What is Cost of Equity? – Meaning, Concept and Formula
February 12, 2025
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The average person believes that they are legally allowed to make any investment that a rich person can. However, this is not true in America, and this is certainly not true in many parts of the developed world. The reality is that the average American population is only legally allowed to purchase securities which are offered by public companies. On the other hand, wealthy Americans known as accredited investors can purchase securities being sold in the private market as well! In order to become an accredited investor, a person must have at least $1 million in net worth or must earn at least $200,000 per annum. It is said that some of the best investment opportunities are denied to the average American investor since they cannot buy private securities offerings.
In this article, we will have a closer look at the way private securities offerings work.
Speaking from a common sense point of view, the difference between private securities and public securities is that public securities are registered, whereas private securities aren’t. The reality is that the registration process can be extremely onerous and time-consuming. This is the reason why many companies decide to forego the process. This is because they are still in their nascent stage and hence cannot afford to bear the expenses. In order to allow such companies to raise capital, American securities law allows the sale of unregistered offerings as long as the securities are not being sold to the general public.
Over a period of time, private offerings have definitely come of age. Today, most start-up companies raise capital from angel investors and venture capital firms. Private securities are the investment vehicle which is used in the majority of these cases.
There are several reasons which make a company choose a private securities offering over a public one. Some of these reasons have been listed below:
The reality is that in the connected world that we live in today, obtaining information is not really a tough task. Also, in many cases, people inherit their wealth. As a result, they do have the money to be called an accredited investor. However, they do not have any knowledge or experience. The current law assumes that since they are rich, they will be able to bear any losses that arise from these investments.
The reality is that it is not really the government’s job to regulate the safety of investments in the securities market. The government does not need to handhold investors. Instead, they must be provided with the freedom required to make their own decisions and also face the consequences (rewards and/or losses). It is strange that the government allows poor people to buy dangerous products like negative amortization mortgages and payday loans. However, they cannot buy private securities.
The market for private securities was ideally thought of as being a small peripheral market to the larger public securities markets. However, over time, it has started to dwarf the open market in size as well as scope. It would be better if the government relaxed the laws around the public listing of securities. This would solve many of the problems which are currently present in the private securities market.
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