[ig1]

Crowdfunded equity investments should be treated as gambling, don't do it unless you're willing to lose money.

Over half of traditional angel investments don't return the investors money and 90% of the returns come from 10% of the companies. These are traditional angels who are well connected, do due diligence, etc.

With crowd-funding from the start you face an adverse selection problem, a lot of the "best" looking startups are going to take money from well respected angels and are going to fill up their seed rounds long before they need to turn to crowd-funding. So with crowd-funding you're left trying to find the good companies (which there are significantly less) which aren't obviously good from a surface analysis.

So rather than 10% of the companies returning 90% of the returns with crowd-funding it might be closer to 5% or 1% of companies (only time will tell us the exact numbers).

[jonnathanson]

Exactly, and it is really hard for me to see a scenario in which this whole thing ends well. It's basically inviting a huge pool of suckers to the table, gambling on terms set by the dealers, with payouts engineered and controlled by the dealers.

Just about the only way for this to work, without causing a ridiculous speculative bubble, would be to force increased transparency of the financial documents of private companies (thus blurring the lines between private and public, which is opening a can of worms in its own right).

Success in angel investing is predicated on two things: 1) access to the best deals on the best terms, and 2) enough capital to absorb losses in search of outsized hits. Retail investors have neither of these things going for them, so what they're doing amounts to little more than playing roulette.

[ig1]

I still think it should be legal. After all you can take $10k and spend it at a Casino, there's no reason you shouldn't be able to gamble it on a company.

Although there are other reasons for investing other than financial returns, for example you believe in the mission of the company or you want to be a customer of the business.

[jonnathanson]

I'm not arguing against its legality; I'm arguing that it's dangerous as written. It needs more enforcement of transparency on the side of the companies. The difference between gambling and "investing" of this sort is that at least gambling is 100% transparent. You know exactly what the odds are at the roulette table. And most people who gamble (barring those with addictions, of course) realize they're gambling; most of the new people who will "invest" probably won't believe they're gambling.

"Although there are other reasons for investing other than financial returns, for example you believe in the mission of the company or you want to be a customer of the business."

Sure, but that's what services like Kickstarter are for. Let's not kid ourselves into thinking that most Mom & Pop retail investors are going to be day-investing in small businesses out of high-minded principle. They're going to see dollar signs and dream of getting rich quickly. And there will be plenty of people ready and waiting to sell them those dreams.

Maybe it'll take a bubble or two to get people to realize the dangers involved, and eventually, it'll normalize into sort of what day trading has become. But there will be pain before then.

[notahacker]

Casinos are heavily restricted in how they're allowed to represent themselves though; in particular they usually can't masquerade as a good proposition for increasing your savings, or emphasise you'll earn so much more with them than at all the other casinos. I'd be all in favour of allowing public soliciting of investment which basically restricted it to statements along the lines of "if these hunches are right there's a small chance you'll end up with more money than you started with", which for most ventures relying on retail investors is basically the only pitch which is honest.

I'm in favour of people that believe in the mission or want to be a customer spending money on startups, but think the Kickstarter model of soliciting the funding without pretending it has a nontrivial possibility of financial returns already nailed that.

[jseliger]

Crowdfunded equity investments should be treated as gambling, don't do it unless you're willing to lose money.

Definitely.

With crowd-funding from the start you face an adverse selection problem, a lot of the "best" looking startups are going to take money from well respected angels and are going to fill up their seed rounds long before they need to turn to crowd-funding

I wonder about the extent to which crowdfunding is optimal for situations like startups versus the extent to which it is optimal in other fields, like real estate development (http://www.slate.com/articles/business/moneybox/2013/06/fund...).

Still, based on my reading of A Random Walk Down Wallstreet and The Millionaire Next Door, most people doing retail investing do not beat the market.

The good news in the case of crowdfunded equity investments, however, is that even if 90% fail, that last 10% may pay for some really cool stuff that wouldn't exist without the crowdfunding, in much the way that Amazon is enabling lots of people to publish shitty ebooks but it also enabling a small number of important books that wouldn't have gotten traction in the conventional system to get traction.