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Stock and Bond Markets Dethroned: Private Fundraising Is Now Dominant (wsj.com)
124 points by JumpCrisscross on Apr 2, 2018 | hide | past | web | favorite | 109 comments



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.


> compliance is so burdensome and expensive that firms don't want to enter the public markets

There's something bigger going on than SOX. That was the hypothesis the JOBS Act was predicated on [1]. Yet the trend continues uninterrupted.

My hypothesis: broadly held (i.e. by employees) companies taking long-term technology risks are fundamentally new. Moreso than reporting requirements, minute-by-minute pricing isn't helpful to a company challenging accepted wisdom over long time horizons. (Contrast: Tesla and SpaceX.) Being able to time large-scale valuation changes with technological milestones is a huge advantage no amount of public deregulation will compete with.

The trade-off between valuation control on one hand and liquidity on the other hand has multiple solutions. Deep private markets have an equilibrium between closely-held private businesses (e.g. Koch Industries) and widely-held public companies (e.g. Apple). (Multi-tier voting in public companies, as Snap and Facebook have, on the the other hand, seems untenable.)

[1] https://www.sec.gov/spotlight/jobs-act.shtml


This has less to do with Sarbanes-Oxley than you might think. The real shift is how much money is chasing very low returns. When 4% over inflation starts looking great companies don't need to go public to access billions in capital.


I doubt that investing in early-stage unicorns is the best way for the poor to get out of poverty.


No, but more folks in the middle class might be able to remain in the middle class if their modest portfolios had access to high-growth companies, ideally through index funds rather than individually-picked stocks


What weighting index of all IPO stocks during the sitcom era would produce a performance boosting return? Does AMZN fix all woes?


only in hindsight. but if they were part of an index the stocks would be even more expensive to buy into reducing gains overall. and remember that unicorns do not pay dividends.


I don't know if this is true, but if it is wouldn't there be a really obvious pattern of the market value of initial IPOs going up compared to before SOX was passed? Is there such a telltale pattern?



This article is just cherry-picking examples of specific tech companies and trying to make the point that SOX is onerous on that basis.

If instead, you look at NASDAQ's own website of recent IPOs[1] and look at the market cap of those companies there's plenty of smaller companies to be found.

E.g. BWB went public less than a month ago and has a market cap of ~300M, meanwhile that Vox article is claiming Netscape's IPO of 2B would be impossible today. AIHS is hovering at ~150M and DNJR at ~60M, both companies public in the last month.

Again, maybe it's true, but given all that I'm more willing to believe that the tech sector in particular just has more access to private equity than it did 20 years ago, and thus there's less pressure to go public. It's more of a hassle to be public, and that applied before SOX, at the very least you need to deal with nosy shareholders wondering how their money's being used.

1. https://www.nasdaq.com/markets/ipos/activity.aspx?tab=pricin...


> hurting them by putting growth opportunities out of their reach.

You're asserting that the "alpha" of the private opportunities is higher, even after you've accounted for risk. This should be amenable to statistical evidence? Including all the VC-funded duds and collapsed buyouts like Toys R Us.

I'm not sure that retail investors want this kind of risk profile; it seems to me that the demand is phrased in terms of interest rates. And to get back to higher interest rates we'd need more inflationary pressure from growth - which we don't have.


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.


I've never dealt with SOX compliance personally, but I did deal with PCI compliance. Now, PCI compliance isn't government-mandated, but since the penalty for non-compliance is that they take away your ability to take credit cards, it's treated as though it were a government mandate in a corporate setting. My observation about PCI compliance was the regulations themselves were clear, helpful, and well thought out. The burden was the months upon months spent arguing about who interpreted which regulation which way (and God forbid you just ask the regulators!), and an apparently certifiably insane executive board that would rather spend $1000 avoiding each individual regulation than spend $10 adhering to it.


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


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.


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".


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."


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?


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.


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).


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.


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.


I think you’re partially correct, but you’re missing out on the asymmetry of the risk/reward payoff. People often forget that there is a lower bound to losses (zero), but no upper bound on price (and therefore profit).

Also, most of these bets that have super high payoffs are initially made when others were walking away from similar bets. There’s significant research to support this, too.


