Democratizing Private Markets: Expanding Access While Preserving Investor Protection

Democratization of private markets is both an economic necessity and a regulatory opportunity. Recent guidance from the U.S. Securities and Exchange Commission regarding registered closed-end funds investing in private funds, alongside incremental reforms to the accredited investor definition, signals that regulators recognize the need for new participation models. Academic literature, technological innovation, and evolving fund structures now make it possible to expand access in ways that preserve investor safeguards, while providing access to the largest and fastest growing segments of the global capital ecosystem. 

Private markets are one of the fastest-growing segments of the global capital ecosystem. Over the past two decades, firms have remained private longer, private equity assets under management have grown from under $1 trillion to over $8 trillion, and an increasing share of economic growth occurs outside public exchanges. This structural shift has created a widening divide between those with access to private capital (institutions and wealthy individuals) and those restricted to public markets. For most Americans, the regulations governing private investments, anchored in the accredited investor definition, function as a barrier to entry, preventing participation in a segment of the economy that increasingly drives innovation, job creation, and wealth accumulation. As of 2024, only 12.6% of US households qualified as accredited investors.

The implications of this divide extend beyond fairness. The migration of value creation from public to private markets means that the traditional path—broad participation in the public stock markets, through which ordinary households accumulate equity wealth—captures a shrinking share of total enterprise value (Stulz, 2020). The number of publicly listed U.S. firms has roughly halved since the mid-1990s, even as the broader economy has grown. Ewens and Farre-Mensa (2020) trace much of this shift to regulatory changes that have made private capital cheaper and easier to raise. The result is a capital market structure in which the most dynamic firms can scale in the private markets while rewarding early investors with extraordinary returns, long before retail investors are ever permitted by the federal government to participate.

The scale of this reversal is worth stating in concrete terms. In the mid-1990s, roughly 7,300 firms were listed on U.S. public exchanges. By the mid-2010s, that figure had fallen to approximately 3,600–4,300, even as U.S. real GDP grew by more than sixty percent over the same period (Doidge, Karolyi, & Stulz, 2017). The listing count has not meaningfully recovered in the years since. Meanwhile, the population of U.S. companies backed by private equity and venture capital has expanded dramatically: industry trackers such as McKinsey, Preqin, and PitchBook now count private-capital-backed U.S. firms in the tens of thousands, an order of magnitude larger than the universe of public listings. The asymmetry is most visible in time-to-IPO. The median age at which venture-backed firms reach public markets has roughly doubled since the late 1990s, and a generation of category-defining companies such as Uber, Airbnb, SpaceX, Stripe, and Databricks have raised tens of billions of dollars in private capital before, and in some cases without, ever offering public equity to retail investors.

Several reinforcing factors have sustained this trajectory. Targeted deregulation of private markets, most notably the 1996 National Securities Markets Improvement Act, which preempted state regulation of Regulation D offerings, and subsequent expansions of Rule 506 under the JOBS Act of 2012 materially lowered the cost of raising private capital (Ewens & Farre-Mensa, 2020). At the same time, the post-2002 compliance environment shaped by Sarbanes-Oxley, expanded Dodd-Frank disclosure obligations, and rising exposure to securities class action litigation increased the cost of being public, particularly for smaller issuers. The combination produced a self-reinforcing dynamic: private capital is more plentiful than ever before, public market burdens have grown, and the structural reasons for high-growth firms who need to innovate rapidly to remain private have multiplied. Industry data from McKinsey, Bain, and BlackRock place global private market assets under management above $13 trillion as of the mid-2020s, with multi-year growth rates roughly double those of public market assets. The continuing migration of value creation into private markets is not a transient cycle; it is a durable feature of the modern capital markets landscape – and a powerful argument for revisiting who is permitted to participate and share in the wealth creation these markets offer.

At the center of this divide is a policy tension: how to expand access to private markets while maintaining robust investor protections. The traditional regulatory approach has equated wealth with sophistication, relying on income and net-worth thresholds as proxies for financial capability. Yet decades of research in behavioral finance, household finance, and market participation suggest that wealth is an imperfect, and often misleading, measure of financial literacy or decision-making competence (Lusardi & Mitchell, 2014; Campbell, 2006; van Rooij, Lusardi, & Alessie, 2011). The resulting regulatory framework excludes approximately 87.4% of U.S. households from high-growth investment opportunities, even as evidence mounts that financial knowledge, not wealth, better predicts investment behavior and outcomes.

