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Opportunities for AIs

Elite Privileges & Opportunities for Accredited Investors

In the next few years, if you haven’t already, you are going to consider diversifying your investment portfolio to include “alternatives” such as private equity (PE) and venture capital (VC). The market for those investments is going to grow and evolve quickly, as both the supply of and demand for PE and VC deals enjoy a boost from the Jumpstart Our Business Startups (JOBS) Act of 2012.

These alternatives, which are available only to accredited investors, offer an opportunity for higher—in some cases spectacularly higher—returns than the investments you have traditionally bought (including stocks, bonds, and real estate), and which have yielded flat returns over the past five years. Along with higher returns, in this alternative-investment landscape, come commensurate risk and restricted liquidity.

Growth of the private capital markets will also result in smaller and younger businesses gaining access to venture capital, expanding secondary markets for private securities (offering investors greater liquidity), innovative deal structures, efficient online deal platforms (so investors who are willing to conduct due diligence can bypass brokers and other intermediaries), and new rules to protect investors from predatory and fraudulent schemes.

75-year trend of general participation
Over the past 75 years, ever greater numbers of individuals have invested in public stock, and individual investors have become better informed and more sophisticated. This trend has been driven by factors such as the Securities Act of 1933, which created a regulatory environment that affords greater protect to individuals; steadily improving market efficiency; and technology that gives investors more, better, and faster news, data, and analysis.

In the 1920s, less than 10 percent of the U.S. population were shareholders (whether directly or indirectly though mutual funds) of public companies. By 1989, the figure was about 32 percent; today the figure stands at about 54 percent.

Since 2008, trading volume has fallen off as individuals fled stocks for less volatile (but not necessarily less risky) bonds, and there is no guarantee that they’ll be back in stocks to extend the 75-year trend further.

We can project a new participation trend into the next few decades, however, as greater numbers of individuals will invest in PE, VC, hedge funds, and tangible assets. And they’ll become more sophisticated about it, thanks in part to sprouting educational materials and resources like AIMkts. This new participation trend will be much narrower than the one over the last 75 years—confined to accredited investors rather than the entire population—but no less revolutionary in its effect on these markets.

There is a big difference between the kind of regulation that drove the past-75-year trend and the next participation trend. The Securities Act of 1933 promoted safety for individual investors, and therefore greater participation, by requiring more fulsome disclosures by companies that sought capital investment from the public. While doing so, the 1933 act actually suppressed, to an extent, investment in assets perceived to be too risky for most people; it created the class known as accredited investors, and banned marketers of PE, VC, and hedge funds from soliciting to anyone who wasn’t accredited. Specifically, the act restricted solicitation to only those potential customers that the marketers had prior relationships with, and whom they knew were accredited and thus (according to SEC logic) able to tolerate the perceived higher risk.

By contrast, the trend we’re projecting into the future will be driven in part by laws that do just the opposite.

The JOBS Act, and rules derived therefrom, remove that ban on general solicitation. The removal of the ban does not change the fact that you have to be accredited to invest in this class of investments. But now you, along with everyone else, will receive solicitations—sales calls, advertisements, promotions, e-mail pitches, etc.—from PE and VC marketers who don’t know you, who don’t even know if you have a positive net worth or any income. You will hear from broker/dealers, investment funds, bankers, and other intermediaries, not to mention magazines, websites, and deal aggregation platforms inviting you to subscribe to their offerings.

Hyper-growth
This flood of offers may bewilder you. And maybe scare you. Many of the solicitations you receive will promise more than they can possibly deliver. Some will be outrageous frauds. It takes some courage to buy private shares in startups and hyper-fast-growing companies with not many years of positive earnings, if any, in pursuit of better potential returns. To overcome your fear, you’ll need an education. You’ll want to know, for example:

  • What are the differences—particularly in the risks and rewards, but just as consequentially the differences in liquidity—between private equity and venture capital (and angel) investments?
  • Should an individual park money in professionally managed PE and VC funds, or diversify further into a fund of funds, or take a flying leap and pursue stellar returns by buying into a one-off PE or VC deal?
  • Are you capable of conducting the due diligence necessary to target a deal that is appropriate for your risk and liquidity profile; and that matches the target company’s need for expertise and/or connections?
  • Will growth in accredited investor markets lead to a bubble like the dot-com-startup bubble of the late 1990s?
  • How will being a partner in a fund or a fast-growing private company affect your income tax status and long-term tax strategy?

If you want to participate in this burgeoning market, you need to learn some fundamentals about these investment classes, and you need a guide to the trends and changes that are, and will be over the next decade, revolutionizing this market. That is what the Accredited Investor Markets website is all about.

© 2012 DailyDAC, LLC. Written by Dave Freedman, a Chicago-based financial journalist.

*Originally published on January 24, 2013. Updated by the AIMkts editors on 9/3/2013.