Washington’s Proposed Rules to Protect Investors Could Widen the Wealth Gap

The Securities and Exchange Commission is pushing for significant changes in how private funded companies operate and who can invest in them, the agency said this week. The proposed changes probably won’t benefit rank and file American investors but will likely help people who are already rich get even wealthier.

While the details remain unclear, the SEC says it wants to increase the financial transparency of large companies which raise money away from the public markets. In addition, the regulator wants to limit the ability of people with less than $200,000 in annual income or $1 million in net worth to invest in non-public companies. In short, the current system, which already excludes the vast majority of Americans, could get more restrictive. In turn, the changes could widen income inequality, something which the Biden administration says it wants to reduce.

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“This would be a significant step backward in financial equality in capital markets,” says Phill Haslet, co-founder of EquityZen, a financial company that specializes in investments in private companies. “We should be making capital markets more inclusive, not less.”

The first part of the equation is improved transparency of larger private companies. That probably won’t be welcomed by the companies themselves, but investors will almost certainly receive such a change warmly because more disclosure allows Wall Street to make better informed decisions.

“Generally speaking, these companies don’t want to give out much information,” says Nicholas Economides, a professor of economics at NYU Stern. “Rightly or wrongly, they are concerned that their business plans are going to become known, and they want to keep those secrets.” In other words, private companies like operating without exposing too much information to the outside world.

The SEC’s pending push for more disclosure of key information from private companies comes as the number of U.S. public companies has dwindled to levels far below the levels seen a quarter-century ago. At the end of 2019, there were 4,266 public companies, down from 8,090 in 1996, according to World Bank data. The current level is similar to that in the 1970s when the economy was far smaller than it is now.

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The drop in the number of listings came mainly following the passing of the Sarbanes-Oxley Act in 2002, which introduced a slew of new, and largely onerous regulations that public companies and their leaders needed to follow. As the full burden of the rules became clearer, fewer enterprises went public. That also had the advantage of keeping private company information out of the limelight and away from newspapers, investors, and competitors.

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That lack of financial disclosure has clearly irritated some market professionals. “I think the lack of transparency in private markets is problematic and willful,” says Dr. Richard Smith, author of the Risk Rituals financial newsletter and a financial markets expert

Meanwhile, the private capital markets have boomed, allowing more non-public companies to grow large, many with valuations of $1 billion or more. It’s those so-called unicorn companies that the administration wants to …read more

Source:: Time – Business

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