Why Retail Can't Touch Private Markets

In this episode of Through the Noise, Cam Harvey unpacks one of finance's most consequential and least understood rules: who counts as a "qualified investor." In the US, the label has nothing to do with knowledge or credentials. It comes down to wealth. Cam traces the rule to the 1929 crash and the Securities Act of 1933, explains why its costly disclosure regime made sense then, and argues that it now locks ordinary people out of the highest-return investments, from SpaceX to OpenAI to Anthropic. With information cheaper and more abundant than ever, he makes the case for a lighter, intermediate tier of disclosure that would let far more investors participate early, diversify properly, and share in the companies shaping the future.

Transcript

SPEAKER_00 0:01

I'm glad to be back in the studio with Cam Harvey for another episode of Through the Noise. We like to just get right into the topics. So, over the last prior episodes, we've been talking a lot about the different kinds of investors, but we haven't really focused on what that means. And I'm thinking back, um, we had an episode where you were talking about different types of investors having access to different investments at different time frames. Um and specifically, it seems like to have access um to certain investments, you need to be a in quotes qualified investor. Uh what is that?

SPEAKER_01 0:44

It means you're rich. Like in a very simple uh definition of qualified, uh the criteria is that you are rich. So let me unpack what I mean here. So we talk about IPOs and uh public equity, the SP 500, the NASDAQ 100, uh, and and these investments are available to everybody. And uh there's another type of equity that is non-public. Sometimes it's called private equity, but it's a little confusing. I I prefer to call it non-public equity. So think of SpaceX, think of OpenAI, Anthropic. These are giant companies. So SpaceX, 1.75 trillion in potential market capitalization. It would be in terms of the SP, uh, like the number seven or eight, depending upon what happens at the IPO. These are giant stocks that are not in the portfolio of the retail investor, uh, which is uh most of the time a non-qualified uh investor. So uh there are rules that you need to qualify to buy this non-public equity. And just by the way, SpaceX has been around a long time. Most people don't realize this company is 24 years old. And there is a market for SpaceX uh non-public equity, but it's only amongst the qualified investors. So again, think of the situation, and this is uh one that I use in some of the talks that I give uh a high school biology teacher who has a master's degree in biology and a keen interest in biotech stocks, most of which are private. Given that teacher's salary, they do not qualify to invest in that private equity. Even though the person appears to be qualified in terms of knowledge and has done the researcher research. So again, the system that we got doesn't seem fair uh to me. So qualification is in the US purely based upon your level of income or your wealth.

SPEAKER_00 3:33

So qualified investor doesn't mean you have any knowledge or you can't you can't qualify yourself by getting a credential. When was this created and why was it created?

SPEAKER_01 3:45

So the history is interesting, and I totally understand the motivation for the current situation. And this started uh in the late 1920s, where there was a boom in the stock market, and many people drawn into investments, uh, and the information that they got was highly misleading, so-called snake oil. And then we know what happened uh in late 1929, the stock market crashed and people lost their wealth. So this is the motivation for the Securities Act of 1933. And the Securities Act of 1933 uh mandated a level of disclosure, and that means the information that the company actually provides uh before it goes public. And SpaceX is a good example of that, where they made very substantial disclosure of their, for example, lack of profitability, the loss of $4.28 billion over uh the last year, though moving in the right direction at least. Uh so there's very detailed disclosure that is costly to do. And this was designed to protect the retail investor. So if there isn't that disclosure, then the uh the retail investor or the non-qualified investor is not allowed uh to hold uh the security. So this was purely uh a way to mandate uh disclosure and to basically separate out. So if the firm did not disclose it is a private or a non-public uh equity, uh the lawmakers at the time said, well, if you're rich, then you can afford to lose everything. But if you're not rich, then you cannot uh hold these uh securities. So that's the the historical motivation.

SPEAKER_00 6:07

Aaron Ross Powell So it sounds like good heuristic, um, but you're skeptical that today this is a this is something that's very helpful. So can you maybe talk about you know what what's changed and and and why you might be skeptical today?

SPEAKER_01 6:23

Well, there's so many things that have changed. Uh and and perhaps uh the most important thing that's changed is just the amount of information that's available today on both public and non-public uh companies. There is intense uh information. On top of that, you've got tools that are freely available. Well, twenty dollars a month uh available to investors to investigate the potential of certain companies. So again, think of Anthropic, think of OpenAI, think of SpaceX. There's a lot of information out there on these firms, and using kind of internet tools and potentially uh AI tools, it puts the average investor in a different situation than even uh like 10 or 20 years ago. So I think that there it's a good time to revisit what a qualified investor actually is. And I can imagine uh a lighter level of disclosure for companies so that they can expand the number of investors that participate uh in uh in these companies at the early stage. Right now, the retail investor is excluded from the early stage. And the early stage is where you see these explosive returns. Think about the implication for something like uh inequality in our society. So if you're rich, you get access to these blockbuster companies. And if you're not rich, you're closed out, and you need to buy at the IPO, and often the price at the IPO is so high that the expect a return is, you know, prospectively going forward, very low or negative. Just does not seem fair to me. So can we have a compromise where there's a lighter level of disclosure, not the disclosure for a public listing, but a lighter level of disclosure, bring in the rest of society to participate in these very important companies. Uh I think it's good for the companies. I think it's good, especially for the retail uh investors. Uh they they want to participate, they want to diversify their portfolio. So think of this another way. We all want diversified portfolios, yet a massive chunk of equity is not available. So you cannot diversify your portfolio because you're not qualified. That's not the way that this uh should work.

SPEAKER_00 9:26

So it sounds like this is uh this is some advice that you have for our policymakers uh and for people who are really thinking about this problem deeply.

SPEAKER_01 9:34

Yeah, this yet it seems to me we should visit um this issue. It's been almost a hundred years, and the world has changed. So it's also the case, and it's kind of interesting, that even though SpaceX is in the news, and then we'll have OpenAI, Anthropic, these giant uh tech firms uh coming to the public, uh IPOs are rare. So many don't realize that the number of public equities has dropped dramatically. So it has dropped by 50% over the last uh 25 years. And and part of the reason for this is the level of disclosure that is required by the SEC. It is so costly that many firms would like to IPO, but they don't like the idea of having to invest so much in terms of compliance to all of the public uh sort of rules. So we see very large firms that can afford to do this, but the smaller firms are are basically not participating because of the cost. And again, this is an ideal opportunity to revisit the rules. So can we lighten the burden for a public listing? And then can we provide a lighter level of disclosure to include uh the so-called non-qualified investors today, make them qualified, and expand the reach uh in terms of these companies uh for financing, and allow the retail investors a chance to have a diversified portfolio.

SPEAKER_00 11:34

Well, this is uh this has been a really fascinating topic. I feel like you're tying together a number of things we've talked in the past. Um, for instance, why are the why are these large IPOs a problem? Well, if you're if you're going, if people are going public, fewer but only larger, then those rules have to change. And these rules have to change. So it sounds like there's a accumulation of uh policy debt, so to speak. And uh and I'm it's very been fascinating to talk about that with you over the last uh several episodes.

SPEAKER_01 12:04

Yeah, there's so much policy debt. Uh another uh fact that people don't realize is that there are more ETFs, exchange traded funds, than stocks. So again, this just speaks to the number of stocks that are publicly traded uh decreasing. Things definitely need to change.

SPEAKER_00 12:25

Well, thanks so much for bringing that to our uh to our show here.

SPEAKER_01 12:28

Thank you.