> "While the investors listed above can take care of themselves, unfortunately, invitations to invest were also extended to small-time individual angel investors. Thousands of AngelList members were invited to invest personal checks ranging from $2,000 to $20,000+ via the mailing lists of multiple syndicates."
It's worth noting that any US person investing this way is required to be an accredited investor, which is another way of saying they've proven they can afford to lose that $20k (or whatever they're putting in).
The accredited investor rules in USA seem draconian, but if it weren't for them, we'd be absolutely drowning in fake tech companies taking money from retail investors. (Today those fakes are in crypto, where you can pretend your investment offering is a utility token or maybe a donation to a revolutionary DAO that just happens to issue tradeable crypto-tokens in return, and hide behind pseudonyms to make it harder for SEC to find you eventually.)
It always seemed a bit nonsensical to me that you can't invest in companies (in the USA) when you can spend your money freely in nearly every other respect. You can waste thousands on gambling, food, clothing, elective surgery, penny stocks, and all sorts of other activities without anyone batting an eyelid. If the goal is to stop idiots from pissing their money away, regulators have seriously underestimated the creativity of fools.
It also protects against the opposite effect: in an environment full of scams, you get run out of business for being honest because you have a hard time competing with the scammers.
> in an environment full of scams, you get run out of business for being honest because you have a hard time competing with the scammers.
This effect was really well illustrated for me Golden Sun (Red Rising saga book #2) by Pierce Brown. The protagonist is telling an older general about how he isn't worried about a scheming snake oil politician type and is corrected about why they are dangerous. Because "Liars make the best promises."
> “Pliny is a leech,” I say. “A liar as much as you’re an honest man.” “And that makes him dangerous. Liars make the best promises.”
My experience in China is a mirror opposite of that, when people know that 90% of business is, at least, shaddy, it gives extreme incentives to keep ones reputation superclean.
Gold supplier/Audited supplier badges on Alibaba were sold for 6 digit sums, and bribes to get out of blacklist were going even higher.
Of course, Reg CF has a host of its own challenges for founders (which I can attest to firsthand..). Also most accredited investors aren't necessarily onboard with it (they prefer private financing where they get more say in the terms). Still, it's a step in the right direction because it gives normal people the opportunity to invest, while also requiring companies to provide actual due diligence documents and comply with SEC laws before accepting money.
Yeah, it varies pretty wildly. Most early startups that have good options for VC or angels don't really benefit from Reg CF, since they don't necessarily have a "crowd" to invest from in the first place. So you end up seeing struggling companies with at least some fan base doing it as a last ditch attempt, which doesn't always work out. However, I do know some of the platforms are lot more selective than others for exactly that reason. But all said, at least the opportunity is there and the financials are legally vetted.
I understand. But there are strong feedback mechanisms in place so that a casino will actually pay your (unlikely) winnings and a surgeon will actually cat your face, which have to do with scrutiny, penalties for bad behavior, and the cost of entering a highly regulated market requiring lots of customers to recoup. They provide the service they claim.
The story is about companies whose business model is simply to take investment money. They do not try to provide the service they claim.
That's what the story about, but non-accredited investors aren't only prevented from investing in those particular companies. They're prevented from investing in the good ones, too. You say that the casino will pay your unlikely winnings, but the thing about casinos is that unless you actually have an edge, the more you gamble, the more you lose. The vast majority of games have odds that result in the house making a profit over time. And yet we're allowed to spend our money freely in casinos.
There are all sorts of penalties for bad behavior on behalf of companies. Of course, that doesn't guarantee they'll make money, but I think it's a very valid point that we're allowed to waste our money on all sorts of dumb bullshit, but not on something like investing in startups, which at least has a possibility, however remote, of resulting in some sort of return.
> They're prevented from investing in the good ones, too. You say that the casino will pay your unlikely winnings, but the thing about casinos is that unless you actually have an edge, the more you gamble, the more you lose. The vast majority of games have odds that result in the house making a profit over time.
What do you think is the expected return of investing in a private company? I don't have data to back this up, but I'd bet it's negative — especially if you hold common stock, or whatever non-preferred equity retail investors would get.
And if, on top of that, we relaxed the guard rails preventing people from being scammed? I think the odds would be much worse than you'd find in a casino.
