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

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

#51

Post by tptacek » Sat, Oct 31, 2015, 10:19 AM UTC

datashovel wrote: post #25

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?

You can't simply diversify. You have to pick a specific kind of company. If you invest in 10 startups that all have an equal shot at 2x'ing --- a fabulous success for a stock market pick! --- you will lose money, because the failure rate of companies with no operating history swamps a 2x return, and the winners can't adequately subsidize the losers.

If it was just a matter of making sure people diversified, I'd agree with you.

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

#52

Post by InclinedPlane » Sat, Oct 31, 2015, 10:59 AM UTC

tptacek wrote: post #47

InclinedPlane wrote: post #44

Earlier quoted context omitted.

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.

And none of my arguments were specific to hucksters scamming investors.

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

#53

Post by notahacker » Sat, Oct 31, 2015, 11:27 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?

The craps table is marketed as a gambling game and has a published payout figure. Startups crowdfunding for equity usually have a slick pitch video about how this excellent opportunity to tap into a £1bn market is a great investment. An opportunity which for a retail investor with adverse selection problems and no influence over company decisions is likely a vastly worse "investment" compared with a game of craps (the expected return on craps is probably less negative and the probability of at least breaking even is certainly higher at the craps table)

And people comparing crowdfunding with "regular stocks" - even on here where it's well known most startups fail - are prime example of which the public in general doesn't know enough about investment to consider it...

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

#54

Post by zacharycohn » Sat, Oct 31, 2015, 12:32 PM 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…

Off topic, but I've been really wanting to get into lending club. I spent about three weeks researching, then when I was ready to pull the trigger... I discovered it's not available in my state. -_-

Any advice, other than complaining to my state representative?

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

#55

Post by datashovel » Sat, Oct 31, 2015, 1:11 PM UTC

tptacek wrote: post #51

datashovel wrote: post #25

Earlier quoted context omitted.

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?

You can't simply diversify. You have to pick a specific kind of company. If you invest in 10 startups that all have an equal shot at 2x'ing --- a fabulous success for a stock market pick! --- you will lose money, because the failure rate of companies with no operating history swamps a 2x return, and the winners can't adequately subsidize the losers. If it was just a matter of making sure people diversified, I'd agree…

I think I see where the disconnect is from my end here. I guess I was thinking that this will have broader reach than just startups.

If a business has been around for 10 years and they're running into a tough patch, I think it could be reasonable to think one of their options would be to offer equity in their business in exchange for money.

Investing in that type of business I think won't necessarily produce the same percentage of "failed investments" so much as it will simply provide a lot more options that will earn the investor less than 2x. Long term prospects, perhaps 2x or even 3x returns may happen, but I doubt anyone will be doing this thinking they're going to find a 1000x return.

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

#56

Post by tim333 » Sat, Oct 31, 2015, 1:55 PM 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…

It seems the legislators are dealing with the problems of the investments probably being a bad bet by limiting the amount investors can blow to 5% or less of their worth/salary per annum. That way you can get the psychological boost of thinking 'hey I'm a startup investor, I'll be a millionaire soon' combined with life going on much as usual when they lose the 5%. Whether that's a good way to allocate capital I don't know. On the one hand cash will be lost on dumb ventures. Then again the odd big hit may make it worth it, possibly for society as a whole rather than for the investors as such.

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

#57

Post by sokoloff » Sat, Oct 31, 2015, 2:13 PM 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…

Agree with your last 4 points, particularly the "market for lemons" aspect.

I disagree with the conclusion of your first point. If the investment is +EV, even after the massive number of "goes to $0", I think it's fine to let retail investors participate. After all, we already let them participate without any oversight or limits in the state-run lottery, which is decidedly and markedly -EV.

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

#58

Post by Dylan16807 » Sat, Oct 31, 2015, 4:14 PM UTC

jsprogrammer wrote: post #24

david927 wrote: post #19

Earlier quoted context omitted.

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.

Even a truly visibly awful business has better odds than a lottery.

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

#59

Post by gbelote » Sat, Oct 31, 2015, 4:25 PM UTC

tptacek wrote: post #48

gbelote wrote: post #13

Earlier quoted context omitted.

(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…

The JOBS Act _does_ cap the amount people can invest per year. It's 5% of your income or net worth across all platforms (whichever is greater). If you make more than $100k the limits are higher and more complex to compute.

Platforms are also required by law to have educational material. And, annoyingly, investors have to fill out a small questionnaire about the risks of investing every single time they invest. So if you invest $100 in 10 companies you'll have to fill out a thing saying you know you could lose all your money and you should be diversifying, 10 times.

Plus, it's in our own economic interest to make it clear how and why diversification is important and that investors make smart decisions. Our whole business model depends on investors making a return since we charge carried interest (i.e. a percent of profits that investors make). This is standard practice for accredited crowdfunding and I expect it to carry over to the unaccredited world.

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

#60

Post by gbelote » Sat, Oct 31, 2015, 5:12 PM UTC

tptacek wrote: post #49

gbelote wrote: post #34

Earlier quoted context omitted.

> [...] 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 cou…

I disagree with the premise that the asset class as a whole is bad.

At the seed stage you're looking at returns of 50-5000x if you "win" so there's more margin of error in the 1/10 statistic.

To be clear: I think investing $5k in one startup (and only one startup) is dumb. I'm not saying that's what people should do. And there are legal limits to how much people can invest and requirements for platforms to educate (and ensure investors understand basic risks like failure rates and need for diversification). When you invest $5k across 50 startups that starts behaving like an index fund.

The caveat to the "big win" returns is that it's traditionally hard to get access to the companies that have a real chance at IPO. A small group of people with privileged access make an obscene amount of money and it's hard to break into that insider club due to structural issues with non-JOBS Act regulations.

The health of the asset class, IMO, is dependent on platforms' ability to attract those companies. For equity crowdfunding (when restricted to rich people) it's clearly in the realm of plausibility. The three major platforms all have at least one "Unicorn" under their belt. For unaccredited crowdfunding I'm optimistic given the information I've seen that this is doable, but if I'm wrong it'll be because the new regulations scare away the "good" companies. Not because retail investors are dumb or there's an inherit issue with democratizing access. There will be a law or amendment in the future that fixes any regulatory issue. I'm pretty certain this or something like it is the future if you look forward far enough.