Why should only rich people get to invest in companies? Anyone can go to Vegas and blow their entire life savings, but buying shares in Dropbox or Oculus at launch is just too reckless?
There's another reason that no-one's mentioned yet: only rich people can afford to investigate and sue if they get scammed.
For example, a few years back there was a Ponzi scheme in the US called PermaPave which took money from a bunch of small investors on the pretext it was being invested in environmentally-friendly stone paving slabs. They didn't make a single cent in profit from the slabs - all the payments out came from other investors' payments in. When the whole thing imploded none of the small investors could afford to do anything about it. Unfortunately for PermaPave, they'd also taken a much larger investment from a company actually interested in buying stuff from them, and when they breached their contract that company had the money to investigate them, figure out that it was a Ponzi, and sue everyone involved.
Another problem is that companies don't want to deal with a load of small investors if they can raise money from a few rich investors instead: it's a lot more work and expense for them, the small investors don't have the same kinds of connections and expertise that the big VCs have, etc. The main reason to raise money from ordinary people is because you're a scammer and big investors have the expertise to spot you, the resources to investigate you, and the money to sue you if they do invest. (The less money you invest, the less you can rationally justify spending on due diligence.)
Ordinary people are at a fundamental disadvantage to the rich here no matter whether they're legally allowed to invest or not.
The SEC did eventually pursue PermaPave several years after the company that'd invested in them figured out it was a Ponzi scheme and sued, and some time after they'd stopped accepting new investments. They're slow, mostly because there are so many companies out there and they don't have all that much information on them until they investigate.
I realize you're trolling but you might have just as well asked "why should only people with good credit be able to buy houses?" That might make the fault in that reasoning a bit more clear. It isn't "rich people" who get to invest as it is "people who understand the risks and are prepared for them" get to invest in "untested companies".
The "accredited investor" rules are an imperfect but functional selection mechanism to select for 'understand risks' and they also add the defense that once you lose enough money to fall below that standard you lose the opportunity to keep playing.
Further, anyone, in the US at least, can become a "rich person" by investing in publicly traded companies (or real estate for that matter) prior to investing in non-public companies. Many thousands have.
And finally, I grew up in Vegas and watched it kill people. Mostly people who managed their pennies and saved their savings. And took a vacation to Vegas and if they were very unlucky won a enough money to pay for their vacation on their first visit to a casino. Then went home broke, sometimes bankrupt. There were enough of those people that it left a mark on me. My buddy in high school who worked at a gas station which was on the the way to I-15 to head back to Los Angeles would have sales guys offering to trade him the demo units they had brought to a convention for a tank of gas to get back to the office.
The trick was you had to actually get there, nobody from a casino called you up and started asking you to play games of chance. And all the games are generally playable at home with your own cards or your own dice. So people can get a feel for just how impossible it is to win long term at those games.
No, this isn't about "rich people" and it isn't about "going somewhere to gamble." This is about enabling a class of unscrupulous people a nominally legal framework for stealing from people who can neither afford, nor effectively defend against it.
Not trolling at all and your comment would be better without the trollish accusation. I sincerely believe this is a matter of personal freedom. No free country should seek to restrict what people can do with their hard earned money. In the same way, I believe that no free country should seek to restrict what plants people choose to put in their bodies.
There are 1001 ways to destroy yourself financially as a poor person in America and precious few ways to have breakout financial success. If you're a poor person, but an early tech adopter of products like Dropbox, Oculus, and Uber, you could very well be a great investor and lift your entire family out of poverty.
Being poor does not make someone stupid or incapable of making proper life decisions. There are far more poor smart people than rich smart people in the world. Most people never leave their social class, regardless of their intelligence, in large part because most avenues for escape are blocked.
"why should only people with good credit be able to buy houses?"
Because typically banks won't give you loans without ability to pay them back. (sans moral hazards)
This equity purchase is at least equivalent to gambling which is already legal, and yea the latter has bad effects - like alcohol, cigarettes, etc.
Also see: nearly all product marketing that sells you shit you don't need, American culture in general that glorifies "livin' it up" instead of thrift, etc.
If you have a problem with JOBS Act on these grounds - you have a much broader fight, and I hope you're as outspoken about those issues as this one.
The reference was to the mortgage crisis, where unscrupulous mortgage brokers colluded with banks and credit reporting agencies to give mortgages to people who could not repay them. Triggering a remarkable financial crisis which still reverberates over 5 years later.
And to re-iterate, as this tends to get lost sometimes in examples, my position is that I am for broader participation in the early investing stages of companies, but I am also a fan of a "fence" or a "marker" which mitigates the risk of bad actors pulling in unqualified participants. The "qualified investor" rules are just such a fence.
