Securities Law’s Dirty Little Secret

Associate ProfessImageor, Usha Rodrigues has recently uploaded a new paper to SSRN.  This paper reviews Securities law’s dirty little secret that rich investors have access to special kinds of investments — hedge funds, private equity, private companies — that everyone else does not. This disparity stems from the fact that from its inception federal securities law has jealously guarded the manner in which firms can sell shares to the general public. Perhaps paternalistically, the law assumes that the average investor needs the protection of the full panoply of securities regulation, and thus should be limited to buying public securities. In contrast, accredited — i.e., wealthy — investors, who it is presumed can fend for themselves, have the luxury of choosing between the public and private markets.

The Article acknowledges elements keeping the current system in place, explaining the current inequality of investor access by way of public choice theory: regulators and companies alike favor the status quo. Viewed from the perspective of the little guy, however, inequality in investment access may prove less defensible and ultimately less tenable. Professor Rodrigues suggests a modest fix: letting the general public participate in the private market via mutual fund investment, something it currently cannot do.


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