Rereading my last comment, it sounds more combative than I meant it to. Sorry about that — didn’t mean to sound as though I was casting judgment on your opinion.
Anyway, I’m not proposing anything. I’m fine with the current status quo.
> we're allowed to waste our money on all sorts of dumb bullshit, but not on something like investing in startups, which at least has a possibility, however remote, of resulting in some sort of return
A lower possibility than the casinos or lotteries, if we're talking retail investment in early stage startup pitches you have no affiliation with. The reluctance of everybody to acknowledge this is the reason the law exist. Most people walk out of casinos having lost some of their money. Most retail investors in random business propositions will never see any of that money again.
It really depends on what you're investing in, doesn't it? We let people spend hundreds of thousands or millions of dollars in casinos over the course of their lives. When you go to a casino, you're paying for the thrill of gambling, and I think random business propositions offer the same thrill at worst.
Well yeah, depends which number you bet on roulette or whether you're the best poker player in the room too! Perhaps we could regulate startups like gambling and allow them to welcome anyone but only allow them to market the "thrill of gambling" like casinos instead of delivering very confident financial projections about how much they're going to make. But I'm not sure investment would be forthcoming then, because actually I think people want to put their savings into startups to get rich.
When gambling is restricted, gamblers generally don't argue it's a conspiracy to prevent them getting rich. The delusion that retail startup investment isn't the bigger gamble with worse odds (unless you're in the leagues where you can personally prod the founders on a daily basis) is why accredited investor rules exists. It'd be a lot easier to believe arguments relaxing them were sound if the people making them were arguing it was depriving them of fun rather than depriving them of the opportunity to get rich.
Why do you think we have these rules, since a free-for-all is the default? Is this a barrier to entry that protects the rich, or a barrier to getting ripped off that protects the less rich? Or both?
Chesterton's fence and all that.
You are allowed to throw all your money away if you want.
These rules are (at least partly) protecting you from having someone take your money under false pretenses.
I think they're absolutely there under the pretense of protecting people, and they do protect people from scams, at the cost of preventing average people from participating in one of the biggest wealth creation events in modern history. I think they're hypocritical, specifically because people are allowed to do all sorts of (in my opinion) far dumber things with their money. I think the world would be a much better place if gambling were illegal and all the people who currently waste their money at slot machines spent all that time thinking about how companies work.
You're correct that I'm allowed to throw my money away if I want, so why am I not allowed to do this?
Do you think most of the people who go to casinos think they're going to lose money? I think an unfortunate percentage do not realize at all that the odds are stacked against them. Their misunderstanding of statistics means they are quite literally getting scammed. And for the remainder that are doing it for entertainment, that's quite literally what I'm proposing be the standard for investing in companies.
> Do you think most of the people who go to casinos think they're going to lose money?
Yes. Everyone I know going to a casino can be asked how much they plan on losing a day. Almost all will respond with reasonable (for their finances) answer. The others still have an answer that I may think is unreasonable, but that's just a greater percentage of disposable income going to gambling than I think makes sense.
I don't even think most gambling addicts think they are going to make money, any more than most smokers don't think they're immune to cancer. There are some areas (poker, sports betting) where a lot of people think they will make money, but that's because they're games of skill and some people can make money there. And people overestimage their own skill.
I’m an entrepreneur, an accredited investor, and a recreational gambler and from my perspective everything you’ve said is completely true.
Casino gambling is only a financial strategy in the most unlikely scenarios, like the infamous MIT blackjack team.
By and large it’s a recreational activity. There’s the dopamine hit from the risk and another dopamine hit from your host paying for everything because you’re willing to spend 6-8 hours at the tables on your vacation. The slots are definitely a worse value proposition even with the higher comp rate.
The simple fact is that recreational gambling is less about strategy and edge and more about proper risk management. If your bankroll lets you Kelly bet at a level the marketing execs want to see then you will have a good time with predictable max losses.
I can’t imagine being entertained by slots, but if someone is and the house edge isn’t completely obscene, which sadly the gaming board permits, then even there there’s a reasonably priced vacation to be had with a Kelly betting strategy.
