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The Insider Investment that Eludes Ordinary Investors

There’s an exclusive club that has eluded ordinary investors for years. This class of investments has been operating in the shadows for decades – outside the periphery of mainstream investing circles.

You can’t download the Robinhood app and gain access to these investments. It’s not that easy. The lucky few who have passed through the doors of this club have discovered investments unlike anything available on Wall Street.  

The members of this club discovered that these investments were uncorrelated to Wall Street and were not susceptible to the same volatility that characterized the stock market. Besides that, many of these investments also generated income, appreciated over time, and ensured you could never lose your entire investment by backing up your capital with a tangible asset.

These insider investments are so valuable that the government has already taken steps to make them available to more investors and is looking to take additional steps to expand access.

  • What exclusive club am I talking about?
  • What is this insider investment that eludes the ordinary investor?
  • What makes it so valuable that the government would want to open the doors to more and more investors?

The exclusive club I’m talking about is the world of private markets and the insider investments available through these private markets include both private company investing and private equity.

Private company investing involves investing in a non-public operating company invested in a particular asset or involved in a specific business; whereas, private equity involves investing in a private company that specializes in investing in a portfolio of private companies.

Typical assets or business classes favored by these private companies and private equity firms include commercial real estate, productive businesses, commodities, oil & gas, and startups.

Why has this club eluded the ordinary investor?

Because it’s only open to Accredited Investors and up until recently with the passage of the JOBS Act that loosened the advertising restrictions on these private market opportunities, was only available to an exclusive class of investors.

For decades, private market deals were backdoor deals that had only been offered to those with key connections to deal makers or people in the know.

The promoters of these deals were restricted by the SEC from soliciting the general public through advertising, phone calls, and public events to invest in their deals. This was the main condition for being able to raise capital without the expense or time of having to register as a public company through an IPO.

Private market deals were “Off Wall Street” and offered to both affluent and connected investors an alternative to Wall Street shielded from stock market volatility but which offered the promise of above-market returns – made possible by eliminating the fees and commissions charged by advisers, brokers, and professional managers in the public markets that drained investor profits.

In fact, many private market deals compensated management only if they were successful – with their sole compensation being a percentage of the profits.

Now, even after the passage of the JOBS Act, the club is still semi-exclusive as advertised private market deals are only available to Accredited Investors.

For individuals, an Accredited Investor is defined as someone that meets one of the following criteria:

  • Have a net worth exceeding $1 million individually or combined with a spouse (excluding the value of the primary residence).
  • Have earned income exceeding $200,000 ($300,000 if combined with a spouse) during each of the last two calendar years, with the reasonable expectation of maintaining these income thresholds during the current year.

The SEC reserves these deals for Accredited Investors because unlike Wall Street, the minimum investment requirements are generally $10,000 or more and the investments are illiquid with average minimum lockups of 5-10 years.

The SEC wants to ensure that not only do you have the financial means to invest but also that you can withstand departing with this money for a period of time and even absorb a total loss of your investment in the worst-case scenario. That’s why the SEC has strict requirements for qualifying as an Accredited Investor.

It used to be that an investor could self-verify their Accredited Investor status. That honor system no longer applies to private offerings that rely on advertising. With these offerings, your Accredited Investor status must be verified through certain financial documents such as tax returns or verified by a third party.

Third-party verification can be accomplished in one of two ways:

  • Accreditation can be verified by a qualified, independent third party familiar with the investor. Qualified parties include a CPA, attorney, or wealth advisor attached to a registered broker-dealer. These qualified third-parties can provide verification of an investor’s accreditation status simply through a one-page letter.
  • Verification can also be accomplished through a third-party commercial provider such as VerifyInvestor.com and www.earlyiq.com who will review personal documentation such as W-2s, tax returns, and/or account balance statements to ensure the satisfaction of the financial criteria for qualifying as an Accredited Investor.

The passage of the JOBS Act in 2012 was a step in the right direction towards making private market investments available to more investors, but to some inside the SEC, it wasn’t enough. There’s talk of making them even more available to ordinary investors. There aren’t any specifics yet, but the definition of an Accredited Investor could be modified to reduce the income and net worth minimums are where I’d guess the SEC would start.

Here’s proof the SEC is interested in making private market investments more available to more investors.

In a speech given in July of this year at the PLI Investment Management Institute 2020, Dalia Blass, the Director of the Division of Investment Management at the SEC made a stunning suggestion:

Main Street investors need more access to private markets – specifically through a defined benefit plan (aka 401k).

You can read the transcript here.

What Dalia Blass was suggesting was that ordinary workers and investors should be able to designate all or part of their 401k funds in private investments like private equity and private companies besides the mix of mutual funds currently available to them.

Why would she recommend this? I’ll let her explain in her own words.

According to Ms. Blass:

“Private investments have the potential to provide stronger returns and diversification for investors, but come with both performance and liquidity risks. Defined benefit plans utilize the potentially advantageous returns while seeking to manage those risks.

Ms. Blass just explained in a few sentences what the exclusive members of the private market investment club have known for years and that is that private investments provide better risk-adjusted returns than any other asset class – especially stocks.

Ms. Blass’s recommendation comes at a time of extreme uncertainty and volatility in the stock market where owners of 401(k)s have seen their retirement balances ride a COVID-19-induced roller coaster.

Savvy investors know that the right private investments can sustain cash flow through perilous times as well as preserve capital. For that and for many other reasons, private market opportunities are so valuable and why the SEC and others want to make them less elusive and make them more accessible to more investors.

Membership in this exclusive club is a big deal. 

For Accredited Investors, this club not only opens up more insider investment opportunities but also higher quality ones offering diversification across a variety of industries and geographic locations.

If you’re reading this article, you’ve been invited to join this club, a club that has eluded millions and millions of ordinary investors.

Learn more about these private opportunities and discover for yourself why access to this club is so valuable.

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