Should Everyone Be Allowed to Invest in Private Tech Companies?

The SEC is considering changing the rules. Here’s why it shouldn’t.

by

and

Luminita Enache

by

and

Luminita Enache

October 15, 2018

Beata Bernina/Getty Images

Summary.

The SEC Chairman recently announced a policy initiative to enable the ordinary investors to invest in private companies. Currently, only wealthy accredited investors are allowed to invest in private companies. His stated goal is enabling small investors to get access to alternative high-quality investments, such as in private tech companies like Uber and AirBnB. But this policy, even if implemented, may not work as intended because the ordinary investors may not want to invest in private startups and private companies, especially digital ones, may not want ordinary investors. Digital entrepreneurs seek investors who understand their business, can cope with significant early losses, can take risks, and can advise them on operations.

The SEC Chairman recently announced a policy initiative to enable the ordinary investors to invest in private companies. Currently, only wealthy accredited investors are allowed to invest in private companies. His stated goal is enabling small investors to get access to alternative high-quality investments, such as in private tech companies like Uber and AirBnB. But in our view this policy, even if implemented, will not work as intended because the ordinary investors may not want to invest in private startups and private companies, especially digital ones, may not want ordinary investors.

Vijay Govindarajan is the Coxe Distinguished Professor at Dartmouth College’s Tuck School of Business, an executive fellow at Harvard Business School, and faculty partner at the Silicon Valley incubator Mach 49. He is a New York Times and Wall Street Journal bestselling author. His latest book is The Three Box Solution. His Harvard Business Review articles “Engineering Reverse Innovations” and “Stop the Innovation Wars” won McKinsey Awards for best article published in HBR. His HBR articles “How GE Is Disrupting Itself” and “The CEO’s Role in Business Model Reinvention” are HBR all-time top-50 bestsellers. Follow him on LinkedIn.
vgovindarajan
Shivaram Rajgopal is the Roy Bernard Kester and T.W. Byrnes Professor of Accounting and Auditing and Vice Dean of Research at Columbia Business School. His research examines financial reporting and executive compensation issues and he is widely published in both accounting and finance.
Anup Srivastava holds Canada Research Chair in Accounting, Decision Making, and Capital Markets and is a full professor at Haskayne School of Business, University of Calgary. In a series of HBR articles, he examines the management implications of digital disruption. He specializes in the valuation and financial reporting challenges of digital companies. Follow Anup on LinkedIn.
Luminita Enache is an associate professor at Haskayne School of Business, University of Calgary. She investigates financial disclosures of new-economy firms. Follow Luminita on LinkedIn.

Should Everyone Be Allowed to Invest in Private Tech Companies?

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