Also, everyone can’t build a $200mm skyscraper, there are limits to how many of those we need.


Typical passive investing vehicles are float-adjusted. That means your analogy is inapt to something like a Total Stock Market fund.


If everyone is just doing passive investment, there's no real price discovery, it's just valuable companies getting more valuable just because they're already valuable. It also screws with management incentives for the companies when their 'owners' are completely checked out and uninterested in performance.



Essentially toothless because an index fund is going to invest the money either way.


False! SNAP has been explicitly excluded from the S&P500 index for exactly this reason[0]. I'm not sure if "whole market" passive funds would include it or not. At the very least VTI has 0.03% of assets in SNAP[1]. Not much to worry about.

0 - https://uk.reuters.com/article/us-snap-s-p-idUKKBN1AH2RV

1 - https://www.etfchannel.com/symbol/snap/


You’re confusing the maintainer of the index’s ( Standard & Poors) with the implementation (Vanguard).

If S&P puts a company in, Vanguard will buy the shares. Not doing so could cause problems, including lawsuits.


Yes, and as I said the S&P500 index excludes companies like Snapchat with the founder-has-most-votes trick. I suppose the real issue here is how much money goes into which indices, and which ones exclude companies like these.


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.


By disvirtuous do you vicious, or something else?


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...


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


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.


There's certainly an unmet demand for investments that yield 1000-fold overnight. People want to invest a few hundred or a couple thousand dollars and be multi-millionaires by Christmas. They don't want to put tends of thousands of dollars into an aggressive portfolio to maybe break a million in 2045.


I think that just shows that there's a huge unmet demand for get rich quick schemes.


It could also be argued that the success of crowdfunding sites like Kickstarter are similar evidence that people want to make micro-investments in early stage ventures that appeal to them.


>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.


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.


>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.

I used to think this too until I saw a bunch of teenagers invest their allowance and part-time job money into a new industry that was open to them and get rich.

It made me wonder if perhaps the definition of accredited investor should be expanded to people who have not only a lot of capital but also lot of time till retirement, since there's an equivalency, and who can afford to take risks and make mistakes in their 20s b/c they still have time to make up for it later.


If the state used that argument, it wouldnt be able to run lotteries.

It is, as many other measures, used by some to profit at the expense of others. Investors have their competition blocked, and ignorant. If a company had the opportunity to go public a lot earlier, they would gain massive leverage over the traditional investors, which means better terms and cheaper money.

Cryptocurrency showed precisely the opposite: it showed the tremendous pent-up demand for investments that regulations forbid. And the best way to reduce fraud is to increase competition. Who wants to invest in cryptokitties when the other startup has actuall revenue and sales and asks for less money than the latest ICO?

Figure 100% of YC companies ICO'ing in comparison to what ICO's are today. It would be massive amounts of cash with al ot less strings attached.


> If the state used that argument, it wouldnt be able to run lotteries

Lotteries are transparently run by the state as negative-sum games.


I fail to see how that makes it any better.


> I fail to see how that makes it any better

Lotteries are not run, nor marketed, as investments. Some people mistakenly think of them as such. They predictably lose money.

Because of private lotteries' histories with fraud, almost every modern nation has the state run (or heavily regulate) lotteries.


So a company has to claim it loses money to be absolved of any moral burden?

IF only the SEC accepted that.


> So a company has to claim it loses money to be absolved of any moral burden?

State and federal governments aren't private companies.


I think you're missing his point. Those very entities have agencies which are both "protecting" the public by imposing regulations that prevent them from expenditures with negative expected value, and at the same time peddle them.

Imagine if there were a state-run cigarette producing public benefit corporations alongside public health departments. You'd have two agencies, one cultivating and the other discouraging the same toxic habit at great public expense. We already have this with various OTB/gaming commissions and gambling addiction services. It's an insane conflict of interest to waste tax dollars on.


Also corn subsidies vs. obesity-related healthcare; free roads & parking vs. smog controls; loose monetary policy vs. financial bailouts; having everyone prepare their own tax returns (as opposed to the IRS just sending out a bill along with their calculations) vs. spending money prosecuting tax evaders; and CIA-financed terrorists using our own weapons against our military.

