“It is difficult to perform a comprehensive marketwide analysis of investor gains and losses in exempt offerings given the significant limitations on the availability of data about the performance of these investments,” the commission wrote.
The opaque nature of the private market also increases the risk for fraud.
Ms. Seidt, the Ohio securities commissioner, told the S.E.C. Investor Advisory Committee in November that more than 100 state actions across the country had involved private offerings in the prior two years. Over a thousand investors had total losses of more than $100 million, she said. And that was only a partial snapshot.
“These private offerings have been and remain the most common source of state enforcement action,” she told the committee. Before adopting any rules, she said, the S.E.C. needs to produce research that illustrates how packaging private investments into a fund would be safe.
Even constructing such an investment vehicle would present challenges because private investments can take so long to pay off.
Some funds that are open to average investors already hold small stakes in private companies. Mutual funds are permitted to dedicate up to 15 percent of assets to illiquid securities, including private companies, but they often invest much less because those holdings cannot be easily sold — that’s a problem for funds because they must have enough flexibility to pay shareholders who cash out.
For example, the $44 billion Fidelity Growth Company Fund, which owns pieces of late-stage private companies like Allbirds, Peloton and Sweetgreen, had less than 3 percent of its assets in private holdings as of Oct. 31.
It would also be difficult — and expensive — for investors to properly diversify their holdings, said Elisabeth de Fontenay, a professor at the Duke University School of Law who specializes in corporate finance.
Article source: https://www.nytimes.com/2020/01/04/your-money/investing-private-market-startups.html?emc=rss&partner=rss
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