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

nytimes.com

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

#21

Post by jsprogrammer »

icelancer wrote: post #17
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.

Exactly, the post reads as investor-class propaganda.

At the moment, the only logical explanation I can think of for posting such a piece is that you wish to reduce competition for equity by limiting the number of participants in the market. If you can limit the supply of cash, those with the cash can make many demands on those without. tptacek advocates for a limited supply of cash, carefully metered out by the cash-class, so as to preserve their position at the spigot (don't forget, those at the spigot get to take 'their' dividends/interest-payments/management-fees/transaction-fees/what-have-yous out of the stream; before anyone else even gets to see them).

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

#22

Post by 7Figures2Commas »

gbelote wrote: post #13
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…

> The main problem I have with the "old rules" of investing is that wealth is used as a proxy for sophistication.

I think there are strong arguments for revisiting the accredited investor criteria, but you're missing an important fact: wealthy individuals have access to resources, like attorneys, accountants and financial advisers, that the less well-heeled frequently don't have access to. So even if accredited investors themselves aren't sophisticated, they usually aren't without the ability to protect themselves.

> With companies staying private longer, most of the growth in high growth startups is only available to the wealthy.

A lot of proponents of Title III offerings use the "average Americans are being denied access to the opportunities the wealthy have" argument but it's not as convincing as it might seem.

First, most Americans are currently not investing in the public markets[1], many because they don't have the money to. They have therefore missed out on one of the greatest bull markets in history, central bank-inflated or not. Providing greater access to private markets doesn't do anything for those who can't even afford to participate in the public markets.

Second, there are plenty of publicly-traded vehicles that provide access to private market investments. For example, for those interested in tech, GSV Capital (ticker: GSVC) owns stakes in pre-IPO darlings like Dropbox and Palantir[2].

> 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.

Are you referring to 506(c)? Adoption of this has been tepid at best.

[1] http://www.cnbc.com/2015/04/09/half-of-americans-avoid-the-s...

[2] http://gsvcap.com/investment-portfolio/

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

#23

Post by drumdance »

forrestthewoods wrote: post #20
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.

The SEC exists mainly to force companies to disclose relevant information about the business in a timely manner. Will this change help or hinder that?

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

#24

Post by jsprogrammer »

david927 wrote: post #19
jsprogrammer wrote: post #16

Earlier quoted context omitted.

>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.

It is an interesting point, but it does contradict your prior claim.

One problem I see is that an investor may actually be dealing with a lottery-like game without knowing. That is, a particular investment may have actual, calculable odds (would depend on the business model) that are as worse as the lottery model, but are, however, unknown (or even unknowable) to an investor.

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

#25

Post by datashovel »

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…

I don't see why "the core issue" is an issue. Suppose someone can only invest $2000 per year. What is preventing them from diversifying that smaller amount across just as many projects as a "professional startup investor" would?

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

#26

Post by zrail »

icelancer wrote: post #17
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.

People are terrible at assessing risk, especially when it's not their day job. Even when it is their job, assessing risk in an adversarial environment is an extremely difficult thing.

Your dad (not really your dad, but for sake of example) is a retail investor. He has no idea what he's doing, but he heard "through the grapevine" that he should invest in this one particular startup. He sends them his IRA balance.

A year later the startup exits, but he hasn't been paying attention and turns out he's been diluted to 10% of what he thought he had. Now he has nothing.

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

#27

Post by nbadg »

fweespeech wrote: post #15
nbadg wrote: post #12

Earlier quoted context omitted.

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].

That really depends on your perspective. I personally think that using wealth as a proxy for... well, really for anything other than wealth, but in this context risk assessment capability and fiscal planning ability, is terrible public policy. If you're concerned with people making poor financial decisions, then you should focus on providing better financial education, instead of restricting the fiscal agency of everyone else in the same income bracket. But that's another discussion entirely.

What I am definitely arguing here and now is that there is an inherent hypocrisy in the way we legally treat lotteries and the way we treat investment. Both are seen by their "players" as vehicles for potential financial windfall, and the riskier and less responsible of the two is wholly unregulated and even state-encouraged, while the other is tightly controlled and very difficult to get involved in.

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

#28

Post by [deleted] »

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…

[deleted]

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

#29

Post by okjgejoeg »

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…

There are many great businesses that would prefer retail money to professional money (or would specifically want retail to take at least part of a round). Specifically, I'm thinking of b2c operations where the crowdfunding would be valuable not just for the funding, but also for the crowd of supporters.

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

#30

Post by akg_67 »

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…

Have you looked into Lending Club and Prosper Marketplace peer to peer lending platforms? The retail investors on these platforms are having good success in assessing and managing risk with consumer lending. There is no reason that the same will not happen with equity crowdfunding.

Equity crowdfunding platforms will be responsible for due diligence and standardizing the equity offerings instead of the individually negotiated deals and preferential deals to different investor groups that is the norm right now.

I run crowd-lending analytics and automation platform, PeerCube https://www.peercube.com, for retail lenders on Lending Club and Prosper. I also consult and advise hedge funds and institutional investors on the same platforms. In my experience, retail investors appear to be much more vigilant, perform much more due diligence and selective than the institutional investors. This is primarily due to "own money" versus "other people's money (OPM)" and the amount of money deployed. When you have your own skin in the game, you are more vigilant.

Your arguments are more about maintaining segregation of certain areas for "privileged" classes. Exact same arguments were made when SEC approved retail investor participation in p2p lending in 2008/2009.

Edit: More details on SEC approved rules in SEC press release http://www.sec.gov/news/pressrelease/2015-249.html. It appears there are enough safeguards in place to alleviate investor screw ups.

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