When you think about it, most of humanity's problems come from "fixes" put forth by some other branch of humanity. Humans are not particularly logical or inclined to see the big picture; they are very good at feeling a pain point acutely and slapping a band aid over it. Over time, this becomes rather absurd, but in the meantime the complexity lets societies that act like this grow bigger populations and amass bigger armies, and so that's all you see today.

Most historical peoples were quite happy to live as hunter gatherers, except that larger & more miserable societies had a knack for enslaving & eradicating them.


> Those very entities have agencies which are both "protecting" the public by imposing regulations that prevent them from expenditures with negative expected value, and at the same time peddle them.

Those two things aren't necessarily in logical contradiction.

There will always be demand for gambling and get-rich-quick schemes. Maybe it's better that the state monopolizes and regulates it (and makes it clear that this is not an investment), rather than letting private entrepreneurs take advantage of that same habit in even more effective and unscrupulous ways.

The state is not a particularly efficient entity, so perhaps letting it do evil in a bumbling and clumsy manner is the least overall evil.


This is a compelling argument, i.e., that regulated promotion is part of the long game toward protection against toxic behaviors. Probably the most notorious example would be supervised injection sites. The devil in the details is to what extent do you impose costs on the public majority that isn't afflicted with the problem, and accounting for all of the externalities, not just those produced by a commissioned "study". It's one thing to implement a progressive tax to claw back some of the advantages wealthy people reap from regulation. We can read those numbers on a balance sheet. Quite another to actually build the betting parlor or injection site, which invariably lands in the lower to middle class communities. Who's really paying the higher costs here in broad terms of value and quality of life impact?


A lottery is marketed as a game in which one spends a small sum of money in the hope of winning a large sum, not as a place to park ones savings in the expectation of increasing their value over time. And still likely offers a less negative ROI than unregulated securities offerings to retail investors.


You are welcome to restrain yourself from your own ignorance, but I don't see why you should have the right to do so on others that don't enjoy that bondage.

Punish those you disagree with by letting them hang by their own rope, or realize later on that it is you today who is being hang by your own.


You can't "punish people by letting them hang their own rope" when they don't actually get hung, because they're still around afterwards but now a burden. They now have to rely (more) on the social safety net, or turn to crime, or just sit around all poor and broken being unpleasant to look at.

A society that has decided to take on, at least partially, the burden of individual failure is incentivised to try to prevent it.

If you were to propose some sort of "unaccredited investors get to invest in risky markets if they agree to be put on a boat and cast out to sea if they fail" then I could see myself accepting that.


We plunge deeper into the rabbit hole. If only a citizen could decide to renounce taxes for services the government provides but that he doesn't use!

We are now all forced to contribute in name of helping the needy, but then we ask in return that they stay needy, and that attempts to rise above their station will be met with the reminder that it is the best for them and for everyone to remain ignorant of such matters.

How caritative, how empathic and how benevolent are those that get their nobility validated with their bank account statement.


So what happens when irresponsible investors plunge the country back into another great depression? How are you going to prevent the mistakes of others from causing a financial collapse which causes me to get laid off, through no fault of my own?


You overestimate the cost of speculative gambles, but let me ask a the opposite: if the regulation costs you your job and an economic recession who is going to compensate you for it? Because as far as i know the government has never given a check to compensate for its mistakes.


So much wrong with everything you said. First, the cost of speculative gambles is economic collapse. Such gambles were a root cause of the Great Depression. Second, how exactly is regulating investment going to cost anybody their job? Think it through. Maintaining the current state of regulation will have an effect now because ... ? It doesn’t make sense. Third, and this is by far the dumbest thing you said, of course the big bad gummint picks up the tab when people lose their jobs, it’s called unemployment! How fortunate you are to live with all of this evil regulation that you can be coddled into thinking that you know better than the generations that came before and put in place these institutions and norms. Libertarianism is a first world disease of entitlement that is only enabled by the stability and prosperity that effective government creates. It’d be so ironic so as to be funny if it weren’t so sad.


