There is a revived push to allow mom-and-pop investors to buy shares in private companies, something from which they have been generally prohibited.
The state of play: At issue is how a lot of startup value creation has become over-weighted to the private markets, with fewer gains being generated post-IPO.
It wasn't always this way. Amazon, for example, went public in 1997 with a market cap of just $382 million. Google took the plunge 8 years later at a $23 billion market cap, still just a fraction of its subsequent worth.
- Combined, the two companies raised less than $100 million in venture capital — in a pre-cloud era of higher fixed IT costs.
- Today, 4 different startups announced $100 million+ rounds.
The current environment was created by 3 main factors:
- Low interest rates. This forced investors to search for yield, in order to beat the benchmarks, and that leads to increased interest in alternative assets like venture capital and growth equity. Included in the rush have been startup "tourists" like mutual fund, hedge fund and sovereign wealth fund managers.
- Bull public equity markets. Even if a public pension maintains a stable allocation to venture capital and growth equity, it represents more actual dollars.
- The JOBS Act of 2012. When passed with bipartisan support, most of the attention was on how it would permit equity crowdfunding for startups. Plus the advent of "confidential" IPO submissions and some new general solicitation provisions. But it also eviscerated the so-called 500 Shareholder Rule, which basically forced startups (including Google) to go public once they reached a certain scale.
The big picture: SEC chair Jay Clayton has regularly bemoaned how Main Street investors are being shut out of private capital formation, saying in a speech last week that his agency will "take a fresh look" at enabling retail access. It's possible this would increase a relaxing of accredited investor rules, which conflate wealth with sophistication.
- Also last week, the House Financial Services Committee held a hearing on the matter. This was the one in which Rep. Alexandria Ocasio-Cortez mistakenly suggested that retail investors had access to WeWork, and therefore got "fleeced" by its recent valuation drop.
Bipartisan consensus is that D.C. must make it easier for startups to go public, so that they'll no longer want to remain private.
- But it's not filing costs or reporting requirements that are creating "unicorns" on the sidelines.
- It's broader market conditions, which only have been exacerbated by recent policy pushes: White House pressure to lower interest rates even further, corporate tax cuts juicing public equities, Clayton and the SEC's refusal to revisit the 500 shareholder rule change.
The bottom line: D.C. can help mom and pop, but only if it first comes to grip with how it hurt them.
Go deeper: The 55 minotaur companies