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.
There's something bigger going on than SOX. That was the hypothesis the JOBS Act was predicated on . 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.)
If instead, you look at NASDAQ's own website of recent IPOs 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.
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.
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.
At my company, developers can't do production deployments for, I've been told, "SOX compliance".
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."
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.
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).
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.
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.
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.
0 - https://uk.reuters.com/article/us-snap-s-p-idUKKBN1AH2RV
1 - https://www.etfchannel.com/symbol/snap/
If S&P puts a company in, Vanguard will buy the shares. Not doing so could cause problems, including lawsuits.
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.
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.
Which could be done easily by raising interest rates above 0% and offsetting any resulting collapse in demand with counter cyclical fiscal policy.
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.
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.
Lotteries are transparently run by the state as negative-sum games.
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.
IF only the SEC accepted that.
State and federal governments aren't private companies.
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.
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 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.
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.
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 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.
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.
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.
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.
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.
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.
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.
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.
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.)
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.
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.
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 . Enforcing this right, however, is expensive .
> 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.
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?
>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.
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.
Are you sure? How many stories have we heard here about people being diluted to shit when big investors come in?
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.
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.
There are other ways around this that are surprisingly obvious to those who work in the industry (but virtually unknown to outsiders)
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?
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.
They become slaves of their quarter reports and lose the ability of investing in long term projects?
Maybe a bit exaggerated? :D
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.
It still requires banks, companies, lawyers, accountants, etc. Its in the millions for sure.
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.