There is a reason for all these regulations. While I am generally pro- deregulation, letting unsophisticated investor put money in start-ups is highly dangerous. While it would make it easier for genuine companies to raise money, the problem is it makes it much easier for scammers.
> the problem is it makes it much easier for scammers.
The real problem is that the legal system isn't set up for a bunch of small investors to try to sue a company/officers doing genuinely fraudulent things.
If the stock is carved up over 100 people, it's very difficult to get unified action, so fraud tends to linger on.
There are lots of reasons that fraud can occur when you have lots of unsophisticated investors. The whole areas seems to be like vaccination - you get rid of a horrid disease by vaccination and once this happens everyone forgets about the disease and stops vaccinating only to then see the disease make a come back. Now that all the people with living memory of the 1920s and 1930s are dead we seem to want to repeat the experience.
I do think it would be great if we could find a way for everyone to participate in startups, but until we find a way to keep the scammers out then deregulation is not likely to end well for the unsophisticated investor.
I think this used to be the case. But think about what the internet has done for "reputation" tracking. I think deregulation would open the "potential" for scammers, but at the same time would open a market for websites like a "Yelp for investors".
Given how much reputation "massaging" occurs on Yelp I am not sure this is a good model :)
The solution to preventing scamming is to make it harder for scammers to raise money than genuine businesses. The major difficulty is it is very difficult for unsophisticated investors (actually all investors) to make accurate judgments into the character of founders of start-ups. Even if we had a good reputational system for start-up founders (we don't), most founders (especially the most innovative ones) are not going to have a lot of history to support any such reputation system.
On the topic of reputation, Linkin^ has a good platform to monetrise this demand. They could charge users (and pay other users) for reputation endorsement (not just skill endorsement). They could have users provide an enormous amount of biographical detail and then have others verify (or not verify) this data. Make enough links and it will be very hard for a scammer to succeed over the honest.
^ Actually this could be a great idea for a start-up. Have people upload massive amounts of biographical data and then pay other people to endorse each data point - probably someone is doing it already and will soon tell me all about it :)
I agree reputation isn't an easy problem to solve. I think taken to its logical limit something like what you've described above is likely close to if not the correct solution.
Using the tried and true methods that already exist in the public key infrastructure of the web, I think the problem of tracking reputation online (in a reliable way) is something that will be solved in our lifetimes.
Yelp only "works" because it isn't worth expending money on lawyers against obviously defamatory reviews.
Note what happens every time somebody tries to start "Yelp for doctors". Now add an extra couple zeros at stake for "Yelp for investment" and watch how many lawyers start flying when a negative review comes in.
I think the critical thing to make reputation tracking work online is if not only are the "reviewed" held accountable, but the "reviewers" are also held accountable. The only way that I know this could happen is if real / trackable identities are attached to the review.
We've already seen how well this works, actually. The Bitcoin community had a neat reputation tracking system. Remember pirateat40, the guy who ran a massive, really unsubtle ponzi scheme? He was one of the top-rated people on there. He actually used this to help encourage people to invest in his scheme.
I think one of the key pieces missing from most if not all online reputation tracking systems is there's no accountability. In other words, even if someone's online profile develops a reputation it's still an "anonymous" reputation. Unless the person makes a conscious attempt to make sure people can easily locate the person's real identity behind the online identity.
I think accountability in an online reputation tracking system would come from the network's ability to easily match the online reputation of the individual to the real identity of that individual.
If a person's real identity is at risk I think they're generally going to be far more cautious / conservative about what they put out there. Also makes it less likely that a person with a poor reputation online will be able to redeem that poor reputation just by creating a new profile.
Having a good reputation in the real world takes hard work. Not so much online.
You can go to vegas and blow $100,000 in a weekend, but you think it's too dangerous to let people put that in 10 seed stage startups? Because they might lose the money?
Further, I'm a sophisticated investor, I've done very well with complex derivative investments. I knew there was going to be a housing bubble in 2001 and profited from it until 2007. How many people were saying there was no bubble at that time?
I'm the very definition of a successful sophisticated investor, but I've been kept out of investing in startups-- the industry where I've worked for nearly 30 years-- because people like you think its "dangerous"?
Requiring me to have $1M in assets does not measure ones sophistication. Make it a $50k a year salary and a swear-under-penalty-of-perjury type form to cover the startup's butt and I'm ok with "accreditation".
Until then, it's just yet another way regulations give rich people better opportunities than regular people.
>You can go to vegas and blow $100,000 in a weekend, but you think it's too dangerous to let people put that in 10 seed stage startups? Because they might lose the money?
Casinos are highly regulated so I am not sure this is a good example.
I actually don't think it is dangerous because people will lose money, I think it is dangerous because scammers would have a major advantage over non-scammers in a deregulated start-up investment market. Like Gresham's Law [1] we would soon be left with a market totally dominated by scammers and all trust would soon be lost in start-ups (i.e 1920s). This was why the regulations in this area were brought in - to restore the trust of the public in the stock market.
You are a sophisticated investor, who has been very successful wth complex derivatives, predicted and profited from the housing bubble for 6 years...and you don't have $1MM in assets?
