Investing in companies before they go public [pre ipo stocks]
The US Securities and Exchange Commission has proposed changing its long-standing definition of a professional investor to allow more Americans to buy private stocks.
The regulator hopes that the changes will make it easier for retail investors to access the growing pool of companies, which increasingly remain private without going public. This is of concern to some investor advocates, who say that even seasoned investors have a hard time identifying problems in private companies..
Under current SEC rules, individuals wishing to invest their money in high-risk, high-yielding private markets must earn an individual annual income of over $ 200,000, or $ 300,000 in total annual income of both spouses, and have at least $ 1 million in assets. not including housing.
These standards define the concept «accredited investor».
Wednesday’s proposed changes for public comment would expand the definition to include an investor qualification test, «based on professional knowledge, experience or certificates».
The SEC said it is not yet clear how many people will meet the expanded definition, but the regulator is trying to attract suitable investors, such as hedge fund employees and license holders, who may not qualify for income and solvency criteria, but «aware» about the risks of private offers.
The SEC initiative does not seek to raise current income or wealth determination requirements, but asks for comment on whether the threshold should be lowered in areas of the United States where income may be lower.
The changes will also provide access to more institutional investors, including the so-called outreach category for organizations with investments of more than $ 5 million..
SEC, led by Republican-appointed chairman Jay Clayton, seeks to make public capital markets more attractive to companies since 2017.
At the same time, the SEC tried to expand the range of private offers. This sector attracted $ 191 billion in the first nine months of 2019, which is almost the same as the volume of capital raised for the entire 2018..
«I believe it is important to focus on solutions that provide access to investment opportunities on essentially the same terms and conditions as those that would be available to institutional investors with protection … which are similar to the protection in our public market», – said Clayton. Wednesday.
Wall Street would most likely approve of the move, as stock market participants have long advocated relaxation of regulation..
In this regard, the recent IPO failure of office rental company WeWork can be used as an example of how even seasoned investors sometimes fail to find the pitfalls of private companies. WeWork IPO Had To Be Held In September After Weak Investor Response Over Concerns Over Corporate Governance Standards.