Since he became chairman of the SEC, Jay Clayton has been clear about one thing: he wants to reverse the decline in IPOs. His action has only backed up his words. He has allowed companies to file IPO registration statements on a confidential basis. He has relaxed reporting requirements. He has floated the radical notion of allowing public companies to block investor lawsuits.
In bending over backward to encourage IPOs, he has done everything short of a limbo dance. Which made it strange to hear that Chairman Clayton just voiced a desire to open up private companies to investment from Main Street investors. It’s hard to imagine a policy that would be more effective in discouraging IPOs. If companies can take investment dollars from anyone while staying private, after all, why go through the headache of going public?
Clayton claims to be serious about the idea, and the SEC is going so far as to develop a proposal around it. None of it seems to make sense, until you consider the possibility that when it comes to companies that refuse to go public, the SEC is adopting a new, yet time-tested philosophy: “if you can’t beat ‘em, join ‘em.”
The Ubers and Airbnbs of the business world are currently inaccessible to everyday investors due to SEC-mandated firewalls like income and net-worth requirements. Those barriers stem from the view that some investors need saving from themselves. Privately held companies aren’t required to provide the same level of transparency as issuers listed on the major stock exchanges, which increases their risk as an investment. The thinking goes that, as opposed to smaller investors, venture capitalists and other deep-pocketed players are better equipped to assess these murky investment opportunities – and take a more rigorous approach to managing their own risk.
On the flip side, critics would argue these paternalistic safeguards deny retail investors the chance to cash in on the upside of startups that hit it big. Clayton, who admits to an evolution in his thinking on the subject, may be coming around to this view.
It might not even be that far from where he started. Consider some of his first public remarks as SEC chairman: “To the extent companies are eschewing our public markets, the vast majority of Main Street investors will be unable to participate in that growth.” You could interpret that as a call for more businesses to go public. If your primary goal is broadening investment opportunities for retail investors, cutting them in on private stock effectively gets you to the same destination.
Of course, you expose them to a lot more potential fraud in the process. But maybe, just maybe, Clayton’s SEC is recognizing a limit on its ability to induce IPOs, and has decided to let Main Street investors “join” the private market instead. Clayton himself acknowledged it’s “pretty risky,” before adding: “But that’s what people want.”