[sohailprasad]

I'm the CEO of Equidate, one of the companies profiled in this article.

The article raises excellent points on the pitfalls of trading pre-IPO stock on secondary markets. The opportunity is risky to be sure, only for educated investors as ready and able to lose money as to make money. Information is limited and protections are only as good as the integrity of the participants. That puts a premium on honestly, transparency, and strict adherence to securities regulations.

The American economy is built on liquidity and rapid turn-around of investments: new company founders, investors, even venture capitalists and private equity fund managers got where they are because an early exit allowed them to cash in early gains in order to re-invest in the market. This used to take a few years, but now, due to market changes, they will no longer see a penny until their company goes public after an average 7.5-year wait. More likely, their company will fail despite years of hard work and success, leaving them nothing. Secondary markets are a relief valve for these founders, early angel investors, and current and former employees.

When shares cannot be traded, even the most ambitious and brilliant entrepreneurs are locked in for the better part of a decade, waiting for something to happen. If they have liquidity they can start something new — perhaps a cure to disease, a new media company, or one that launches rocket ships. This liquidity is how many of today’s great companies got their start.

Collectively, we owe it to founders and investors, and the economy, to create reliable secondary markets. That’s why Equidate was founded.

[themagician]

"The opportunity is risky to be sure, only for educated investors as ready and able to lose money as to make money."

That's bullshit. We let poor people gamble and they aren't "ready and able" to lose anything.

The laws around accredited investing are a disgusting example of how the 1% legally entitle themselves to opportunities while excluding the other 99%.

[rday]

I don't think the gambling analogy works here. You can't invest 5 dollars in a company 1000 times until you have no money left.

Also gambling odds are heavily controlled. Could you imagine a pit boss telling you "Table 5's die have an unfair advantage to land on 7"? Conversely, people raising money tell you exactly why they will succeed and why they are a better choice than some other company. These people can be very convincing as well.

When gambling, bets are easy to understand. You make a static bet before the wheel spins. When investing, size of the pot depends on how well the company was valued when you made that bet. The next players may decide that the company was only worth half what you paid. This isn't something uneducated investors expect.

[themagician]

That analogy isn't about odds. It's about the why.

The reason we don't let 99% of people buy shares of private companies has NOTHING to do with protecting the wealth of the 99%. Nothing. Zero. And to pretend like people with less than a million dollars in liquid assets are "too dumb" or "inexperienced" to purchase something is beyond insulting.

It has everything to do with creating a private market where the 1% can get in early before the price rises as public money flows in. Wouldn't want too many poor people to get in early. Wouldn't want to have to deal with a bidding war against poor people. Better off to just exclude them from the buying process when the price is low and then sell it to them later when everyone wants it.

It's an institutionalized example of a law designed to maintain a plutocracy. It's disgusting.

I never really understood just how stacked the cards were until I tried to buy FB shares on the secondary market one day. I wasn't allowed to. What the fuck? Then I got married and I became an accredited investor over night. I'm like, "Wow. Really? REALLY?!?! This is how it works?" Then I lost my status as the result of a divorce. So a few years ago I was smart and experienced enough to take on that risk. Now I'm not.

[Domenic_S]

> to pretend like people with less than a million dollars in liquid assets are "too dumb" or "inexperienced" to purchase something is beyond insulting.

Really? Because a lot of that group said they "didn't know any better" and were "misled" when it came to bad mortgages during the crunch. Whether you believe them or not, that was their argument and it worked.

There are entire industries based on exploiting people with bad money management skills (payday lenders, rent-to-own, etc). Clearly the population exists.

[themagician]

Yeah, lots of people do claim that. But we still let them do it. High risk, low reward investments are totally cool for everyone. We don't have a problem with the risk portion. It's only when the reward becomes huge that we have a problem.

I don't think most people realize how true the adages are, "the rich keep getting richer," or, "it takes money to make money," really are. People say it, and other people feel it's true, but then they can't point to anything tangible. But there it is. Current SEC regulation basically institutionalizes this.