> First, the cost of speculative gambles is economic collapse. Such gambles were a root cause of the Great Depression

A man has earnt a nobel prize of economics by detailing how the federal reserve's money supply policy was the most noticeable trigger of the 1930's economic collapse. But even if you disagreed with that, speculation is definitely not what caused the great depression.

- The popular fear of engrossing and forestalling [types of speculative activity outlawed in England] may be compared to the popular terrors and suspicions of witchcraft. The unfortunate wretches accused of this latter crime were not more innocent of the misfortunes imputed to them than those who have been accused of the former -

> Second, how exactly is regulating investment going to cost anybody their job? Think it through

By restricting investment it lowers wage growth and employment. The rate of investment is maybe the best predictor of productivity increases and wage growth.

> Third, and this is by far the dumbest thing you said, of course the big bad gummint picks up the tab when people lose their jobs, it’s called unemployment!

Unemployment benefits are paid by the population, not by the government. Government is unable to compensate for its mistakes, because government owns nothing at all. Taxes are the ultimate ninja loan.

> How fortunate you are to live with all of this evil regulation that you can be coddled into thinking that you know better than the generations that came before and put in place these institutions and norms.

What is unfortunate is to disagree with it and still being obligated to follow it. If you find those kind of regulations upon the action of individuals beneficial, then the only thing you have to do is allow the Libertarians you so despise not follow them, and harm themselves. AFter that you will be able to enjoy your cautious riches and laugh at them, while not incurring any loss and having relative advantages.


Well I hear Somalia is great this time of year and they have very little regulation of oversight to speak of, perhaps you’d feel more liberty there? Or if that’s too warm of a climate for you, there are portions of Antarctica that are accessible most of the year. And I don’t despise libertarians, at all. I used to identify very strongly with both the political party and the philosophy. And then I grew up.


"You overestimate the cost of speculative gambles"

No, I remember my history.

"if the regulation costs you your job"

What regulation? The regulation saying that you can't screw people over? I wouldn't find myself in that job to start with.

"Because as far as i know the government has never given a check to compensate for its mistakes."

Not true in the least. Retraining programs to help people get into other industries have been all over. It's just the deficit hawk Republicans who tend to cut them.


> What regulation? The regulation saying that you can't screw people over? I wouldn't find myself in that job to start with.

For example, city regulations in San Francisco has made it very expensive and difficult to build. Hence, the rent of everyone that lives in the city is much higher than it would have been because of city regulations. When will I, an SF resident, get my compensation for the cost of regulation?

The government's mistakes are like spilled milk. They can only replace the milk spilled by taking it from someone else, and they drink the milk on the way to deliver it.


> Who wants to invest in cryptokitties when the other startup has actuall revenue and sales

If you look at historical investment patterns, it's often the big startups with no revenue and no sales that raise the most money. It's almost a disadvantage to have revenue, unless it's growing meteorically.


State lotteries are unethical for many of the same reasons why accredited investor requirements exist.


It's a lot easier to fix though: make minimum ticket prices higher. At $20 or $100 each, there is more sticker-shock friction to prevent overspending on lottery tickets.


You should also cap the max jackpots. The multi-hundred-million jackpots generate a bit of a mania.

Also, if you wanted to disincentivize lotteries, but not ban them outright, you could start taxing them - up front, not the behind-the-scenes cut states get now. Add a 50% tax on lotto tickets and a 50% surtax on winnings and most people will be too disgusted to play.


From what I see of gambling behavior, I'm not convinced that at $20 ticket price would help the people who are most likely to lose money they can't afford in the lottery.


It would make a fine business out of black market lottery ticket selling.


> 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.

You say this as if its obvious, but I'm not even convinced that it's true.

Sure, there are all sorts of strategies that VC firms employ to mitigate their downside, but those are only marginally effective. The real reason the successful ones are successful is because they were part of the right deals, not because they lost less money on the wrong ones.

Modern portfolio theory is adequate protection from that kind of risk.


In order to have a portfolio sufficiently weighted towards the the right deal(s), it is necessary to say no to enough of the wrong deals. (And of course to have access to the right deals, which many of the most advantaged startups can conclude far more quickly and discreetly with VCs than by marketing their business plan to the public.)