One more example then. Criminals are a small fraction of a population, but the harm they do is disproportionate. The number of mortgage brokers who were acting fraudulently was a small percentage of the total, and yet the harm they was quite high.
Large, interconnected systems, with humans providing some of the linkages are difficult to manage. And some of the humans are trying to "game" that system all the time. My claim is that the "qualified investor" gate is a mechanism which is a current inhibitor on the games players in terms of potential victims for investment fraud. Loosening the rules, as was done in terms of mortgage qualification in early 2000's, will give these bad actors the pool of victims they need to fund their games. The damage they will do will be disproportionate to any gain we might have achieved by getting a company funded which would have otherwise gone unfunded. I hope I am shown to be wrong in this fear, but it is my current best guess at how this "crowdfunding early investment" change plays out.
Vegas is very highly regulated. Every "investment" has specific odds associated with it that are checked regularly. No one presents gambling as a sure thing.
I don't see any reminders in Las Vegas or casino advertisements that all the games are negative-expectation, and repeated play can result in the loss of any amount of money.
In fact there's no paperwork or legal counsel required to play at all!
Can equity crowdfunding be placed under this same "highly regulated" regime that Vegas is under, so that anyone can walk up and participate at any time?
They did that with tulip-bulbs once. It did not work out well.
The securities market isn't a place to have fun, it's a vital machine on which all our prosperity depends.
Treating stocks as a blind gamble means money is not chasing the best investment but is being scattered randomly or by easily manipulated rumors.
Anyone who buys stock as a blind gamble should be deterred. Not to protect them but the rest of us. The same way children shouldn't play with matches; I don't care about burning their little fingers off I care about burning the house down.
I am no lover of the current system and would love to see it changed to be more equitable. But for better or worse as things stand right now, stock markets and prosperity, even of ordinary people, are apparently very strongly correlated. Ideally fixing them should not plunge the world into recession (or worse).
Where there are inequality issues, surely the safest thing is to just adjust tax rates and social spending to fix those. Viewing securities exchanges as a possibly useful machine that needs watching is much better than turning it into to a gambler's play ground for no good reason.
Even if you provided evidence of said correlation (you didn't), it still doesn't imply causation. The economy doing well could cause the stock market to do well for all I know.
It was said that our economic prosperity depends on the securities market. Im calling bullshit, and simply repeating the claim doesn't make it more true.
Wrong. You might be good at math, and still play the roulette; the difference is that you have to play it for variance, not for expected value (i.e. it's OK to lose $100 for a small chance of earning $100 000).
just because the odds are against you doesn't mean it isn't fun. gambling is mostly fine as long as you know your limits. The problem is that it is an addictive behavior, and if you are addicted it becomes a huge problem.
I'm have a math major. I know that i'm likely to lose money playing roulette. yet i'll put a few dollars down when i'm on vacation on a cruise ship because it's entertaining and fun. the difference is that i view it entirely as an entertainment expense, and limit myself to a reasonable amount of money (that is generally really low). How much entertainment i get (how long i get to play) depends on how lucky i am. if it's gone it's gone, there is no getting more out to play longer (which is where people who are addicted generally struggle).
It's not like rich people are all that much better at investing in companies anyway. They're just better able to afford the consequences of their ignorance.
Actually yes, I know an economist (working for the BCE) half-jokingly preaching it. According to him, lottery should be reserved to people who can afford to lose 10$.
In fairness to the lottery, few people consider it to be a sensible place to stick 50% of their net worth. Bearing in mind that top startups - which generate nearly all the return to VCs - have a marked preference for "smart money" and the majority of startups ventures fail hard, most lotteries probably have a higher expected value than retail investors are likely to see from the average crowdfunding portfolio.
If I understand correctly, the 10% of net worth restriction applies to investments in a single startup.
That being the case you can guarantee there will be commission-earning intermediaries or platforms misrepresenting the concept of portfolio diversification to encourage people to invest in as many startups as they can afford...
There are regulations that require thorough disclosure to investors. There is an exemption if all investors are "accredited". Rather than remove the exemption, the SEC has effectively removed the disclosure requirement.
The rule did not protect naive investors from themselves, it protected them from fraud and the economy from bubbles.
If anything, by creating a bubble environment the change will benefit the wealthy at the expense of naive later investors and can be pitched by populists as "wonderful" deregulation.
The crowdfunding rules require plenty of disclosure and background. Just not the expensive disclosure required of a company when it goes public, which is what you're talking about.
