WSJ Your Money Briefing - Private Markets Have Been Reserved for the Wealthy. Should a Test Change That?

Episode Date: October 25, 2024

A proposal from lawmakers could open up investment opportunities in private companies – if you can pass an exam based on your financial acumen. Wall Street Journal reporter Corrie Driebusch joins host Ariana Aspuru to break down how it might work and what it means for investors.  Sign up for the WSJ's free Markets A.M. newsletter.  Learn more about your ad choices. Visit megaphone.fm/adchoices

Exchanges. The Goldman Sachs podcast featuring exchanges on rates, inflation, and U.S. recession risk. Exchanges on the market impact of AI. For the sharpest analysis on forces driving the markets and the economy, count on exchanges between the leading minds at Goldman Sachs. New episodes every week. Listen now. Here's your Money Briefing for Friday, October 25th. I'm Arianna Espudu for The Wall Street Journal, filling in for JR Whalen. Wayland. The debate over whether wealth or intelligence should determine who could invest in private markets is shifting. Recently, a group of lawmakers have proposed a test

to see if someone should have access to these high-risk, high-reward investments. Score enough points and you could be in. There seems to be this feeling that there needs to be some level of financial sophistication for individuals who want to invest in these securities. But what determines financial sophistication? Is it that you have enough money that if you do lose a lot, you'll be okay? Or if you have this financial knowledge,

should that be the determining factor? Wall Street Journal reporter Corey Dreeiebusch, joins me. After the break. Balance your trading strategy by adding futures. CME Group helps you manage risk and capture opportunities in all market environments. Capitalize on around-the-clock access to highly liquid global futures and options markets across all major asset classes. Visit your online broker and get started. See what adding futures can do for you at cmegroup.com slash podcast.

Derivatives are not suitable for all investors and involve the risk of losing more than the amount originally deposited in any profit you might have made. This is not a recommendation or offer to buy, sell, or retain any specific investment or service. are offered to buy, sell, or retain any specific investment or service. Investing in private companies has long been reserved for the wealthy. But that could be changing. Wall Street Journal reporter Cori Driebusch joins me. Cori, what could be shifting about the way that people buy into private markets? For the last several years, there's been this growing, almost drumbeat, to allow more people to invest in private securities or private companies.

There have been examples of really big gains happening in private markets, and the feeling is that maybe the best way to determine who is quote unquote sophisticated enough to buy these investments shouldn't be just based on wealth or how much money you earn each year. It should be based on your financial acumen. And so what's the proposed solution here? The SEC and Congress have started proposing and floating this idea of maybe there should

be a test. And that test would determine if people are knowledgeable enough to be able to invest in financial securities that are private. What types of questions would be on this test? I'm picturing a Scantron, you know, college, high school. What is it going to look like? The SEC did make some changes that they could expand access. So people with entry-level stockbrokers license can now invest in private securities as of

2020. But what turns you into a stockbroker is you pass a dreaded series seven exam that's four hours long, just about, and it's expensive to take. So the idea is that this test is not going to be as difficult. But it still will quiz individuals on topics such as the types of securities, disclosure requirements under securities laws, corporate governance, financial statements, and the risks of getting involved in these types of purchases. under securities laws, corporate governance, financial statements, and the risks

of getting involved in these types of purchases. What's the reason behind implementing a test for this? On the stock market, you can buy a stock, and if the stock market's open, you can decide to sell whenever you want to. And you can get money back. It might not be the same amount of money that you purchased if the stock price went down,

but you can at least get out whenever you need to. In private securities, it's not that simple. So there seems to be this feeling that there needs to be some level of financial sophistication for individuals who want to invest in these securities. But what determines financial sophistication? Is it that you have enough money that if you do lose a lot, you'll be okay? Or if you have this financial knowledge, should that be the determining factor? And I know that we're talking here about the test, which is proposed legislation. But if it does pass, what would this mean for people who are interested in investing?

The proposed bill from the Republicans on the Senate Banking Committee say that the SEC or another regulator can write an exam that would test this. So we're going to have to see an exam approved. Does it seem like the exam will be kind of tricky? Like do you think you could pass it? I don't know. And I think that's all up in the air. So we'll see.

I hope I could pass it from my time covering Wall Street and capital markets. But who knows? Maybe not. When we're talking about these investment opportunities, they've been shelled off for just the wealthy for so long. What kinds of thresholds now does someone have to meet in order to invest in these companies? How hard is it right now? Yeah.

So today, accredited investors need $1 million in net assets, but that does not include your primary home residence, or at least $200,000 in annual income, or $300,000 for a joint household. So those are the pretty standard requirements, but that's basically been left mostly the same for the last four decades.

The SEC actually has put out estimates a couple years ago that showed how many U.S. households 40 years ago qualified as accredited investors. In 1983, that was just 1.5 million households as of 2022, they estimated about 24.3 million U.S. households qualified. And before you think, oh, we've expanded access so much, it's more because of inflation. How much demand is there to invest in these companies? There's definitely demand and there's definitely folks who would love to participate. But sometimes it's hard to tell how much of this is coming from Wall Street and smaller advisory firms, which want to get a bigger slice of investors' retirement funds, or how much of this is coming from individuals.

Is there any possible risk with opening up this opportunity for investment? Yes. The risk is around liquidity in large part and understanding that liquidity risk. The proponents of the bill say this quiz is a better understanding of if you understand your liquidity risk versus just a pure income level. And the critics of the legislation are quick to say that knowledge cannot protect you from potential losses if you invest in risky, opaque, or illiquid

private offerings. That's WSJ reporter Corey Drewbush and that's it for your money briefing. Tomorrow we'll have our weekly markets wrap up, What's News in Markets? And then we'll be back on Monday. This episode is produced by Zoe Kolkin. I'm your host, Arianna Aspudu. Jessica Fenton and Michael LaValle wrote our theme music. Our supervising producer is Melanie Roy. Aisha Al-Muslim is our development producer.

Scott Salloway and Chris Zinsley are our deputy editors. And Falana Patterson is The Wall Street Journal's head of news audio. Thanks for listening.