Regulators, investor advocates warn against deregulating private markets

State regulators and investor advocates are urging the Biden administration not to include provisions in economic stimulus legislation that would make it easier for private companies to sell unregistered securities.

In a recent letter to the President Joe Biden, the North American Securities Administrators Association and 13 investor and consumer groups said reducing regulations surrounding so-called exempt offerings would not spur economic growth and could harm investors.

“On the contrary, further expanding the pool of securities exempt from the disclosure and investor protections afforded by the federal securities laws has the potential to damage the economic recovery, including by increasing the probability of fraud and hindering the efficient allocation of capital,” the letter states.

State regulators have been raising red flags about efforts in Congress and at the Securities and Exchange Commission to provide more access to private markets for ordinary investors and expand private offerings by start-up companies. Currently, investors must meet certain income or wealth thresholds to invest in private securities.

Last year, Rep. Patrick McHenry, R-Texas and ranking member of the House Financial Services Committee, introduced three bills to address the economic slowdown caused by the pandemic through private-market reforms.

As the Biden administration and lawmakers begin negotiations over Biden's $1.9 trillion coronavirus relief proposal, state regulators are concerned that private-market deregulation could become a bargaining chip.

“The letter’s goal is to explain why these proposals should not be on the table when these discussions happen,” said Michael Canning, NASAA director of policy and government affairs.

A spokeswoman for McHenry did not respond to a request for comment.

Organizations that promote alternative investments pushed back against the preemptive strike.

Allowing investors broad access to financial markets coupled with appropriate protections “is a positive driver of economic growth,” Anya Coverman, senior vice president and general counsel at the Institute for Portfolio Alternatives, said in a statement.

“We should always look for ways that our system can be safely improved for the benefit of investors,” Coverman said. “Those improvements have and should always result from due diligence and debate in order to arrive at the best possible solution for Americans regardless of the regulatory or legislative vehicle that makes that possible.”

John Harrison, executive director of the Alternative and Direct Investment Securities Association, encouraged the Biden administration, Congress and the SEC to allow “a broader spectrum of American savers” to participate in private markets.

“We need to retire the arrogant, elitist notion that Americans are incapable of making wise investment choices,” Harrison said in a statement. “Private securities must be prudently democratized so that more Americans, not less, may take advantage of these powerful wealth-building tools and provide greater investment to the U.S. economy.”

In early November, the SEC approved a rule that would streamline regulations and increase the amount of capital that can be raised through private securities.

But the effective date for the measure is March 15, giving the incoming Democratic-majority SEC a chance to impose a delay and potentially modify or scrap it. Democratic control of Congress also provides an opportunity for lawmakers to overturn it.

The Biden administration should halt expansion of private securities markets until the SEC has collected more data on the impact on ordinary investors, NASAA said.

“In developing its policy response, your Administration should commit, from Day 1, to giving at least equal consideration and attention to the expectations and needs of retail investors who, because of the expansion of private markets, are increasingly directly exposed to the risks of these markets,” the NASAA letter states.

Barbara Roper, director of investor protection at the Consumer Federation of America, predicts a different approach to private market regulation under Gary Gensler, the Biden administration’s nominee for SEC chairman, than the agency took under previous Chairman Jay Clayton.

Opening private markets to more ordinary investors was a priority for Clayton, who argued that individual retirement savers should have access to private equity and hedge funds just as institutional investors do.

“I’m confident the Clayton era of finding expansive new ways to expose financially vulnerable and unsophisticated investors to risky and opaque private offerings is over,” Roper said.

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