My comment is meant as a correction, not an expansion. What you said was wrong.
>Rather than remove the exemption, the SEC has effectively removed the disclosure requirement.
The rule did not protect naive investors from themselves, it protected them from fraud and the economy from bubbles.
Interesting how making completely vacuous denials devoid of any support utterly fails to advance a conversation. Perhaps you will explain what the point of wasting time typing them is. Or let me guess, the reason is "here's a down vote".
A 'conversation' built on falsehoods is no conversation at all.
I am less interested in finding some sort of constructive area with you as I am keeping you from misinforming the people who might read your comment and accept it as true.
That is not a waste of time.
If you must have detailed sources and point by point rebuttals, rather than 'vacuous denials' (who's wasting time now?) here you go:
> Rather than remove the exemption, the SEC has effectively removed the disclosure requirement.
Title III created the Securities Act of 1933 Section 4A which states, among other things that "s to reduce the risk of fraud with respect to such transactions, as established by the Commission,
by rule, including obtaining a background and securities enforcement regulatory history check on each officer, director,
and person holding more than 20 percent of the outstanding
equity of every issuer whose securities are offered by such person"
Along with all sorts of information regarding the business including "(I) the income tax returns filed by the issuer
for the most recently completed year (if any); and
(II) financial statements of the issuer, which
shall be certified by the principal executive officer
of the issuer to be true and complete in all material respects;"
And
"financial statements reviewed by a public
accountant who is independent of the issuer, using
professional standards"
And "the name and ownership level of each existing
shareholder who owns more than 20 percent of any
class of the securities of the issuer; "
And "not less than annually, file with the Commission and
provide to investors reports of the results of operations and financial statements of the issuer, a
" And on and on and on.
So, there is a significant discosure requirement despite your assertion to the contrary.
> The rule did not protect naive investors from themselves, it protected them from fraud
That much, at least, is true, but it suggests that the new rules will not which is false as shown above.
> and the economy from bubbles.
This also suggests that the new rules will form bubbles. While that is always a risk, the amount each business can raise and the amount prospective shareholders will be able to invest in these entities is limited, so I don't think this adds significant risk of new or bigger bubbles.
Now the record is straight and those that read these comments will have immediate access to the truth. It might not leave much room for whatever conversation you were planning on having but it is a worthy use of time nonetheless.
Vegas expectations = always negative, no matter how much time or thought you put into it
Private investing expectations = usually negative, but sometimes positive (and more likely positive with experience and effort, or within domains of personal expertise)
So why is the first a better deal to open to everyone without regard to wealth, whereas the second is so dangerous it must be encumbered with wealth-tests (not knowledge/skill/credential tests) and major legal barriers/overhead costs?
Here's an idea: let anyone invest, on the same basis as a traditional "accredited investor", whatever amount of cash they could also obtain, via withdrawals or loans, at a casino cashier cage. If it's OK to hand someone $10-20K in chips for negative-expectation games, why not let them invest $10-20K in maybe-positive-expectation learning experiences, without prejudice?
Poker in vegas has +EV in the right circumstances, as does card counting blackjack when coupled with player reward bonuses. Hell, roulette with a martingale system has a positive expectation if you have more money than the house and the bet size is unlimited.
So occasional +EV situations in Poker and Blackjack for a tiny fraction of the most disciplined players (and only at the direct expense of others) are why non-rich people are allowed to wager their entire life savings at roulette, lottery, and slot machines? And then even more than their net-worth, via lines-of-credit?
But then those same people – no matter how disciplined – must face large (practically insurmountable) paternalistic legal barriers against putting even a few dollars into private investments? Even in domains where they have personal expertise? And where the results can be positive-sum for all involved, rather than strictly zero- or negative sum?
The nonsense is still strong in the dichotomous regulation of gambling and investments. It's almost as if the paternalists want to protect poor people from becoming wealthy!
Roulette with a martingale system has exactly the same expectation as roulette without a martingale system, just a slightly different distribution of returns. Having more money than the house certainly isn't an advantage when you've lost 16 times in a row and they can't honour your next bet...
True, and it is not like Las Vegas, it is like buying a used car which is a gamble exactly to the degree there is an information deferential. The less disclosure to the unwary, the more opportunity for disaster.
The new SEC rule affects disclosure and allows more ill-informed investments.
Also if you gamble in Las Vegas it doesn't destroy the tech industry as a side effect like a bubble will.
this is a valid argument, however, the opportunities available to non-rich people are very likely to be severely adversely selected ( skewed towards not so great companies )
