The SEC’s Attempt to Reel in the Big Fish

Private companies aren’t subject to the same regulations that publicly traded companies are, but according to SEC Commissioner Allison Lee, that may soon change.

Non-public companies may soon need to file more information with the SEC, similar to that of public companies such as earnings, business outlooks, risks, and manager pay. Without this data, investors may lack adequate information about the business and operations of these private companies.

According to the SEC

Many private companies enjoy the ability to operate and take on investors without the hoops the SEC has in place for public companies, however, the lack of transparency is becoming problematic in the eyes of Big Brother. Allison Lee says that big firms “can have a huge impact on thousands of people’s lives with absolutely no visibility for investors, employees and their unions, regulators, or the public.”

According to the SEC, the explosive growth of private markets has significantly increased the overall portion of the equities markets and economy that’s non-transparent to investors, markets, policymakers, and the public.

They are interested in cracking down on large private companies, not small businesses, given that these companies can have an immense impact on the economy at every level from local to national. For this reason, the commission is calling for periodic reporting to increase transparency.

The Other Side of the Argument

Some tout the strict and cumbersome regulations the SEC imposes on public companies as the reason for the expansion of private markets. If going public were more appealing, larger private companies may not be private at all.

However, even if the SEC takes steps to enhance the draw to go public, many companies would then face the significant cost associated with the switch and the ongoing costs of reporting. It would also dispel the flexibility companies were given with the JOBS Act, which eliminated the need for companies with fewer than 2,000 shareholders to register with the SEC.

The Impact on Investors

The increased oversight Lee is calling for will not only impact private companies but also their investors as the SEC is also considering tightening the investor criteria for those that can access private markets.

This is likely an effort to restrict investment into private markets to those who can afford the risks.

Currently, through Rule 506(c), qualified entities and individuals, known as accredited investors, feed much-needed capital into the private market. The difference between rule 506(b) vs 506(c), is that unqualified investors have access to the same financial information required for Regulation A offerings. This transparency is a critical step already enacted to safeguard investors, while at the same time protecting the freedom of the private investment industry to grow even more.

It’s important to maintain knowledge of these regulations and how they protect investors, verified or otherwise, as well as the continual changes enacted by the SEC that affect investors and the private companies they’re invested in.

Nothing is Final

The SEC has yet to put specific regulations in place or to provide a timeline for doing so, so nothing is set in stone. However, large private companies and investors in private markets should be aware that change is likely coming.

If and when increased oversight goes into effect, it’s important to stay compliant with SEC federal law and adjust accordingly. As a private company, if you’re looking to raise capital, you can utilize Verify Investor to find accredited investors both now and as regulations change.