
Stock and Bond Markets Dethroned: Private Fundraising Is Now Dominant - JumpCrisscross
https://www.wsj.com/articles/stock-and-bond-markets-dethroned-private-fundraising-is-now-dominant-1522683249
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csense
It's a tough problem. In the late 1990's, there was a big wave of accounting
scandals (Enron, Worldcom, etc.) Which led to heavy regulation (the Sarbanes-
Oxley Act). The Act was a well-intentioned attempt to _protect_ retail
investors from crooks.

The problem's that compliance is so burdensome and expensive that firms don't
want to enter the public markets until they're already large (or if they're
forced to when their cap tables get too big).

So this regulation that's supposed to help protect retail investors ended up
hurting them by putting growth opportunities out of their reach. If you keep
the regulations in place, it makes it easier for the rich to get richer and
the poor to stay poor, deepening the class divide. But if you roll back the
regulations, maybe the crooks will immediately see that as another opportunity
to line their pockets by creative accounting, and in another few years we'll
see a bunch of big companies go bust, as the lies can't last forever if the
money simply isn't there.

Damned if you do, damned if you don't.

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jbob2000
This is a false dichotomy. Just because the regulations we imposed in the past
made things burdensome, doesn't mean that regulations we impose in the future
have to be burdensome.

I'd want to understand why they're burdensome. Give me some concrete examples.
Everybody talks about how regulations are burdensome but nobody actually
mentions the specific things that are a burden.

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ehmish
You're required by to set up systems to ensure accounting information can not
be tampered with, even if people tampering with accounting information isn't
considered to be a high risk. To make it more concrete, it means you can't
push to master any more in a git repository to fix some botched merge because,
it happens to deal with revenue in some tiny corner of it's functionality and
every change has to be approved by multiple people

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jjoonathan
In light of git's enforced immutability constraints and the fact that multiple
approval for merges is SOP at many large companies, I suspect that isn't a
very good analogy.

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jogjayr
I thought they meant that literally, and not as an analogy.

At my company, developers can't do production deployments for, I've been told,
"SOX compliance".

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fricat1ve
Another step along the path to public markets becoming essentially a suckers'
game to siphon money away from passive investors.

Those who possess actual money seem to understand that real investments come
with terms and conditions. Not just "Here's 10% of my salary, see you again
when I retire."

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tspike
Could you explain how this would work in practice? If I'm allocating a
percentage of my salary to, for example, Vanguard's total stock market index,
how would that get siphoned?

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charlesdm
One simplified example: say people are investing in a passive property fund.
Those funds generally yield around 3 to 5% per year.

You're a smart entrepreneur. You build a huge skyscraper for $200m. You manage
to generate a yield of 10% on that $200m. Most of the $200m is debt levered
against the asset. The building subsequently gets sold to the fund on a yield
basis. They'll pay $400m, i.e. $20m in yield p/a = 5%.

Smart entrepreneur just made $200m.

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maerF0x0
Smart entrepreneur had to take massive risks (albeit short term because of the
sold yield) and do a ton of work over the timespan it takes to have that come
to fruition.

Yes, I understand the reward is also super high. I'm just trying to point out
that for most people if they tried this they'd likely fail to pull it
off(competence) or run out of runway(contingency).

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charlesdm
Just pointing out how you can siphon off massive amounts of money from passive
investors because they invest in a certain fixed way. Smart entrepreneur (he's
smart after all) would also likely raise his capital from a wealthy family
office, thus take very few risks himself.

Private equity roll-ups are another example -- you buy one amazing asset at
15x earnings, roll up a few other ok or "meh" businesses that you can buy at 5
to 10x earnings, and go public with a group that then trades at 20x earnings.
Preferably while loading it up with a ton of debt before going public. Who
buys that? Why your pension fund, of course.

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MR4D
The p/e is basically irrelevant. You want to buy a company that is somehow
broken (hence why p/e is irrelevant - if the company was barely losing money,
the p/e would be infinite).

Buying a broken company allows you to fix the flaw(s), and then sell the fixed
company back to the market. Even if the p/e were the same, if done correctly,
you make a killing on the deal.

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xivzgrev
Kind of a disvirtuous cycle isnt it? More income inequality means fewer people
have more money. If you need to fundraise it would be preferable to raise from
fewer than more - lower transaction costs and oversight. These private
individuals then capture more and more of the growth becoming further
enriched.

At some point though it seems like it would backfire. If wealth is
sufficiently concentrated than those individuals could effectively dictate
terms, possibly even colluding with others. Then the pendulum swings back the
other way, it may be more cost effective to go to public markets as crazy as
that sounds.