Modern portfolio theory isn't adequate protection when the probability of the average retail investor picking a portfolio consisting entirely of losers is sufficiently high.


The proof of the opposite is easier than that. That phrase implies it should be illegal to give stock to employees.


> That phrase implies it should be illegal to give stock to employees

Not necessarily. I identified three asymmetries for which capital matters: the costs of diligence, negotiation and keeping up on corporate actions. Employees gain an insider advantage in respect of the first and last. In respect of the second, employee stock options contracts are--relatively speaking--on the regulated end of the private markets. (Despite that, employees still get screwed on a regular basis[1].)

There is also the forced savings component. If an executive saving 30% of their salary were considering a start-up job with a 30% pay cut, the cut is 100% a speculative move. To a middle manager saving 1%, on the other hand, part of the difference can be explained as forced savings. Those forced savings may outweigh the speculative downsides of the position.

[1] https://www.bloomberg.com/view/articles/2015-12-23/good-tech...


There are more protections for investors than for employees in options. Investors are also provided considerably more information. And they sue regularly.

Employees getting screwed can be perfectly legal. So yes, I agree it has regulations, and it has them slanted. IF employees could re-sell their stocks in the open market, then employees could protect themselves from all of these.

So instead, they get lottery tickets with their name on it, with unclear terms and information obscurity.

In any case, the argument against is very simple. Who wants to pay the sec for the sec to make it impossible for you to do something. The sec could just as easily say "sec compliant" as a bonus for enterprises, and those that arent, arent. Those who care about not getting fleeced, will go get legally fleeced by sec compliant companies, and those that dont care, wont.


> There are more protections for investors than for employees in options

Negotiated at great legal expense.

> Investors are also provided considerably more information

Information rights are not a default. In any case, every shareholder--common or preferred--in a Delaware corporation has the right to inspect the company's books and records [1]. Enforcing this right, however, is expensive [2].

> they sue regularly

Which, again, requires lots of capital.

> The sec could just as easily say "sec compliant" as a bonus for enterprises, and those that arent, arent

Observe the 1930s (or cryptocurrency boom). Accredited investors would go for the former; clueless investors be sold the latter. The latter would lose money and promptly (a) end up on the public balance sheet through our social safety nets or (b) foment a crisis, having taken bets they couldn't afford.

[1] http://codes.findlaw.com/de/title-8-corporations/de-code-sec...

[2] https://www.bizjournals.com/sanjose/news/2018/02/23/judge-or...


> Which, again, requires lots of capital. > Negotiated at great legal expense. > Information rights are not the default. Every shareholder--common or preferred--in a Delaware corporation has the right to inspect the company's books and records [1]. Enforcing this right, however, is expensive [2].

That goes back to my original criticism. If employees cant afford the legal expense of proteccion, then the stance has to be that private equity to employees should be illegal. Since they cant protect themselves, nor its a risk their portfolio should have.

I dont find the narrative that people are too irresponsible on their own money to play the stock game (but yes to the casino or state sponsored lottery) unless they worked for a place where the information asymmetry is formalized. (just because you have the legal capacity to ask for documents doesnt mean you can or will. We all have the capacity to be physically fit but we arent, so asking someone to be fit before they do something else is truly onerous).

> Observe the 1930s (or cryptocurrency boom). Accredited investors would go for the former; clueless investors would be sold the latter. The latter would then lose their money and promptly (a) end up on the public balance sheet through our social safety nets or (b) foment a crisis, having taken bets they couldn't afford.

Id read some articles about it, but its going to take quite a bit to be persuaded of the opposite with such an example. Remember that right now real companies expose themselves to extreme regulatory risk if they asked an ICO for their own securities: most likely illegal. The reason ICO's are mostly scams is because it is practically illegal to do it with a real company. Who would sell 30% of the company at 10 million when they can sell 2% at 50 million?


I think that the rich and the poor should have equal protection of the laws, as a matter of principle. Investor accreditation could be done on the basis of passing an exam (similar to how lawyers need to pass a bar exam in order to practice law) instead of on the basis of net wealth or annual income.

>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.

