Clockwork Perspectives

SEC weighs stricter disclosure requirements for larger private companies


Kyle Rose

As the availability of private capital has continued to improve, the number of companies listed on public exchanges has dwindled in recent decades. The hundreds of millions required to properly grow late-stage startups can now be readily acquired from growth equity funds, institutional, and strategic investors. However, access to these markets continues to be limited to accredited investors, or those with sufficient capital that they are deemed by the SEC to be able to handle the inherent risks of illiquid and opaque investments. This definition was also expanded last year to add some industry experts to the pool. Now the SEC is reconsidering who should fit this description and if larger private companies should be subject to more of the same disclosure requirements as their public counterparts.

Because the underwriting of later stage investments is usually delegated by accredited investors to experts through funds and full-time management teams, it is hard to buy the argument (at least on a micro level) that these investors need additional protection. The more important regulatory consideration should be whether lax governance standards on a huge portion of equity markets pose any macroeconomic threat if left unchecked. If investors and policy makers are unable to regularly monitor key indicators like leverage levels or conflicts or interest, or unable to monitor massive job creators for signs of fraud, this could ultimately pose a larger systemic threat than a few privately traded early-stage ventures.

Another key consideration here comes down to fairness. Is it fair that everyday retail investors continue to be excluded from one of the most profitable segments of the market? If the SEC increases disclosure requirements for later stage private companies, it would do well to consider whether an exception to the accredited investor rules for these types of entities would make sense.

The gears of government grind slowly, and it is unlikely that an issue this impactful will be decided any time soon. Democrats and Republicans have already lined up predictably supporting and lamenting the possibility of additional regulation, respectively. It is likely we will end up somewhere between the two extremes, but investors and entrepreneurs would be wise to keep an eye on the SEC as these changes continue to unfold.

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