Or maybe we just need a few huge flame outs to cause private investors to
retreat.

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jmalicki
By disvirtuous do you vicious, or something else?

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sol_remmy
Thank goodness the government protects me, a non-accredited investor, from
investing in any private companies! I'm too stupid to make investment
decisions without going broke!

[https://passiveincomemd.com/not-secret-society-accredited-
in...](https://passiveincomemd.com/not-secret-society-accredited-investors/)

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JumpCrisscross
I used to be skeptical of accredited investor requirements [1] until
cryptocurrencies happened. That an entire space can (a) go from zero to fraud
in the blink of an eye and (b) not only ignore the delineation between gambles
and core investments, but develop a collective disdain for it and anyone
espousing it, has me convinced of the rule's wisdom.

Investing in start-ups costs money. Diligence costs money, negotiating terms
costs money and staying up to date on corporate actions costs time, and when
it matters, more money. Those who can't afford that not only sets themselves
up to get screwed, they bring down the quality of the ecosystem.

There is no person (a) who doesn't meet the accredited investor requirement
and (b) for whom an illiquid, volatile security like start-up equity is a
prudent risk-reward decision.

[1]
[https://www.sec.gov/files/ib_accreditedinvestors.pdf](https://www.sec.gov/files/ib_accreditedinvestors.pdf)

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mattnewport
Another interpretation is that the crypto mania is evidence of huge unmet
demand for the types of investment profile that are largely unavailable to non
accredited investors. If regular investors had access to more (possibly less
risky) such investments perhaps the demand for crypto investments wouldn't
have been so great.

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crdoconnor
>If regular investors had access to more (possibly less risky) such investment

Which could be done easily by raising interest rates above 0% and offsetting
any resulting collapse in demand with counter cyclical fiscal policy.

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mattnewport
Years of extremely low interest rates does seem like a contributing factor to
the demand for riskier investments that may see some inflation beating return.

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rdlecler1
One issue is even with accredited investors is the so-called 99 investor
problem for pooled investment vehicles. If I’m a company I don’t want
thousands of individual shareholders on my captable. The answer would be that
we could have crowdfunded VC funds that invests. But because the SEC limits
pooled investment vehicles to 99 accredited investors you limit the number of
$1k-$100k checks you can take in, which then limits how big a crowdfunded VC
could be.

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MR4D
Qualified Purchasers ($5MM+) are limited to 500, thereby minimizing this
problem considerably.

There are other ways around this that are surprisingly obvious to those who
work in the industry (but virtually unknown to outsiders)

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maxxxxx
It's just another symptom of increasing inequality. There is now enough
private money floating around so there is no need for taking money from the
general public. The main purpose of an IPO is to dump the stock on retail
investors once valuation isn't increasing anymore.

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maerF0x0
I've long thought about a law whereby companies over some 409a valuation must
allow public trading of their stock. For example maybe all companies over $5B
or some other quite large valuation would be required to allow public sale of
stock.

This would be good for much of society. It gives liquidity to employees, it
creates a market forces valuation, it allows pensions and other institutions
to more accurately index the economy as a whole.

What are some downsides I'm missing?

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conanbatt
Going public is super expensive. Are you saying the state should pay companies
to go public?

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maerF0x0
yeah its hard to say... I would imagine most companies could create new stock
to sale in order to cover the costs? I was mostly thinking about creating
liquidity for those who want to sell existing stock, more than raising from
sale of new stock .

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conanbatt
In freedom, liquidity is plentiful. Every company is public if every employee
is allowed to sell their stock in the open market. It is precisely regulation
that creates private markets. Do without and you will cheaply have an infinite
Amount of public companies, without the significant expenditures of dues to
wall street.

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rdlecler1
Public markets are highly efficient and it’s difficult to have a real
sustainable advantage. Private markets are different. Access to deal flow is
king and there is no insider trading because not everyone has the right to
invest in any company they want. This concentrates returns in a handful of
king makers.

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dmoy
Say one has enough income or assets to be an accredited investor, but doesn't
want to spend the time to figure out what private market investments are
worthwhile. Do there exist any low fee broad market index funds for that?

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gibybo
EquityZen has an index fund of sorts, but the fees are high and it only
includes companies that are on EquityZen which are probably not representative
of the average.

I'm not sure how much you need to join a round with a VC fund (and they would
distribute that into a bunch of companies for you), but that might be your
second best bet.

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patentatt
Lol, if you have enough to be an LP with a VC, they’ll find you ;-)

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advisedwang
Available at [http://archive.is/efiAd](http://archive.is/efiAd)

