S.E.C. Gives Small Investors Access to Equity Crowdfunding • Hacker News Board

Re: S.E.C. Gives Small Investors Access to Equity Crowdfunding

#11

Post by stevecalifornia » Sat, Oct 31, 2015, 12:16 AM UTC

I am happy they are doing this, I am disappointed they placed such a low cap on what you can invest.

I would love to hear more reasons for the investment cap other than protecting investors from themselves. It seems like such a low cap that you can invest in maybe one startup.

I would also love to hear why protecting investors from themselves is a good thing. It's an honest question: what is the merit of putting a cap on what you can invest based on your income? Shouldn't that cap be a personal choice?

Re: S.E.C. Gives Small Investors Access to Equity Crowdfunding

#12

Post by nbadg » Sat, Oct 31, 2015, 12:30 AM UTC

stevecalifornia wrote: post #11

I am happy they are doing this, I am disappointed they placed such a low cap on what you can invest. I would love to hear more reasons for the investment cap other than protecting investors from themselves. It seems like such a low cap that you can invest in maybe one startup. I would also love to hear why protecting investors from themselves is a good thing. It's an honest question: what is the merit of putting a ca…

I agree with your reasoning totally. We don't put a cap on how much you can spend in the lottery. Why should we have a cap on something with better odds?

Re: S.E.C. Gives Small Investors Access to Equity Crowdfunding

#13

Post by gbelote » Sat, Oct 31, 2015, 12:32 AM UTC

tptacek wrote: post #3

I'm not a fan of this idea. After the Startup podcast did an episode endorsing the idea, I wrote a blog post and circulated drafts to friends, but never got around to finishing it. Instead of doing that now, here's a rough list of arguments, all of them about how tech startup equity will work out poorly for retail investors: * The core issue: professional startup investors rely on (a) relatively large portfolios wher…

(Disclosure: I'm a founder of an equity crowdfunding platform so I financially benefit if people use this legislation.)

I don't think startup investing is for everyone, for some of the reasons you mention below. And I agree there's a risk of the ecosystem developing poorly to be a "market for suckers". But I think the JOBS Act is a net good thing and the concerns you highlight are addressable.

The main problem I have with the "old rules" of investing is that wealth is used as a proxy for sophistication. If you happen to have a PhD in Machine Learning, for instance, you're unable to invest even $100 in AI companies unless you're literally a millionaire. With companies staying private longer, most of the growth in high growth startups is only available to the wealthy. From the data we've seen so far from unaccredited investors trying to invest in startups (but failing the financial requirements) we haven't seen any correlation in financial status and savviness. Unaccredited investors try to invest in the same companies as the accredited investors, and they all avoid the weaker startups. So I'm optimistic about that, at least for the early adopter crowd. And I think as the ecosystem matures fundraising platforms will look less like Kickstarter campaigns and be more optimized for groups of people assessing/vetting startups. (But I'm an optimist and obviously biased.)

The biggest problem with the JOBS Act is the potential for adverse selection. If "the best" startups don't want to touch it with a 10-foot pole for legal reasons, that's a serious issue for the ecosystem. We've been spending a bajillion dollars on legal research and think we have something that makes this nearly a no-brainer for startups, but time will tell. Startup lawyers hate being guinea pigs with new regulations.

At best I think we'll see a lag in mainstream startups using Title III. Instead we'll see small businesses that are underserved by current investors first. With more precedent and familiarity with unaccredited crowdfunding I'm pretty sure we'll see more startups use it. A similar thing happened three years ago with "rich person" crowdfunding – many critics speculated only bad companies would use it, not-bad companies started using it, and now it's generally accepted.

Index funds would be great. The JOBS Act prohibits investment funds explicitly and it's prohibitively expensive to create a fund for early stage startups that unaccredited investors can participate in. However we're working on ways to emulate index funds, and I think it'll be doable by someone in the long-run.

Re: S.E.C. Gives Small Investors Access to Equity Crowdfunding

#14

Post by fweespeech » Sat, Oct 31, 2015, 12:36 AM UTC

stevecalifornia wrote: post #11

I am happy they are doing this, I am disappointed they placed such a low cap on what you can invest. I would love to hear more reasons for the investment cap other than protecting investors from themselves. It seems like such a low cap that you can invest in maybe one startup. I would also love to hear why protecting investors from themselves is a good thing. It's an honest question: what is the merit of putting a ca…

> I would also love to hear why protecting investors from themselves is a good thing. It's an honest question: what is the merit of putting a cap on what you can invest based on your income? Shouldn't that cap be a personal choice?

The reality is these bets have ~10% chance of success. People [in aggregate] have a history of being duped into putting too much money into highly risky bets that they don't understand. That doesn't include the outright scams that have happened in the past.

At the end of the day, we [the taxpayers] are on the hook for things going badly. [i.e. In the form of investigation, entitlements] So yeah, we should have some say in how much is on the hook. So yes, when I'm on the hook for bailing people out of poor decision making...I don't want them to dump their life savings into it.

> Those with an annual income or net worth of less than $100,000 will be allowed to invest up to $2,000 in a 12-month period, or 5 percent of the lesser of their income or net worth, whichever is greater. Those with an income and net worth of more than $100,000 will be permitted to invest up to 10 percent of the lesser of their annual income or net worth.

This is pretty reasonable.

http://www.bloomberg.com/news/articles/2015-03-30/u-s-consum...