In order to qualify under the SEC’s accredited investor definition, the primary gatekeeper to retail investor participation in the private securities markets, an individual must either (i) have a net worth over $1 million, excluding their primary residence (individually or with spouse or partner); (ii) have income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years; or (iii) meet one of a very limited number of professional criteria the SEC associates with financial sophistication, such as the general securities representative or “Series 7” license.  The accredited investor definition’s wealth-based requirements were never empirically derived from evidence about investor capability and reflect a mid-twentieth-century assumption that wealth correlates with sophistication, an assumption that has not been meaningfully revisited in the more than four decades since the definition was adopted. In fact, evidence shows that financial literacy is a stronger predictor of stock market participation than wealth, formal post-secondary education level, or income (Van Rooij, Lusardi, & Alessie, 2011).  As a result, the current accredited investor definition arbitrarily shuts millions of individual investors out of the private markets based on a flawed premise.

A growing body of empirical literature challenges the assumption that wealth correlates with sophistication. Lusardi and Mitchell (2014), in a comprehensive review of more than a decade of household-finance evidence, demonstrate that financial literacy varies widely within every income bracket and is more strongly associated with education and exposure than with assets. Campbell (2006), in his American Finance Association Presidential Address, shows that costly portfolio mistakes—under-diversification, inertia, failure to refinance, and exposure to high fees—are observed across the wealth distribution spectrum and often reflect knowledge gaps rather than balance-sheet constraints. Calvet, Campbell, and Sodini (2007), studying the full population of Swedish households, similarly find that the welfare cost of investment mistakes is substantial and concentrated among households with lower financial sophistication—not necessarily lower wealth. In a striking reminder that wealth alone does not produce optimal financial behavior, Choi, Laibson, and Madrian (2011) show that even affluent, educated employees frequently leave “$100 bills on the sidewalk” by failing to capture employer 401(k) matches. 

Taken together, these findings support a shift toward knowledge-based accreditation. The SEC’s 2020 amendments allowing holders of Series 7, 65, and 82 licenses to qualify as accredited investors marked a first step in that direction (U.S. SEC, 2020). Robinhood supports the SEC taking additional action to expand the list of professional criteria that would qualify an individual investor as accredited. In addition, proposed legislation such as the Equal Opportunity for All Investors Act would build on this knowledge-based approach through a new, uniform exam to achieve accredited status, recognized professional credentials, or demonstrated experience as alternatives to wealth screens. The policy logic is straightforward: if the purpose of the rule is to ensure that investors understand what they are investing in, the rule should directly measure that knowledge, rather than simply relying on an investor’s existing wealth.

For fund managers, the current system also imposes operational and privacy burdens. Verification of accredited status requires investors to share tax returns, bank statements, and other sensitive disclosures, creating friction at the very moment of investor engagement. A tailored knowledge-based certification regime available at the point of investment—administered through FINRA or a similar self-regulatory body and offered broadly through brokerage and investment advisory platforms—could simultaneously reduce this friction and align eligibility with actual capability, rather than with a balance-sheet snapshot that may bear little relation to risk tolerance, time horizon, or understanding of illiquid assets. 

A proposed competency-based pathway into private markets—one grounded in demonstrated financial ability rather than wealth alone—could assess whether an individual understands the unique risks, valuation methodologies, liquidity constraints, legal structures, and governance characteristics that define private capital markets. It would not purport to predict investment success or evaluate skill; rather, it would establish that a candidate has the baseline literacy necessary to make informed decisions in markets where continuous disclosure, daily pricing, and immediate liquidity may be absent.

An examination of this type should be around specific governing principles: (1) competence should matter more than financial status; (2) risk recognition must precede any discussion of potential gain; (3) questions should test judgment rather than memorization; (4) informed participation improves market integrity; and (5) broad public access can coexist with regulatory confidence. 

