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

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

#41

Post by 7Figures2Commas » Sat, Oct 31, 2015, 4:46 AM UTC

akg_67 wrote: post #30

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 ne…

> Have you looked into Lending Club and Prosper Marketplace peer to peer lending platforms?

1. Lending Club and Prosper Marketplace have grown up in a period of historically low defaults. We will see how successful investors, retail and institutional, really are at assessing and managing risk when the current cycle ends and defaults rise. As Warren Buffett said, "Only when the tide goes out do you discover who's been swimming naked."

2. Marketplace lending activity is increasingly institutional[1]. Without institutional money seeking yield, you would not see nearly as much dollar volume in this market.

3. While I would not be surprised to find that some institutional investors aren't very diligent, you should also recognize that the notes they are purchasing typically make up just a portion of their investments. Unless you have a 360-view of a fund, it's not entirely fair to pass judgment on how well the fund manager is managing risk.

4. Assessing the risk of Lending Club and Prosper notes, which are debt obligations associated with consumer loans, is a very different exercise than assessing the risk of an equity investment in a company, especially when that company has little or no operating history.

5. The last time I checked, the notes on Lending Club and Prosper were actually obligations of Lending Club and Prosper and are not secured by the actual loans. In other words, if Lending Club or Prosper run into financial difficulty and can't meet their obligations, investors can lose even if a borrower is still making payments on his or her loan. I would venture a guess that many of the supposedly diligent retail investors you refer to don't actually know this.

[1] http://qz.com/536573/one-thing-putin-and-kim-jong-un-both-ge...

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

#42

Post by intrasight » Sat, Oct 31, 2015, 4:54 AM UTC

Just reading this about new book by Akerlof and Shiller

https://www.washingtonpost.com/news/wonkblog/wp/2015/10/29/t...

"Their latest book, Phishing for Phools, takes the idea further. Not only are people vulnerable to making mistakes with their money, they argue, but the market is exceedingly good at exploiting them."

“The economic system is filled with trickery, and everyone needs to know that,” they write in the book’s opening pages.

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

#43

Post by forgotmysn » Sat, Oct 31, 2015, 4:57 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…

I think a curated marketplace, something between Kickstarter and Angellist, where companies are vetted and structured into tiers based on experience, team, capital, etc. with the hottest/safest companies are in the top tier, and risky/scammy ventures are at the bottom tier. This won't eliminate risk for inexperienced investors, but investment is never without risk, and there's nothing that can be done about that.

Thing is, I don't see equity crowdfunding as a replacement for VC funding because much of the value that comes from established investors comes from their insight, experience and contacts. If ecf becomes popular enough, VC's will still be able to invest in and advise great companies, but hopefully a majority of the returns will be more distributed.

I don't disagree that the risk is significantly higher in startups/private ventures, and that a vast majority of the money invested will be lost, but hopefully ecf will allow a large enough number of people to invest a small enough amount in each company (a la kickstarter) that the losses aren't catastrophic, but enough aggregate capital is able to be accumulated for companies to do what they need to do.

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

#44

Post by InclinedPlane » Sat, Oct 31, 2015, 6:25 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…

This seems like classic "protect the ignorant, unwashed masses from their own folly" condescension. Sure, people will fuckup and waste their money, a lot. Just like they do now with spinning rims, Big Macs, the stock market, lottery tickets, and televangelism. Should we ban those things because we think we know how to run people's lives better than they do? There are already some pretty severe limits in place to keep people from losing their shirt with crowd investing.

Sure, people are going to get scammed, just as they're scammed in numerous ways today, and people are going to throw their money away investing in hopeless companies. But that's not the only thing that will happen. And there's a significant potential for improvement over time in terms of educating investors on risk. I think overall it'll be a big win for everyone despite the abuse. And if it ends up replacing people's even riskier investment schemes (such as the lotto or cousin jim-bob's wacky business idea or the coworkers multi-level marketing scam) it'll be an even bigger win.

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

#45

Post by dllthomas » Sat, Oct 31, 2015, 7:05 AM UTC

icelancer wrote: post #32

zrail wrote: post #26

Earlier quoted context omitted.

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 ye…

...okay? That is different how than the craps tables in Vegas, state lottery commission, or... picking regular stocks?

Every single one of those has substantially more regulation about what they can do with how much of his money, and what they must and must not say when they do it.

