Originally uploaded at SSRN.

Abstract

Securities law’s dirty little secret is that rich investors have access to special kinds of investments—hedge funds, private equity, private companies—that everyone else does not. This disparity stems from the fact that, from its inception, federal securities law has jealously guarded the manner in which firms can sell shares to the general public. Perhaps paternalistically, the law assumes that the average investor needs the protection of the full panoply of securities regulation and thus should be limited to buying public securities. In contrast, accredited—i.e., wealthy— investors, who it is presumed can fend for themselves, have the luxury of choosing between the public and private markets.

This Article uses the emergence of new secondary markets in the shares of private companies to illustrate the above disparity, which has long characterized the world of investment access. First, focusing narrowly on these markets reveals their troubling potential effects on the venture capital world, a vital source of startup funding. More broadly, these new secondary markets bring to light the stark contrasts in investing power and access that have always been securities law’s dirty little secret: by making it easier for accredited investors to wield their special privilege, the new markets just make the disparity of investment access more obvious. For example, after Facebook’s initial public offering, it was widely reported that accredited investors had been buying shares of the high-profile company in the three years before it rather disastrously went public—at which point the big money had already been made.

Thus, the increased transparency that the secondary markets bring to the world of private investment makes our overall securities law newly vulnerable to a fundamental critique: government intervention has created an investing climate that lets the rich get richer, while the poor get left behind. The Article acknowledges elements keeping the current system in place, explaining the current inequality of investor access by way of public choice theory: regulators and companies alike favor the status quo. Viewed from the perspective of the little guy, however, inequality in investment access may prove less defensible and ultimately less tenable. I suggest a modest fix: letting the general public participate in the private market via mutual fund investment, something it currently cannot do.

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