovative and dynamic private markets. This inevitable shift and market demand is forcing broker dealers and advisors to innovate and find access to these insatiable Pre-IPO securities.
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