[gbelote]

(Disclosure: I'm a founder of an equity crowdfunding platform so I financially benefit if people use this legislation.)

I don't think startup investing is for everyone, for some of the reasons you mention below. And I agree there's a risk of the ecosystem developing poorly to be a "market for suckers". But I think the JOBS Act is a net good thing and the concerns you highlight are addressable.

The main problem I have with the "old rules" of investing is that wealth is used as a proxy for sophistication. If you happen to have a PhD in Machine Learning, for instance, you're unable to invest even $100 in AI companies unless you're literally a millionaire. With companies staying private longer, most of the growth in high growth startups is only available to the wealthy.  From the data we've seen so far from unaccredited investors trying to invest in startups (but failing the financial requirements) we haven't seen any correlation in financial status and savviness. Unaccredited investors try to invest in the same companies as the accredited investors, and they all avoid the weaker startups. So I'm optimistic about that, at least for the early adopter crowd. And I think as the ecosystem matures fundraising platforms will look less like Kickstarter campaigns and be more optimized for groups of people assessing/vetting startups. (But I'm an optimist and obviously biased.)

The biggest problem with the JOBS Act is the potential for adverse selection. If "the best" startups don't want to touch it with a 10-foot pole for legal reasons, that's a serious issue for the ecosystem. We've been spending a bajillion dollars on legal research and think we have something that makes this nearly a no-brainer for startups, but time will tell. Startup lawyers hate being guinea pigs with new regulations.

At best I think we'll see a lag in mainstream startups using Title III. Instead we'll see small businesses that are underserved by current investors first. With more precedent and familiarity with unaccredited crowdfunding I'm pretty sure we'll see more startups use it. A similar thing happened three years ago with "rich person" crowdfunding – many critics speculated only bad companies would use it, not-bad companies started using it, and now it's generally accepted.

Index funds would be great. The JOBS Act prohibits investment funds explicitly and it's prohibitively expensive to create a fund for early stage startups that unaccredited investors can participate in. However we're working on ways to emulate index funds, and I think it'll be doable by someone in the long-run.

[tptacek]

I think you're conflating two kinds of sophistication here.

Your comment suggests that by "sophistication", we all mean "understanding the offerings of companies", such as an AI expert knowing the nuts and bots of an AI company's products. I am not talking about that kind of sophistication.

The kind I'm talking about is the kind that tells an investor "don't invest in just one startup, because for the math to work on startup investing, you've got to invest in 10 startups, each of which have a 1/10 chance of success", and then the kind of sophistication that (a) knows how to secure the dealflow to make that kind of investment strategy work and (b) still be OK if it doesn't.

Virtually no retail investor has any experience executing that kind of strategy. In fact: most professional VCs can't either: the asset class as a whole has historically lost money, and is subsidized by asset allocation rules at the large financial funds that plow money into VC firms.

Most startups fail; most of the good startups fail.

I agree: if it's just $100, who cares? But that's not how retail investors approach the markets they're allowed to invest in now. Maybe the JOBS Act should have capped the amount people can invest per year.

[gbelote]

The JOBS Act _does_ cap the amount people can invest per year. It's 5% of your income or net worth across all platforms (whichever is greater). If you make more than $100k the limits are higher and more complex to compute.

Platforms are also required by law to have educational material. And, annoyingly, investors have to fill out a small questionnaire about the risks of investing every single time they invest. So if you invest $100 in 10 companies you'll have to fill out a thing saying you know you could lose all your money and you should be diversifying, 10 times.

Plus, it's in our own economic interest to make it clear how and why diversification is important and that investors make smart decisions. Our whole business model depends on investors making a return since we charge carried interest (i.e. a percent of profits that investors make). This is standard practice for accredited crowdfunding and I expect it to carry over to the unaccredited world.

[7Figures2Commas]

> The main problem I have with the "old rules" of investing is that wealth is used as a proxy for sophistication.

I think there are strong arguments for revisiting the accredited investor criteria, but you're missing an important fact: wealthy individuals have access to resources, like attorneys, accountants and financial advisers, that the less well-heeled frequently don't have access to. So even if accredited investors themselves aren't sophisticated, they usually aren't without the ability to protect themselves.

> With companies staying private longer, most of the growth in high growth startups is only available to the wealthy.

A lot of proponents of Title III offerings use the "average Americans are being denied access to the opportunities the wealthy have" argument but it's not as convincing as it might seem.