These principles would shape content areas spanning the full arc of private market investment literacy for the competency-based certification. This certification would use a limited set of scenario-based questions to evaluate practical decision-making, such as identifying risk exposures in real-world portfolio allocations, rather than simple recall. Candidates would demonstrate proficiency through a straightforward exam, allowing them to test out of educational modules by answering questions correctly. Optional advanced modules offering specialty endorsements in private equity, venture capital, or private credit would also be made available as mechanisms to increase a participant's knowledge over time. The content and length of the exam should be designed such that retail investors of all backgrounds can pass the it in a reasonable and limited amount of time with a reasonable amount of preparation.  The SEC should allow registered broker-dealers and investment advisers to offer the exam directly through their websites and mobile apps.

To ensure competency the recommended core content areas tested would be as follows:

• Capital Markets & Regulatory Foundations: U.S. capital market structures, public vs. private security distinctions, and legal/regulatory frameworks governing private offerings.

• Vehicles, Structures, & Terms: Key investment vehicles, legal structures, and economic terms defining private market participation.

• Risk Landscape & Portfolio Construction: Evaluating valuation, liquidity, operational, and macroeconomic risks, along with portfolio construction tailored to long-horizon, illiquid investments.

• Due Diligence & Evaluation: Interpreting offering materials, evaluating manager incentives and quality, and identifying unsuitable allocations.

• Quantitative Performance Analysis: Quantitative methods for pricing private assets and measuring investment performance.

The regulatory case for this approach is well-supported. The SEC’s Investor Advisory Committee has explored knowledge-based alternatives to purely wealth-driven accreditation, and academic research in both finance and behavioral economics demonstrates that structured financial education and demonstrated competence reduce decision biases and improve risk assessment in complex products more reliably than income or net worth thresholds. This pathway would not lower investor protection standards; it would reorient them around the criteria most directly relevant to informed decision-making: what an investor actually knows. By certifying that individuals can evaluate private investments, understand their risks, and interpret the documents governing them, the examination would expand the pool of qualified investors without diluting expectations for financial literacy, supporting more efficient capital formation while preserving the protections that give private markets their long-term credibility.

Private markets are defined by long capital lockups, often spanning 7–10 years. While institutions can accommodate this illiquidity through diversified pools and long planning horizons, individual investors typically cannot. Illiquidity is a priced risk factor for which investors demand a premium (Ang, Papanikolaou, & Westerfield, 2014). The corollary, however, is that excluding most households from illiquid markets means excluding them from the very premium that compensates for the risk. The illiquidity premium becomes inaccessible when investors cannot participate at all.

Registered investment vehicles under the Investment Company Act of 1940, particularly interval funds and closed-end funds, address this challenge by transforming rather than eliminating illiquidity. Interval funds align redemption rights with the liquidity profile of private assets by offering periodic repurchase opportunities, typically on a quarterly basis and subject to predetermined limits, allowing fund managers to plan for predictable cash needs while avoiding forced sales of illiquid investments. Similarly, closed-end funds provide investor liquidity through exchange trading rather than fund-level redemptions, enabling shareholders to buy and sell shares in the secondary market without requiring the underlying private assets to be liquidated. While investors may trade at a premium or discount to net asset value or accept limited redemption opportunities, these structures create an effective liquidity management framework that protects remaining investors, reduces fire-sale risk, and preserves the long-term investment strategy. Rather than making private assets liquid, these regulated fund structures create a mechanism for liquidity transformation that aligns investor access with the characteristics of private markets, thereby expanding opportunities for a broader range of investors to participate in private equity, private credit, real estate, and other alternative asset classes.

Secondary markets offer limited relief but are characterized by opacity and steep discounts. Secondary transactions in private equity routinely clear at material discounts to reported net asset value, reflecting both genuine illiquidity and information asymmetries between buyers and sellers. Evergreen structures and interval funds attempt to introduce periodic liquidity, but they often impose gates during periods of market stress, which create a mismatch between perceived and actual liquidity that can leave retail investors particularly exposed at precisely the moments when liquidity matters most.

Technological innovations, including tokenization and blockchain-based recordkeeping, present potential solutions for improving transferability, liquidity, and transparency of ownership within regulated environments. Yermack (2017) outlines how distributed-ledger technologies can sharpen corporate governance and ownership records, while Cong and He (2019) develop a framework for how smart contracts can reduce information asymmetries in financial transactions. These technologies align with foundational work on market design that emphasizes transparency and standardized trading protocols as drivers of liquidity (Duffie, 2012). Implemented carefully, within existing securities frameworks and with appropriate custody, AML, and disclosure requirements, tokenized secondary markets could narrow the bid-ask spreads that currently make exit so costly for individual investors.

