Not the stocks, mind you, but the market itself. There are less than 4,000 companies listed, and new companies have less and less appetite for going public. Conversely, there are over 8,000 private-equity-backed companies in the US, and growing.
There are a couple of problems with the stock market mouldering. One is that this is where most of America keeps their retirement. Common wisdom is that if you invest in a nice index fund, then your money should grow apace to the US economy. This works until the economy grows without the market.
Suppose the public market continues to dwindle. New companies stay private, so the companies on the market get older and older. Old companies have a tendency to grow more slowly and, eventually, go out-of-business. Without new blood, I’d guess the market would ossify around a few large surviving stocks.
Without the possibility of explosive growth in the public markets, any money that could go into private equity would (and is). Unfortunately, at the moment, private equity is only open to accredited investors (i.e., the already well-off) so most of America won’t be able to participate at all.
It’s important that everyone in the US:
- Has the opportunity to benefit from economic growth and
- Able to participate in a way where they won’t get fleeced.
As I understand it, the SEC doesn’t allow the middle nor lower class to invest in private companies because they don’t want people who are barely making ends meet to be hoodwinked out of all of their money.
Why is investing private equity riskier than public companies? Small companies tend to be riskier, but there are plenty of private companies that are larger than public ones. If I understand correctly, most of it is related public companies being better-regulated than private ones.
My knee-jerk reaction is, then: how can we get more companies to go public? And maybe that’s a good goal. However, why are we in the pocket of big-market here?
The goal is to allow more people to benefit from private companies, not bail out banks/NYSE/NASDAQ. So one possible solution is making the private market more liquid while adding protections for investors.
Making the private markets more liquid is easy: just let anyone buy and sell shares without being accredited and without needing the company’s approval.
However, given that something like 50% of VC firms don’t even return the capital they invest and (almost) everyone there is doing this professionally and on the up-and-up, making sure people aren’t fleeced seems more difficult. My strawman proposal is to tighten up regulations on private companies based on top-of-line revenue. Making $1M/year? Great, you need some sort of S-1-like prospectus for investors. Making $10M/year? Great, you can’t just spout off about “funding secured” on Twitter. Making $50M/year? Great, you basically have to follow all of the rules public companies do. I dunno, it’s a first draft. But I think it’s important the SEC gets on making private equity more accessible before the middle and lower classes are left in the dust.
Kristina Chodorow's Blog 