First, most Americans are currently not investing in the public markets[1], many because they don't have the money to. They have therefore missed out on one of the greatest bull markets in history, central bank-inflated or not. Providing greater access to private markets doesn't do anything for those who can't even afford to participate in the public markets.

Second, there are plenty of publicly-traded vehicles that provide access to private market investments. For example, for those interested in tech, GSV Capital (ticker: GSVC) owns stakes in pre-IPO darlings like Dropbox and Palantir[2].

> A similar thing happened three years ago with "rich person" crowdfunding – many critics speculated only bad companies would use it, not-bad companies started using it, and now it's generally accepted.

Are you referring to 506(c)? Adoption of this has been tepid at best.

[1] http://www.cnbc.com/2015/04/09/half-of-americans-avoid-the-s...

[2] http://gsvcap.com/investment-portfolio/

[gbelote]

> [...] you're missing an important fact: wealthy individuals have access to resources, like attorneys, accountants and financial advisers

This is less of a concern when non-accredited investors are investing alongside accredited investors under the same terms. I also think it's the duty of a platform to make sure unaccredited investors don't get unfair treatment.

> First, most Americans are currently not investing in the public markets[1], many because they don't have the money to.

True, but I'm not advocating that every American should invest in super-risky companies. Plenty of Americans (actually, folks from all over the world) definitely want to invest small amounts of money in companies they believe in and want to support. They try, but can't. If the investor limits magically went away tomorrow we'd see an order magnitude more money invested in startups on our platform.

Even though startup investing may not be right for everyone doesn't mean that most people should be legally prohibited from doing it. There are plenty of products I use in my life (personally and for business) that I would love to invest $100 in. I understand the risks, what's inherently wrong with me investing with 10k other people? There's a lot of potential issues with the _implementation_ of a platform (e.g. do investors get enough information? is there adverse selection?), but I don't think there's _inherent_ issue with all possible implementations.

> Second, there are plenty of publicly-traded vehicles that provide access to private market investments.

I didn't realize CSV Capital was publicly traded, that's great - thanks for pointing it out! Maybe I'll buy some shares.

> Are you referring to 506(c)?

No, I meant 506(b) earlier in 2013. The argument was that only companies desperate for money would resort to listing on a crowdfunding platform.

506(c) has a few problems that makes it a pretty weak and ineffective regulation. There isn't much upside in generally soliciting to accredited investors only to counteract the legal uncertainty with the way accredited verification was implemented.

[tptacek]

Plenty of Americans also want to invest in consumer products they believe in and support; a whole major consumer financial brand, The Motley Fool, was premised on consumers picking winners by investing in products they like. But it turns out that's not a very good idea, and virtually every retail investor is much better off investing in the market as a whole than they are in trying to pick stocks.

I'm asking: how could the situation be any better with companies that at best have a 1/10 chance of not abruptly ceasing to exist within 2 years?

Individual startup equity for retail investors is a bad financial product. We all know that to be true; it's weird that we're somehow able to pretend otherwise for the sake of argument.

[gbelote]

I disagree with the premise that the asset class as a whole is bad.

At the seed stage you're looking at returns of 50-5000x if you "win" so there's more margin of error in the 1/10 statistic.

To be clear: I think investing $5k in one startup (and only one startup) is dumb. I'm not saying that's what people should do. And there are legal limits to how much people can invest and requirements for platforms to educate (and ensure investors understand basic risks like failure rates and need for diversification). When you invest $5k across 50 startups that starts behaving like an index fund.

The caveat to the "big win" returns is that it's traditionally hard to get access to the companies that have a real chance at IPO. A small group of people with privileged access make an obscene amount of money and it's hard to break into that insider club due to structural issues with non-JOBS Act regulations.

The health of the asset class, IMO, is dependent on platforms' ability to attract those companies. For equity crowdfunding (when restricted to rich people) it's clearly in the realm of plausibility. The three major platforms all have at least one "Unicorn" under their belt. For unaccredited crowdfunding I'm optimistic given the information I've seen that this is doable, but if I'm wrong it'll be because the new regulations scare away the "good" companies. Not because retail investors are dumb or there's an inherit issue with democratizing access. There will be a law or amendment in the future that fixes any regulatory issue. I'm pretty certain this or something like it is the future if you look forward far enough.