Most people really don't even save up to these limits.

Besides, you really should be dumping the money into tax advantaged accounts anyway. At that point, to hit the cap, we are talking 33% or more of your income being saved. Very, very few people hit that number and they mostly are the /r/FI types who wouldn't touch this except for a minority position in their investments.

Re: S.E.C. Gives Small Investors Access to Equity Crowdfunding

#15

Post by fweespeech » Sat, Oct 31, 2015, 12:37 AM UTC

nbadg wrote: post #12

stevecalifornia wrote: post #11

I am happy they are doing this, I am disappointed they placed such a low cap on what you can invest. I would love to hear more reasons for the investment cap other than protecting investors from themselves. It seems like such a low cap that you can invest in maybe one startup. I would also love to hear why protecting investors from themselves is a good thing. It's an honest question: what is the merit of putting a ca…

I agree with your reasoning totally. We don't put a cap on how much you can spend in the lottery. Why should we have a cap on something with better odds?

Well, really, that is just an argument to put a limit on lottery purchases [which we should].

Re: S.E.C. Gives Small Investors Access to Equity Crowdfunding

#16

Post by jsprogrammer » Sat, Oct 31, 2015, 12:52 AM UTC

david927 wrote: post #10

tptacek wrote: post #3

I'm not a fan of this idea. After the Startup podcast did an episode endorsing the idea, I wrote a blog post and circulated drafts to friends, but never got around to finishing it. Instead of doing that now, here's a rough list of arguments, all of them about how tech startup equity will work out poorly for retail investors: * The core issue: professional startup investors rely on (a) relatively large portfolios wher…

Startups aren't like Kickstarter projects. Crucially: people put money into projects on Kickstarter, not teams. Professional startup investors do mostly the opposite. That's actually a great reason why this may work. Apple was Woz and Job's first company and they hadn't finished college, going into a non-existent sector. No current investor would look at them. I know several startups that are working on something tru…

>the lottery whose odds are calculated and defined to not be possible to win

Sorry, but this just isn't true. It is possible to win with a single ticket and the return on that ticket could be $xxxx million : $1.

Re: S.E.C. Gives Small Investors Access to Equity Crowdfunding

#17

Post by icelancer » Sat, Oct 31, 2015, 12:56 AM UTC

tptacek wrote: post #3

I'm not a fan of this idea. After the Startup podcast did an episode endorsing the idea, I wrote a blog post and circulated drafts to friends, but never got around to finishing it. Instead of doing that now, here's a rough list of arguments, all of them about how tech startup equity will work out poorly for retail investors: * The core issue: professional startup investors rely on (a) relatively large portfolios wher…

Assume everything you said is true verbatim. None of it is a good reason to exclude retail investors simply because you don't think people are good at assessing risk correctly. There are a lot of bad investing ideas - hell, ideas of all sorts - that aren't banned/excluded.

Re: S.E.C. Gives Small Investors Access to Equity Crowdfunding

#18

Post by icelancer » Sat, Oct 31, 2015, 12:57 AM UTC

fweespeech wrote: post #14

stevecalifornia wrote: post #11

I am happy they are doing this, I am disappointed they placed such a low cap on what you can invest. I would love to hear more reasons for the investment cap other than protecting investors from themselves. It seems like such a low cap that you can invest in maybe one startup. I would also love to hear why protecting investors from themselves is a good thing. It's an honest question: what is the merit of putting a ca…

> I would also love to hear why protecting investors from themselves is a good thing. It's an honest question: what is the merit of putting a cap on what you can invest based on your income? Shouldn't that cap be a personal choice? The reality is these bets have ~10% chance of success. People [in aggregate] have a history of being duped into putting too much money into highly risky bets that they don't understand. Th…

> The reality is these bets have ~10% chance of success.

Randomly picking stocks - which is heavily advertised on TV, radio, and by your personal broker - has at least as bad of a chance. Yet we glamorize it, do we not?

Re: S.E.C. Gives Small Investors Access to Equity Crowdfunding

#19

Post by david927 » Sat, Oct 31, 2015, 1:05 AM UTC

jsprogrammer wrote: post #16

david927 wrote: post #10

Earlier quoted context omitted.

Startups aren't like Kickstarter projects. Crucially: people put money into projects on Kickstarter, not teams. Professional startup investors do mostly the opposite. That's actually a great reason why this may work. Apple was Woz and Job's first company and they hadn't finished college, going into a non-existent sector. No current investor would look at them. I know several startups that are working on something tru…

>the lottery whose odds are calculated and defined to not be possible to win Sorry, but this just isn't true. It is possible to win with a single ticket and the return on that ticket could be $xxxx million : $1.

Yes, literally, that's true. What I'm saying is that the odds are known and low, whereas with investing the odds are never known, and that itself is a leap.

Re: S.E.C. Gives Small Investors Access to Equity Crowdfunding

#20

Post by forrestthewoods » Sat, Oct 31, 2015, 1:07 AM UTC

tptacek wrote: post #3

I'm not a fan of this idea. After the Startup podcast did an episode endorsing the idea, I wrote a blog post and circulated drafts to friends, but never got around to finishing it. Instead of doing that now, here's a rough list of arguments, all of them about how tech startup equity will work out poorly for retail investors: * The core issue: professional startup investors rely on (a) relatively large portfolios wher…

* Don't want poor people to get rich.

* Must protect poor, stupid people from themselves because they're poor and therefore stupid.