There's no such thing as a 100% safe betting strategy. Even in a player advantaged game with optimal betting an horribly unlucky player with a finite bankroll can still be ruined! So never risk money you can't afford to lose. Casino gambling is a recreational activity, not a way to reliably make money outside of the occasional astronomically rare exception.
The wikipedia page[1] is decent enough. Some searching will find various gambling and math sites that go into further detail, but I don't have one in particular I'd recommend over the encylopedia page. The super simple overview is that one always bets a fixed percentage of one's bankroll. That means as one wins one's average bet goes up and as one loses it goes down. The Kelly criterion is how one determines the optimal percentage.
Strictly speaking the correct Kelly bet for a house advantaged game is zero, so it only applies when the player can gain an edge, such as with blackjack advantage play or sports betting[2]. It's not too difficult to adjust the strategy for a house advanced game. The player just has to reckon what the comps (which are predictable, being based on play time and average bet size) and the rest of the experience are subjectively worth. For many persons the correct bet size is zero! If one is playing for entertainment and comps and not with an advantage over the house, then one can expect to spend a significant chunk of one's bankroll!
[2] My understanding is that it's possible for a savvy sports bettor to have better knowledge of the true odds than the bookie and thus make advantaged bets. On the other hand, far more persons believe that they do than actually do.
> That's what the story about, but non-accredited investors aren't only prevented from investing in those particular companies. They're prevented from investing in the good ones, too. You say that the casino will pay your unlikely winnings, but the thing about casinos is that unless you actually have an edge, the more you gamble, the more you lose. The vast majority of games have odds that result in the house making a profit over time. And yet we're allowed to spend our money freely in casinos.
Casinos have to be licensed and follow particular requirements about e.g. payout rate. Companies can solicit investment from the public, they just have to register and follow particular reporting requirements; a company with $310M can certainly afford to be public (there was a time when IPOs were much smaller than that).
> And yet we're allowed to spend our money freely in casinos.
That actually isn't true. In the US, almost all states have restrictions on gambling.[1] These are generally enforced by criminalizing or requiring government oversight of those offering gambling services.
Those other economic activities generally have a regulator standing by, a gambling commission, the FDA, SEC, and FTC. Most of them aren’t anywhere near funded or have necessary powers or maybe susceptible to regulatory capture. But at least there is someone. In the world of private angel investing, there is truly no one but you and your legal team to go after crooks.
> The accredited investor rules in USA seem draconian
I don't know about that - it hardly seems draconian, it's a trust-based system, entirely reliant on self reporting. Most of the time you just have to check a box that says you are an "accredited investor". Sometimes they want you to upload a few bank statements.
If you check that box, then others run diligence and discover you've lied it's called fraud. Attitude like yours is why many early companies are obligating their investors to prove net-worth. So many people want to be investors they'd lie to get there - number one sign you're a bad investors. Don't cheat!
I didn't see the OP saying you should lie, only that the system relies on self-reporting. If anything, I'd guess they agree that the system is open to abuse, but they're not saying people should therefore abuse it.
I've been part of a non-zero amount of deals where there was one, or more, parties who've made that false claim. In an open group I participate in there are some early Angels and want-to-be investors. I've observed folks attempting this shortcut. And every time it's fucked over multiple people. So, yea, it's trust based - and truth will out.
Mostly the deal falls apart, the company seeking investment can't get it (timely) - and may have to start all over (6mo process).
Another outcome was that the folk buying in had to buy out the non-RegD parties - and crushed them on the price so those investors got a better price, the fraudulent actors didn't see the gains they thought, the company now has more % owned by new investor group than originally thought (which changes the control balance) and the founders are grumpy and distracted and mad at folk they thought were cool (and all that has a down-pressure on productivity while everyone involved gossips for a few weeks)
Edit: of you're getting your FFF round, it's all private, that group can be unqualified and you mark the deal as a Loan, so when you raise your Angel round you'll pay them back, or start the payback - and let the Angels know that's happening. Part of the investment to service debt.
> Attitude like yours is why many early companies are obligating their investors to prove net-worth.
I didn't express any attitude about the current rules around "accredited investors", I merely expressed what the current status quo appears to be, i.e. the system is largely based on self reporting. Obviously, there are all sorts of problems with that.