I'm not at all sure all of that makes sense, but it's a huge difference.

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

#46

Post by tptacek » Sat, Oct 31, 2015, 9:31 AM UTC

jsprogrammer wrote: post #21

icelancer wrote: post #17

Earlier quoted context omitted.

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…

I don't invest in startups; I work for them, and plowing the proceeds of that work back into startups (or any other tech company) seems like bad diversification to me. So no, I don't have an ulterior motive.

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

#47

Post by tptacek » Sat, Oct 31, 2015, 9:38 AM UTC

InclinedPlane wrote: post #44

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…

This seems like classic "protect the ignorant, unwashed masses from their own folly" condescension. Sure, people will fuckup and waste their money, a lot. Just like they do now with spinning rims, Big Macs, the stock market, lottery tickets, and televangelism. Should we ban those things because we think we know how to run people's lives better than they do? There are already some pretty severe limits in place to keep…

None of my arguments involved hucksters scamming retail investors; all of them hold even if both sides of the deal enter it in good faith.

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

#48

Post by tptacek » Sat, Oct 31, 2015, 10:03 AM UTC

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…

I think you're conflating two kinds of sophistication here.

Your comment suggests that by "sophistication", we all mean "understanding the offerings of companies", such as an AI expert knowing the nuts and bots of an AI company's products. I am not talking about that kind of sophistication.

The kind I'm talking about is the kind that tells an investor "don't invest in just one startup, because for the math to work on startup investing, you've got to invest in 10 startups, each of which have a 1/10 chance of success", and then the kind of sophistication that (a) knows how to secure the dealflow to make that kind of investment strategy work and (b) still be OK if it doesn't.

Virtually no retail investor has any experience executing that kind of strategy. In fact: most professional VCs can't either: the asset class as a whole has historically lost money, and is subsidized by asset allocation rules at the large financial funds that plow money into VC firms.

Most startups fail; most of the good startups fail.

I agree: if it's just $100, who cares? But that's not how retail investors approach the markets they're allowed to invest in now. Maybe the JOBS Act should have capped the amount people can invest per year.

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

#49

Post by tptacek » Sat, Oct 31, 2015, 10:10 AM UTC

gbelote wrote: post #34

7Figures2Commas wrote: post #22

Earlier quoted context omitted.

> 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 inves…

> [...] you're missing an important fact: wealthy individuals have access to resources, like attorneys, accountants and financial advisers This is less of a concern when non-accredited investors are investing alongside accredited investors under the same terms. I also think it's the duty of a platform to make sure unaccredited investors don't get unfair treatment. > First, most Americans are currently not investing i…

Plenty of Americans also want to invest in consumer products they believe in and support; a whole major consumer financial brand, The Motley Fool, was premised on consumers picking winners by investing in products they like. But it turns out that's not a very good idea, and virtually every retail investor is much better off investing in the market as a whole than they are in trying to pick stocks.

I'm asking: how could the situation be any better with companies that at best have a 1/10 chance of not abruptly ceasing to exist within 2 years?

Individual startup equity for retail investors is a bad financial product. We all know that to be true; it's weird that we're somehow able to pretend otherwise for the sake of argument.

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

#50

Post by tptacek » Sat, Oct 31, 2015, 10:16 AM UTC

forgotmysn wrote: post #43

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 think a curated marketplace, something between Kickstarter and Angellist, where companies are vetted and structured into tiers based on experience, team, capital, etc. with the hottest/safest companies are in the top tier, and risky/scammy ventures are at the bottom tier. This won't eliminate risk for inexperienced investors, but investment is never without risk, and there's nothing that can be done about that. Thi…

It's not really true that much of the value of VC investment comes from things like insight.

What is more true is that professional VCs compete for deal flow, and among the things they use to try to compete is advice and their rolodex. But don't confuse the cart and the horse! What's important is the competition.

The problem is that retail investors do not --- cannot, really --- compete for deals. They'll invest in things that have a 1-Click "Buy" button. They won't fly to Palo Alto to take a coffee shop meeting with a promising investment prospect.

So there's an adverse selection problem. The VCs poach the good deals. Some might slip by and land on crowdfunding sites, but the statistical reality will be that the deals VCs have access to are advantaged. Worse: everyone knows this, and a huge part of raising money (long term) at a startup is signaling, and so there are reasons for good companies to avoid crowdfunding even if they can't stand VCs.