Securities Lawyers Blog
We now have the answer to what they will think up next. According to a New York Times article, one of Wall Street’s most exclusive investment products, sold to the wealthy, is moving toward the mainstream investor. Private equity funds. These vast pools of capital that buy and sell companies will become accessible to smaller investors if supports have their way under a plan being contemplated by the Nasdaq stock exchange.
The plan calls for a market where investors in private equity funds can sell their interests to individuals whose net worth falls short of the usual requirements for such investments. Today, private equity funds are limited by the Investment Company Act of 1940 limits their investors to “qualified purchasers,” or individuals with at least $5 million in investments.
Other rules that stand in the way of the sale of alternative investments to the masses include Regulations D. Under Regulation D, private placements can only be sold to “accredited investors.” Under Rule 501 an “accredited investor” is any person who has a net worth in excess of $1,000,000 — excluding residence — or has an annual income in excess of $200,000 in two most recent years.
Prior to the financial crisis brokers could more easily sell these investments to many middle class families because the former Rule 501 allowed brokers to include the value of the investors home in making the income determination. Now in the post-crisis world and with the change in the accredited investor standard, the pool of eligible investors is rapidly shrinking.
Enter Wall Street “innovation.” Private equity giants such as like Kohlberg Kravis Roberts, the Blackstone Group and the Carlyle Group want to tap into savings of moms and pops across the country by allowing smaller investors into their funds. In the past, these firms raised billions from sophisticated institutional investors, pension funds, university endowments, and ultra-wealthy investors who have the financial ability to commit and potentially lose millions of dollars. If these firms have their way small time investors can invest alongside huge institutions.
Under the plan, one day an average joe will be able to log-in to their e-trade account and buy private equity. However, I simply can’t see how this will end up being beneficial for mainstream investors. Most brokers will peddle these private equity products as safe and diversified vehicles. Since these funds will have no trading history, investors will be completely unaware as to the potential failure rate of the fund’s underlining assets. Moreover, such funds will be plagued by opaque and confusing valuations that will be easily manipulated to serve the fund’s purposes at the expense of investors.
For those waiting for Wall Street to bring us an innovative product that won’t tank the economy or their retirement savings, keep waiting. The attorneys at Gana Weinstein LLP are experienced in representing investors to recover their financial losses. Our consultations are free of charge and the firm is only compensated if you recover.