For what it's worth, I don't particularly like the current rules around "accredited investors", they seem pretty arbitrary, and at the same time too lax (self reporting) and too restrictive (obviously, these rules give rich people access to a lot of opportunities not available to others).
"The accredited investor rules in USA seem draconian"
Think carefully about what the word "draconian" means. There is no organization that is responsible for tracking or allowing membership in the club of "accredited investors." This article suggests 1 in 10 USA households meets the definition:
Look around on Google and you will find many different estimates. Since there is no central organization that actually tracks this number, it is impossible to point to an official number.
If an unaccredited investor invests in a small startup, there is no penalty for the investor. Because of that, I would not use the word "draconian."
1. Anyone can invest all they want in a diversified portfolio of approved investments (non-penny-stock public companies, mutual funds and exchange-traded funds with modest fees, insured bank accounts, etc.).
2. Anyone can also invest in any other dumb investment; you just have to go to the local office of the SEC and get a Certificate of Dumb Investment. (Anyone who sells dumb non-approved investments without requiring this certificate from buyers goes to prison.)
3. To get that certificate, you sign a form. The form is one page with a lot of white space. It says in very large letters: “I want to buy a dumb investment. I understand that the person selling it will almost certainly steal all my money, and that I would almost certainly be better off just buying index funds, but I want to do this dumb thing anyway. I agree that I will never, under any circumstances, complain to anyone when this investment inevitably goes wrong. I understand that violating this agreement is a felony.”
4. Then you take the form to an SEC employee, who slaps you hard across the face and says “really???” And if you reply “yes really” then she gives you the certificate.
5. Then you bring the certificate to the seller and you can buy whatever dumb thing he is selling.
6. If an article ever appears in the Wall Street Journal in which you (or your lawyer) are quoted saying that you were just a simple dentist, didn’t understand what you were buying and were swindled by the seller’s flashy sales pitch, then you go to prison.
Related: Robin Hanson's idea of "would have banned" stores (that sell things that would normally be banned, with some kind of filter that you understand why they were banned):
I enjoy Matt Levine's pieces and I understand this is meant to be humorous and far from serious, but it's also instructive to think about how such a scheme could go wrong, because it illustrates how hard incentive problems are. I think the big problem would be if the "Certificate of Dumb Investment" by happenstance didn't seem so dumb anymore (a couple of lucky, high-profile investments really take off and are in the news for weeks) and then say a million people (< 1% of the U.S. adult population!) pile in to the next dumb investment and get all their money stolen.
No matter what they've signed, that's still a million people who've gotten their money stolen and they'll be out for blood, communicating on forums, in-person, etc. Beyond the brute fact that a million people have had money stolen, which is bad, there's the secondary problem that if just another 1% of that million still complains to newspapers, there's no way that the government could arrest 10,000 people at once without major public backlash, especially if those people play their cards well and can spin a media story of "victims of financial fraud further being punished by the government." If you've got 10,000 examples to choose from, there are bound to be sympathetic stories which capture the public attention.
And then at that point, if the government chooses not to prosecute those cases, the floodgates are loose and the "Certificate of Dumb Investment" has lost most of its power and purpose.
Have you ever been party to a class action lawsuit and gotten some amount of recompense for your troubles? And had that not been part of the mainstream news so no one you already knew was part of it? Because they happen all the time, and the government doesn't go after them - damages are civil not criminal, so the lawyers are the ones getting richer. As far as "the big problem", people win the lottery every day. It's still not a sound investment strategy (unless you have some sort of edge).
> Because they happen all the time, and the government doesn't go after them - damages are civil not criminal, so the lawyers are the ones getting richer.
The crucial point from the original proposal is the following:
> If an article ever appears in the Wall Street Journal in which you (or your lawyer) are quoted saying that you were just a simple dentist, didn’t understand what you were buying and were swindled by the seller’s flashy sales pitch, then you go to prison.
The implication (the WSJ is just a stand-in) being that if lawyers representing you even talk about this investment, let alone try to bring a court case, you go to jail. No law like this exists at the moment and I'm saying such a law would quickly become toothless because it would be nigh impossible for the government to enforce.
> As far as "the big problem", people win the lottery every day. It's still not a sound investment strategy (unless you have some sort of edge).
