The SEC Just Voted To Lift The Ban On General Solicitation

One thing I noticed in passing when reading the articles about this today: the accredited investor rules have not been updated for inflation since they were passed in 1982.

If they had been, by my calculations, the net worth requirement would be $2.41m instead of $1m and the income requirement $482k instead of $200k. Definitely easier to get accredited these days...

> Basically, this will be a huge amount of new competition for angel investors.

It is unlikely to do any such thing. To argue this, you must believe that there exists a substantial number of accredited investors who are not actively investing in private companies because they haven't received random solicitations to do so.

The reality is that accredited investors come in all shapes and sizes. The vast majority of the ones who are interested in putting their capital to work through investments in young private companies are already the people we call angel investors. In other words, lifting the ban on private solicitation is not likely to produce enough new angel investors to have a meaningful impact on competition for deals.

> I expect to see a small industry of companies assisting founders in this new kind of marketing.

There is already a well-established cottage industry of firms that help private companies raise money from accredited investors.

Obviously, the firms that do this don't do so for free, and some of them demand finder's fees that no savvy founder would ever pay, but there's absolutely no reason to believe that companies unable to raise money on their own will pay less trying to market themselves to investors directly than paying a finder's fee.

The accredited investor requirements are a little silly and outdated. Good news is that more change is on the way in the form of Title III of the JOBS Act, which was signed into law last year. Removing the ban on general solicitation was Title II of the JOBS Act.

My instinct is to lash out against this move. General solicitation lowers the amount of social vetting a manager must go through before being able to raise funds. It also makes un-accredited investors more aware of the investment barriers around them, which could loosen resolve for maintaining those walls.

But 2013 isn't 1933. The average sophisticated investor is more versed in finance, more wary of solicitation if they are not, or closer to one of the former.

What this is, is a boost to non-conventional assets and managers. The ones too young or crazy to have made it through the traditional vetting process. There's already plenty of noise if some idiot broker put you on a mailing list...

I'm just waiting for this to blow up like it did right before all these rules were added (i.e. the great depression). Startup investments are hugely speculative, the vast majority turn a lot of cash into nothing. The public is risk adverse; look at the last financial downturn, there is still a subset of people pushing legislated guaranteed stock market returns because they don't understand the risk/return relationship. As soon as a few people lose all their money, this whole scheme is going to violently implode.

Consider this, the 10-year early stage VC performance was 3.9% [1], with late stage and expansion focused funds at 9.3%. Average VC returns were 6.1%. By comparison, the DJIA returned 8.6%, the NASDAQ returned 10.3%, and the S&P 500 returned 8%. Private, non-qualified investors are going to get slaughtered. VCs are professional investors and their overall industry returns are awful. In addition, private investors have no connections. Those returns include VC's that now routinely liquidate failing companies to other portfolio companies and their LP's as "talent acquisitions", where they recover their investment through their liquidation preference; Joe six-pack won't be able to do that, he will just lose all his money.

The average mutual fund generates below market returns in the long run. If the average fund manager, a professional that spends 100% of their time trying to find strong opportunities for investment can't consistently generate excess returns, does anybody actually believe that the public will be able to? This is only compounded by the extreme risk and volatility of startup investing. Maybe you hand-wave this off, and say the average fund manager is stupid, and maybe they are, but I'd bet they are nowhere near as stupid as the average member of the general public, just go read some YouTube comments.

My bet is that late-stage and expansion deals still go to the VC crowd because they can bring mountains of cash, fast, with connections. The early-stage funding, with the 3.9% long-term returns will go to the public, with even lower than historic returns. As soon as the public figures out that they are hundreds of times more likely to get wiped out than become billionaires, this whole mess will get legislated away again.

[1]: http://www.avc.com/a_vc/2013/02/venture-capital-returns.html