SEC May Make it Easier For Everyone to Invest in Startups

Can we all just relax?

News broke this morning that the SEC is thinking about relaxing the limit that keeps private companies from having more than 500 shareholders. It’s a move that would reshape the tech world, making it possible for companies to significantly delay their IPOs by relying on a broad pool of wealthy individuals to provide them capital to grow. It’s troubling as well, since it would mean more small investors putting money into firms that don’t make their financials public.

“Just because you can afford a car, doesn’t mean you know how to drive one,” quipped Larry Lenihan, CEO of First Mark Capital and a board member at SecondMarket, in a call this morning. “Bitch and moan and call me a socialist, but people do need to be protected from themselves,” said Lenihan. “While I think it makes sense to relax the shareholder limit and the general solicitation ban, this has to come with new regulations and increased transparency in the private markets.”

Union Square Ventures’ Fred Wilson had the opposite reaction to the news. “The best companies will most likely eventually go public and deal with the issues that being a public company presents, but the value creation that occurs pre-IPO has been and will likely to continue to be very significant,” he wrote no his blog, A VC. “And it would be a fantastic outcome if the SEC decides to allow the general public to be a more active participant in the value creation that happens while companies are still privately held.”

Some in the New York venture community see the focus on private markets as misplaced. “I think the SEC and White House should be focused on helping small companies to go public,” Greycroft’s Alan Patricof told Betabeat by phone. “That would have a greater benefit for entrepreneurs and our economy than expanding the scope of these private markets.”

According to the WSJ story, the average number of IPOs each year has plummeted, from 503 during the 1990s to 130 during the aughts. At the same the transactions in private shares has jumped from $2.4 billion in 2009 to $4.6 billion last year. But has the general public really missed out on an enormous opportunity, as Wilson suggests? Certainly LPs in the nation’s top venture funds may have seen great returns, and USV has some big winners in its portfolio of private companies. But as an industry, venture returns over the last decade have been flat to negative.

If the SEC’s response to the boom in private markets is to broaden access to them, both by increasing the pool of possible stake holders and relaxing the ban on soliciting buyers, then it needs to put in place new rules as well. That would help to ensure that platforms like SecondMarket and Sharepost become a productive new paradigm for funding young companies, not an artifact of the cyclical boom and bust in tech, with a new class of smaller investors left holding the bag.

  SEC May Make it Easier For Everyone to Invest in Startups