Over the past two decades, U.S. capital markets have undergone a structural transformation. Research by Doidge, Karolyi, and Stulz (2017) and Ewens and Farre-Mensa (2020) documents a sustained decline in publicly listed companies alongside unprecedented growth in private capital formation, as economically significant firms remain private well beyond the stage at which comparable companies historically accessed public markets. The result is that a substantial share of U.S. economic activity now occurs within what has been described as a "dark economy"—not because firms are engaging in improper conduct, but because they operate outside the comprehensive disclosure regime that governs public companies.

This structural shift has created a pronounced information asymmetry. Institutional investors, pension plans, and family offices receive extensive due diligence materials, financial statements, and ongoing reporting, while retail investors, researchers, and policymakers have often relied largely on press reports, selective disclosures, and eventual IPO filings to assess companies that may represent hundreds of billions of dollars in enterprise value. The asymmetry is compounded by valuation opacity inherent to private assets. 

Unlike public securities, whose prices continuously incorporate new information through active trading, private assets are valued using internal models, comparable transactions, discounted cash flow analyses, and judgment-based assumptions. Gompers, Kaplan, and Mukharlyamov (2016) document the extensive discretion private equity professionals exercise in valuing portfolio companies, while Brown, Gredil, and Kaplan (2019) demonstrate that reported returns exhibit valuation smoothing and timing effects—particularly surrounding fundraising cycles—suggesting that reported net asset values may not fully reflect underlying economic volatility. Phalippou (2014) and Harris, Jenkinson, and Kaplan (2014) further show that conclusions regarding private equity outperformance depend heavily on benchmarking methodologies, fee treatment, and valuation assumptions. Stable reported valuations may, therefore, obscure meaningful changes in underlying enterprise value, limiting outside investors’ ability to independently assess risk.

These observations do not argue against private markets. Longer investment horizons, reduced compliance costs, governance flexibility, and freedom from short-term earnings pressures generate real economic benefits. The objective is not to impose public-company reporting obligations on all private firms, but to recognize that once a company reaches sufficient economic scale, a limited set of standardized, material disclosures becomes a matter of market infrastructure rather than regulatory burden. For instance, a proportionate disclosure regime would preserve the advantages of private ownership while improving transparency for economically significant firms. 

Modern technology substantially reduces the cost of transforming standardized disclosures into meaningful investor information. Advances in cloud computing, machine learning, and artificial intelligence enable independent firms, researchers, and financial intermediaries to analyze large volumes of private company data at relatively low cost, supporting the development of independent valuation analytics, benchmarking services, credit assessments, and AI-powered research tools. Large language models and specialized AI agents can synthesize financial reports, identify performance trends, compare companies against industry peers, and tailor risk analyses to individual investor circumstances—reducing information-processing costs and broadening access to sophisticated financial analysis that has historically been available only to large institutional investors. This analytical ecosystem would narrow informational disparities while preserving the flexibility and long-term orientation that distinguish private markets.

A tailored, threshold-based disclosure framework for private companies would strengthen U.S. capital markets without impeding private market growth. Improved transparency reduces the information asymmetries that contribute to adverse selection and inefficient pricing in secondary markets, supporting more accurate valuations, lower uncertainty premiums, and more efficient capital allocation. A limited set of standardized, material disclosures also encourage stronger governance and more consistent valuation practices without requiring firms to become publicly traded. Importantly, baseline private disclosures would not require quarterly earnings guidance, detailed segment reporting, or continuous disclosure of competitively sensitive information, preserving the principles-based, long-term orientation that makes private markets an important engine of economic growth.

High minimums of often $1 million or more prevent diversification for individuals. Participation through feeder structures adds fee layers that erode returns relative to low-cost indexing (French, 2008; Khorana, Servaes, & Tufano, 2009). Kaplan and Schoar (2005), in their foundational study of private equity returns, document substantial dispersion across funds and demonstrate that performance persists across consecutive funds raised by the same general partner. Harris, Jenkinson, and Kaplan (2014) update this evidence with a broader sample and confirm that top-quartile fund selection drives a disproportionate share of investor outcomes. The implication is straightforward and uncomfortable: in private markets, fund selection matters far more than in public markets, and access to top-tier managers is the central determinant of investor outcomes.

