SEC Chairman Wants to Let More Main Street Investors in on Private Deals

1 | By Shah Gilani

A Wall Street Journal article from August 30, 2018, titled SEC Chairman Wants to Let More Main Street Investors In on Private Deals, (eerily similar to my headline…) really grabbed my attention.

As in, “Really?”

While it’s a good idea on the surface – letting retail investors buy unregistered securities in would-be unicorns (private companies with a valuation of over $1 billion) so they can get rich and be eligible under current regulations to buy into hard-to-value deals restricted to “accredited” investors – there’s no way to adequately protect them in the jungle of private placement offerings.

And there’s much more just beneath the surface.

Here’s the truth behind why this isn’t the best idea…

An Elite and Exclusive Club

U.S. Securities and Exchange Commission chairman Jay Clayton, in a recent speech at the Economic Club of New York, an elite and exclusive club whose “membership is curated from the senior executives and leaders in New York City,” said, “To the extent companies are eschewing our public markets, the vast majority of Main Street investors will be unable to participate in that growth.”

Mr. Clayton was referring to the fact that since the 1990s flood of IPOs, fewer companies are going public and opting instead to remain private. They choose to sell equity interests to venture capitalists and accredited investors rather than selling shares of their company to the public.

That’s fine for institutions and accredited investors, who, by SEC definition:

  • Have a net worth – excluding their home – of at least $1 million, or;
  • Have income in excess of $200,000 a year in each of the two most recent years, or;
  • Joint income with their spouse in excess of $300,000 in each of those years, and has a reasonable expectation of reaching the same income level in the current year, who can buy into private placement deals.

The problem as Jay Clayton and others see it is the elite and exclusive accredited investor club prevents everyday retail investors – including mom and pop, retired and elderly investors – from getting rich on companies that become unicorns or go public, handing early investors staggering rewards.

There’s a “sucker born every minute” club.

According to the Wall Street Journal, “If more retail investors got access to companies before they launched an initial public offering, the move would create another alternative for companies that already have ample access to private cash, and a possible new avenue for brokers’ commissions.”

Now there’s a good reason to let unsophisticated investors who can’t afford to lose big-time – while trying to make it big-time – run free in the Wild West world of private placements.

Why not make it easy for unscrupulous companies and brokers to soak a gigantic, easily fleeced public into throwing money and commissions at dream weaving shysters?

Not that most, or even many, companies trying to raise money through private placements are unscrupulous – they’re not – and not that all brokers are unscrupulous (though too many are on the edge), but opening private placements to unsophisticated investors is a train wreck waiting to happen.

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Let Your Broker Be Your Guide

While adequate disclosures are necessary for private placement offering documents, I’ve read hundreds that are anything but transparent.

Sure, the bases are usually covered in terms of what would constitute adequate disclosure, but it takes a professional and regular investor in private placement deals to read between the lines.

Average, unsophisticated mom and pop investors aren’t capable of understanding what undisclosed risks are there.

Opening protective floodgates to let retail investors jump into private placement deals will only open the floodgates for would-be con artists and practiced shysters.

So, let your broker be your guide.

Brokers come in all shapes and sizes. If you find one who is good at what they do and has your best interests at heart, they can make you very comfortable – if not rich.

But there are plenty of suspect players in the brokerage biz and a lot of them play the private placement game.

A recent Wall Street Journal analysis revealed, “Securities firms with an unusually high number of troubled brokers are selling tens of billions of dollars a year of private stakes in companies, often targeting seniors… In a review of more than a million regulatory records, the Journal identified over a hundred firms where 10% to 60% of the in-house brokers had three or more investor complaints, regulatory actions, criminal charges or other red flags on their records – significant outliers in the investment community. These brokerages helped sell to investors more than $60 billion of stakes in private companies, known as private placements.”

That’s what I’m worried about.

More than $710 billion of private placement interests were sold in 2017. That’s a lot of money and a lot of opportunity for brokers.

In the review mentioned earlier, it was said, “Sales of private placements are so lucrative to the brokerage firms that they are a perennial concern for regulators,” said Brad Bennett, former enforcement chief at the Financial Industry Regulatory Authority. Issues on the regulators’ radar, he said, include whether the private placement offers a stake in a legitimate business, what selling perks or markups the brokers get, and how it is sold to investors.”

Don’t get me wrong, I’m all for retail investors getting a better, fairer shake in America’s too often rough and tumble capital markets.

But opening private placements up to unsophisticated investors, in the hope that they’ll find the next Uber or Airbnb, just isn’t the way to go.

Maybe the SEC should make it easier and cheaper for companies to go public and do a better job of eliminating dark pools and not allow high-frequency trading shops to read customers’ trading orders before reach exchanges, so the public trusts their chances in the market.

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That would be a better starting track for Mr. Clayton to run on.

But if you want a fairer share in these crazy volatile markets, there’s a better way to do it – and it’s not through the advice of the big wig CEOs and greedy Wall Street fat cats.

You might remember me mentioning that by Halloween – Wednesday, October 31 – of this year, the average stock traded on Wall Street is poised to plunge by at least half, potentially annihilating the investments of millions of traders.

This crash could’ve been avoided, but thanks to grimy money managers and politicians, there’s a $6 trillion time bomb at the heart of the stock market. And none of those crooks will be worrying about your financial future.

But, there’s a way to protect yourself against this catastrophe – all while receiving checks of up to $6,833 per month.

My friend and colleague, Money Morning’s Chief Investment Strategist Keith Fitz-Gerald, through painstaking research, has a solution for you – so you and your investments can be protected while everyone else shakes through the storm.

Click here to learn more.


Shah Gilani

One Response to SEC Chairman Wants to Let More Main Street Investors in on Private Deals

  1. Roger Bryenton says:

    What nonsense! There are thousands of brokers constantly fleecing, churning and ill advising on “good investment opportunities”. Look at the record of bad returns on mutual funds! I can squander / gamble on options – no one to stop me. Why not allow us to invest in emerging ideas – 3D printing, or Square – the easy, small business credit card reader? GREED! Disgusting.

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