Yes and that's precisely why there's still a lot of people who buy lottery tickets. My point is telling people upfront that something is a losing proposition and then taking away the ability to complain if they do it and lose anyway isn't enough of a disincentive to prevent people from doing something if they are convinced that they're the lucky ones or that "this is the real deal," a slap in the face at your local SEO office be damned.
Yeah, it's funny as a joke but not really a sound principle. We have all sorts of people screaming "that's a stupid investment!" for stupid investments. The problem is not that the nay-sayers aren't heard. It's that the buyers are convinced everyone else is a h8er or sheeple, and will buy whatever dumb shit they've been convinced of regardless.
I get that they exist to protect people from getting scammed, but it also locks people out of some of the best ways to create wealth unless they’re already rich.
Crypto is an example of both. More people get scammed, more regular people accumulated wealth. Outside of that look at startups, regular people are locked out of early stage investment (including many of us in the industry).
I understand the trade off but find it frustrating I’m constrained for my own good. It feels like being held down to the level of the (uncharitably stated) dumbest person.
Hmmm; According to which metrics and stats is investment in early startups / random new companies and schemes, the best way to accumulate wealth? How do we define "best" - safest? Highest top possibility? Lowest risk? Over which period of time?
Our experiences may vary. I have far more visibility into people scammed left right and centre where I'm at. Those who did make money on sketchy schemes are lucky outliers (who of course believe themselves to be savvy risk takers fair enough ; I see most of them as incorrigible Russian roulette players who got lucky but not wiser).
The accredited investor rule is not the main barrier to investing in quality startups. The barrier is being part of an insiders' club. A16z will call its network of rich entrepreneurs when an investment opportunity arises. Nobody except the already-rich and connected even know it's happening.
> locks people out of some of the best ways to create wealth unless they’re already rich
im sorry what? investing in startups is one of the best way to create wealth? you have a source that talks about average and median returns on investments across all startups?
I don't care about the average or median case and 'some of the best' is suitably subjective, I just want the freedom to make my own choices.
The entire bet with startups if you're not rich enough to fund via an incubator is picking a team or company you think is good and kicking in some smallish amount of cash (~10k), angel list basically. If you're in the industry you may be better positioned to do this than a random person. We can do this by going and working for a startup and dumping money in to exercise options (arguably even riskier since now your job is also tied to its success), but not by just kicking in some cash unless you hit the accredited investor threshold.
I should be able to choose to do this if I want to. Instead I can only put money in after the company is public and a lot of the early return has already been taken by people rich enough to be allowed to buy in earlier.
Meanwhile I could go and gamble at a casino on slots without any proof that I'm rich enough to waste money that way.
If you've been in the industry for a while, you may already qualify as an accredited investor. The income threshold is $200K/year, which according to levels.fyi would easily be met by someone with a few years experience at a FAANG, for example.
If not, you can also qualify by passing the Series 65 exam, which is a 3-hour multiple-choice test that anyone can take.
You'll probably find that the biggest barrier is finding good startups who will take your money. The ones interested in taking a small amount of cash from some random person are also the least likely to succeed.
The relatively little money (and little experience with startups) that most retail investors have would not be enough to diversify their risk and thus be equivalent to gambling. I think the figure is 5% of startups are successful?
Anyone who has become wealthy through crypto became so because they gambled. And, bitcoin has a history of being manipulated. I had a friend who was part of a network that communicated to him when to buy and sell bitcoin. He mentioned "the whales" a few times when talking about it.
Interesting statement, since "certified" investors invest money into startups which have a failure rate of 95%.
But these people are of course not "gambling", because they bet at 50 horses at once. And for all their experience, they continuously fail. It all seems very arbitrary.
Personally, I think "gambling" is the wrong word. It's high risk investing. When I put all my chips on "red", that's gambling. When I read about a startup, believe in their idea and see potential, yet am proven wrong, I made an investment mistake. It's not gambling unless one blindly invests without any research.
I've heard exactly this argument from every gambler who walked into a casino with a "system". You might come out better than someone blindly laying bets, but you are still very much gambling.
Where is the line of personal responsibility? Fraud should be prosecuted. Isn’t that the protection? These are laws that ensure only the rich can get richer. Terrible. Literally a law that says “you’re too stupid, we’re protecting you”.