This raises a classic adverse selection concern (Akerlof, 1970). The highest-performing private equity funds are routinely oversubscribed by institutional limited partners and do not need retail capital. If retail-facing structures are populated primarily by funds that institutions have declined, the retail investors policymakers wish to protect may be channeled disproportionately into lower-quality opportunities. Addressing this potential problem requires thoughtful platform design, differentiated sourcing, and operational rigor to ensure that “access” does not become a euphemism for access to inferior assets. Robinhood Ventures’ emphasis on focused sector expertise, robust operational resources, and differentiated deal sourcing is intended to address this concern directly; pairing retail access with the diligence standards that institutional investors take for granted with lower fees.

The SEC’s recent guidance clarifying how registered closed-end funds can invest in private assets while being offered to retail investors under the Investment Company Act of 1940 framework is a significant development. These structures provide:

• Regular NAV calculation and standardized reporting

• Independent board governance and fiduciary oversight

• Limits on leverage and conflicts of interest

• Real-time liquidity through exchange trading, or periodic liquidity through interval fund structures

This model creates a regulatory bridge between private markets and retail investors, embedding investor protection into the vehicle itself rather than relying solely on investor qualification. Stulz (2020) makes a related observation: as the public-private boundary blurs, the relevant regulatory question is increasingly not who is allowed in but what protections travel with the investment vehicle.

Academic research on fund structure suggests that governance, transparency, and reporting requirements significantly reduce agency conflicts (Jensen & Meckling, 1976; Khorana, Servaes, & Tufano, 2009). Registered closed-end funds leverage these protections while allowing exposure to private assets, effectively shifting some of the protective work from a wealth-based eligibility screen to a vehicle-level set of guardrails. Importantly, this approach is consistent with the empirical evidence that vehicle design—board independence, fee disclosure, redemption mechanics, and conflict policies—materially affects investor outcomes, often more than investor sophistication alone.

Contrary to the claims of some critics,  democratizing private markets does not require sacrificing investor protection in the name of access and innovation. Instead, it requires modernizing these markets along five reinforcing lines:

• Replace wealth thresholds with knowledge-based accreditation. Allow investors to qualify through demonstrated competency with a uniform, reasonable examination accessible by retail investors of all backgrounds, recognized professional and educational credentials, or supervised experience reflecting the evidence that financial literacy, not wealth, drives sound investment decisions.

• Use registered fund structures to embed governance and transparency. Where individual qualification is insufficient, vehicle-level protections including board oversight, standardized reporting, leverage limits, and periodic liquidity can carry much of the investor-protection burden.

• Leverage technology to improve liquidity and information symmetry. Tokenization, distributed-ledger ownership records, and smart-contract-based settlement, deployed within regulated frameworks, can reduce frictions that have historically made private markets potentially unsuitable for retail investors.

• Utilize AI to produce continuously updated independent analytics to standardize risk assessment. AI tools have been developed that provide valuations that are continuously updated using real market signals, credit spreads, and financial statement inputs giving a dynamic rather than static view. These assessments can narrow the information gap between institutional and retail participants, addressing concerns about valuation opacity.  AI can also provide and help retail investors analyze a wealth of information on private market investment opportunities, which can begin to level the playing field with institutional investors.  

• Create a proportionate disclosure framework to address private market opacity: Evaluating a tailored, threshold-based disclosure framework for large private firms, supported by modern AI and cloud analytics, can reduce risk and improve capital allocation without imposing full public-company reporting burdens. Implementing a threshold-based, material disclosure framework reduces adverse selection, improves secondary market pricing, encourages better governance, and supports efficient capital allocation while preserving the core benefits of private ownership.

• Ensure operational excellence and disciplined sourcing to avoid adverse selection by using a registered fund or other managed vehicle. Platforms offering retail access must apply the same diligence, obligation to act in the vehicle’s best interest, and sourcing rigor that institutional limited partners apply to top-quartile funds, addressing the adverse-selection concern that retail investors are systematically offered “leftovers”. 

Private markets are no longer a niche domain for institutions and the ultra-wealthy. They are where much of the modern economy is built. Ensuring broader participation is not simply a matter of fairness; it is a matter of aligning capital markets with where value creation actually occurs. The goal is not to dismantle investor protection but to redefine it for a world where knowledge, transparency, and structure can serve as more effective safeguards than wealth alone.

See references here.