I disagree. I don't meet the wealth or income requirements for 'accredited investor' status, but if I had been allowed to invest some money in early-stage tech start-ups, I could have done quite well for myself.


How much would you have invested, and how well would you have done had the start-ups went belly up?


>How much would you have invested

Only what I could have afforded to lose. Around $5k. Not a lot of money (maybe even too small an amount to overcome the friction of traditional early-stage fundraising), but I would have gotten a much better RoI than my indexed stock-market fund got.

>and how well would you have done had the start-ups went belly up?

Well clearly I would have done poorly in that case. But that is why I don't invest more than I can afford to lose in risky investments.


"but I would have gotten a much better RoI than my indexed stock-market fund got."

Are you sure? How many stories have we heard here about people being diluted to shit when big investors come in?


Don’t know why this is being downvoted. The above comment makes it seem like early stage venture capital is an easy money spigot, and the only barrier to them getting rich is the big bad government.


Your last statement is incorrect. If it were true, then only millionaires would be able to start companies.

You’ve (inadvertently, I believe) just prohibited every independent plumber, carpenter, computer programmer, etc., from starting their own business. Because, trust me, starting a business is very illiquid - it’s like having a hole in your pocket.

Even worse, said plumber, carpenter, etc., has a high concentration risk - pretty much everything in one basket, including the person’s income.


Often this argument isn't really about whether everyone is collectively 'better off' by some particular metric. It's about how much of a nanny state it takes to get that result, and whether that's contrary to the spirit of freedom of association. In other words, money is not the only value. Liberty itself is a value.


What of the liberty to not be swindled? The liberty to have access to public markets with an expectation that there is third party oversight of the companies you are investing in? The liberty to live in a society where hucksters are the exception rather than the norm?


Those aren't liberties by the connotation implied by the US framers. You seem to be repurposing the word for rhetorical reasons.


I assume you are in favor of closing Las Vegas and prohibiting all those marketing campaigns that play with the brains and sentiment of billions of people. Many different kind of scams or tricks are present everyday.

Also, there are zillions of entrepreneurs wasting their health and time following impossible dreams. I prefer losing money than my health.

I am not endorsing any ICO but education should change to include basic finances since elementary school.


Not OP, but yes, I’d be in favor of all of the parade of horribles you trotted out


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.


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)


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.


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?


> What are some downsides I'm missing?

Maybe forcing owners to give up equity in their business just because their valuation hit some magic number? Keep in mind that not all $5B companies are Silicon Valley, VC-funded startups, and some founders still retain the majority (or in rare cases 100%) of their equity.

I also think you're over-exaggerating the benefits. None of those things seem like problems that need fixing.


This wouldn't per se force owners to give up equity, it'd merely prevent them from making it available to a limited circle of investors.


But in doing so one or more of the equity owners would have to give up a percentage of their holdings. So yes, you would be forcing people to sell equity when they'd potentially rather hold it.


This could be done without forcing anyone to sell if companies were allowed to be listed with very little volume/liquidity. Essentially those who own shares could publicly trade them, but there would be no IPO, and possibly no shares available to buy.


Public companies tend to focus on making money instead of innovation?

They become slaves of their quarter reports and lose the ability of investing in long term projects?

Maybe a bit exaggerated? :D


I think shareholder expectations determine what a company does. If the company is a growth company, shareholders will gladly allow the company to innovate, but if it's a blue chip, they will expect dividends.


Right, but there are important, large companies that are neither of these things. A privately-held company can act as a pseudo-nonprofit, if its management wants, investing in the benefit of humanity at the expense of both profit and growth. The possibility of shareholder lawsuits makes that much harder to do.


Hers’s One complication:

Assume I start a business. I own 100% of it. It grows like crazy, and 5 years later, it’s worth $5 billion. Now you require me to go through all the regulatory hoops so that my stock can trade publicly. But nobody will buy my stock. Because there is only one owner, and he ain’t selling.

Simplistic, I know, but problems very similar to this actually exist.


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


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 .


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.


How expensive?


I once read about 10% of the company, but i wouldn't bet on that memory.

It still requires banks, companies, lawyers, accountants, etc. Its in the millions for sure.


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.


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?


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.


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





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