Private Markets Have Been Reserved for the Wealthy. Should a Test Change That?
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Here's your money briefing for Friday, October 25th. I'm Arianna Espuru for The Wall Street Journal, filling in for J.R. Whelan. The debate over whether wealth or intelligence should determine who could invest in private markets is shifting. Recently, a group of lawmakers have proposed a test to see if someone should have access to these high-risk, high-reward investments. Score enough points and you could be in.
There seems to be this feeling that there needs to be some level of financial sophistication for individuals who want to invest in these securities. But what determines financial sophistication? Is it that you have enough money that if you do lose a lot, you'll be okay? Or if you have this financial knowledge, should that be the determining factor?
Wall Street Journal reporter Cori Dreebush joins me after the break.
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Investing in private companies has long been reserved for the wealthy. But that could be changing. Wall Street Journal reporter Cori Dreebush joins me. Cori, what could be shifting about the way that people buy into private markets?
For the last several years, there's been this growing almost drumbeat to allow more people to invest in private securities or private companies. There have been examples of really big gains happening in private markets. And the feeling is that maybe the best way to determine who is quote unquote sophisticated enough to buy these investments shouldn't be just based on wealth or how much money you earn each year. It should be based on your financial acumen.
What proposal would let more people invest in private companies via a test?
And so what's the proposed solution here?
The SEC and Congress have started proposing and floating this idea of maybe there should be a test. And that test would determine if people are knowledgeable enough to be able to invest in financial securities that are private.
What types of questions would be on this test? I'm picturing a Scantron, you know, college, high school. What is this going to look like?
SEC did make some changes that they could expand access. So people with entry-level stockbroker's license can now invest in private securities as of 2020. But what turns you into a stockbroker is you pass a dreaded Series 7 exam. That's four hours long, just about anything. And it's expensive to take. So the idea is that this test is not going to be as difficult. But it still will quiz individuals on topics such as the types of securities, disclosure requirements under securities laws, corporate governance, financial statements, and the risks of getting involved in these types of purchases.
What's the reason behind implementing a test for this?
On the stock market, you can buy a stock, and if the stock market's open, you can decide to sell whenever you want to. And you can get money back. It might not be the same amount of money that you purchased if the stock price went down, but you can at least get out whenever you need to. In private securities, it's not that simple. So there seems to be this feeling that there needs to be some level of financial sophistication for individuals who want to invest in these securities. But what determines financial sophistication? Is it that you have enough money that if you do lose a lot, you'll be okay? Or if you have this financial knowledge, should that be the determining factor?
And I know that we're talking here about the test, which is proposed legislation. But if it does pass, what would this mean for people who are interested in investing?
The proposed bill from the Republicans on the Senate Banking Committee say that the SEC or another regulator can write an exam that would test this.
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