The fact that laws prevent people from doing things that would cause them harm is a feature, not a bug.
The accreditation requirements are not absurdly stringent (eg $200k annual income). I think there’s a clear argument that people who do not meet those requirements can neither accurately judge the risk of their prospective investments nor afford to lose their investment (high likelihood). The current crypto markets are perfectly bearing this line of thinking out.
Retail investors are free to invest in public companies where there are significantly more fraud protections in place.
Also note that the SEC has recently (2016) relaxed rules on equity crowdfunding to allow retail investors more access to such deals while also mitigating some components of risk or fraud:
You're only repeating the law without addressing the point.
Rich people, whom are already in a situation of privilege, have unique access to the number one way to exponentially increase their wealth: an early seat at the table.
The basis for this distinction is that they're rich. It's kind of insane to award rich people with extra perks. The other basis for the distinction is that they're smart, and we're stupid. Whether you're stupid or smart apparently is based on the random number of 200K. Below it you're obviously not very smart.
Preventing self harm is quite an arbitrary point. I'd say the greatest self harm one can inflict is regarding your health. Death seems worse than losing money. Yet there's basically no protection at all against this self harm, hence we have an obesity crisis, diabetes crisis, inactivity crisis, sleep crisis, mental health crisis, public health is in a terrible state. This is all fine though, just don't lose money.
The other side is that gains to the upside (private equity, other alternatives only available to accredited investors and QP's) aren't available to the masses, which further feeds the gap.
Didn't they change the rules so you don't need 200K salary / 1M in non-house assets to be an accredited investor, but you need to pass one of the financial services exams (Series 7, etc.)?
I'm not sure, it seems that many who make good money but are in debt can invest:
> Individual investors with an annual income or net worth less than $107,000 can contribute either $2,200 or 5% of their annual income or net worth, whichever is greater. The old rules limited them to the lesser of those two numbers.
> Investors with annual incomes or net worth greater than $107,000 can contribute up to 10% of the highest number.
But the same people excluded by the government from investing in early stage tech companies are encouraged by the same government to buy lottery tickets and visit casinos.
Lotteries and casinos are recognized as a form of entertainment - gambling - people may not behave rationally and they may end up ruining their lives, but there is a certain folk wisdom that gambling just loses money and you shouldn't do it (except for fun).
Investing has different norms and expectations. Few people think that financial analysis is "fun" in the same way that going to a casino or buying lottery tickets is fun - so the "entertainment" value isn't there in the same way. But many financially unqualified people will be bamboozled by con-artists who take advantage of the apparent "respectability" of investing.
> Lotteries and casinos are recognized as a form of entertainment - gambling - people may not behave rationally and they may end up ruining their lives, but there is a certain folk wisdom that gambling just loses money and you shouldn't do it (except for fun).
This is a pretense. They're recognized as things that generate huge sums of money for nothing for the owners of lotteries and casinos. They refer to them as "entertainment" to abandon responsibility for serious consequences. Cigarette companies would be happy to sell "smoking entertainment."
edit: to be fair, nutritional supplements have basically lobbied their way into the same thing.
Casinos will take your grandmothers last dollar and throw her out on the street when her credit runs out.
Somehow the regular people are smart enough to know the lottery is entertainment but they aren’t smart enough for investment wizardry. It’s just incidental, I guess that the government profits significantly from the lottery.
Listen, I’ve heard and understand the arguments “why” investors must be accredited. But I can’t help but find myself hearing these arguments and thinking “this is the government codifying the wealth gap”. When Slick Rick scams someone, it’s the worst thing ever. But when the government scams us all, it’s just the way the world works.
It's worth noting that any US person investing this way is required to be an accredited investor, which is another way of saying they've proven they can afford to lose that $20k (or whatever they're putting in).
The accredited investor rules in USA seem draconian, but if it weren't for them, we'd be absolutely drowning in fake tech companies taking money from retail investors. (Today those fakes are in crypto, where you can pretend your investment offering is a utility token or maybe a donation to a revolutionary DAO that just happens to issue tradeable crypto-tokens in return, and hide behind pseudonyms to make it harder for SEC to find you eventually.)