Here is a financial opportunity that's actually not that complicated, which is no more risky than other available opporutinies, but we have actually made it the law such that, "Only the 1% may do this."

[shanemhansen]

But there's only one law "protecting" them from one specific kind of bad money decision. So I guess we're saying payday lenders are ok for poor people, rent-to-own is ok for poor people, but we must protect them from investing in the next amazon or dropbox at all costs. That's much riskier than the lottery.

[a_c_s]

1. Mortgage contracts are too complex for a layperson to understand. Often the amount of time people are given to sign them is less than it would take to read the entire contract through just once. 2. Getting a mortgage is an instance where the seller is also the advisor (similar to an auto mechanic or a doctor). 3. Consumers were actively advised to take out mortgages that the seller knew were more expensive than the consumer could afford. 4. If a predatory auto mechanic deliberately advised a customer they needed repairs that they did not, that would be fraud on the part of the mechanic. The same thing applies to predatory lenders.

(There certainly were people who just made bad decisions. But there was also widespread, documented fraud on the part of lenders.)

[prostoalex]

Nobody really got screwed by misunderstanding small print on page 89 of the mortgage contract. The fraud (faking employment and income levels) was directed at insurers and buyers of those mortgages, not at the recipient.

[tsotha]

>Because a lot of that group said they "didn't know any better" and were "misled" when it came to bad mortgages during the crunch.

What else are you going to tell people when you lose half a mil? That sounds a lot better than "Honey, I gambled our financial future trying to get rich in the housing market, and you'll never believe what happened..."

[prostoalex]

> Wouldn't want too many poor people to get in early.

In reality loosening that restriction would lead to a reverse selection bias, where only extremely unfit companies would approach such investors. Talk to any startup and their preference of funding is ranked roughly this way:

1) Value-add VC

2) Non-value-add VC with big pockets

3) Value-add angel/superangel/seed fund

4) Non-value-add angel/superangel/seed fund

5) Randoms

By removing the gatekeepers we're back to that scene in "Wolf of Wall Street" where random brokers call up some widow in Nebraska to pitch her on some "high tech company about to go big" and forgetting to mention they're getting a 50% commission on this.

Meanwhile someone in the league of Google, Facebook or Uber would not go this route just because they already filled their rounds.

> And to pretend like people with less than a million dollars in liquid assets are "too dumb" or "inexperienced" to purchase something is beyond insulting.

This is less about treating the folks as "dumb" vs "bright" and more about access to proper financial professionals. Accredited investors typically have access to a financial advisor, investment consultant, attorney and a CPA whom they can ask to "look things over". The lower the total assets number, the higher are the chances that no financial advisor is ever involved.

[refurb]

The reason we don't let 99% of people buy shares of private companies has NOTHING to do with protecting the wealth of the 99%. Nothing. Zero.

You seem pretty confident in your hypothesis. Have you gone back and looked at what drove the change in regulations? It's not like these regulations are passed with supporting evidence. The regulation was passed in 1933, right after the crash.

Between protecting investors and "creating a private market for the 1%", I'm thinking the first seems more rational.

[themagician]

We don't protect investors from penny stocks, which are far riskier. We "protect" investors from damn near nothing. There are some limits on day trading and options trading sure, but those start to get lifted at around $25k.

Investing in a private company that's about to go IPO is actually not that risky when compared to multitude of other investment instruments that are available.

The secondary market is private market for the 1%. That's literally what it is. Maybe that's not how it started or how it was originally sold, but that's what it is. And it's now institutionalized and part of the law.

The idea that it's about protection is just absurd. It's absurd. Are you telling me you are glad that the 1% is out there making sure that you can't invest in Facebook for $20/share? Protection? Really?

[oh_sigh]

Right...I wonder how the public would react to those "protections" if they were dropped a bit, but still out of reach for the average person. Let's say $100k in assets, not including your home and property. Now, about 15% of Americans have access to this pool. Do you think the other 85% is going to be happy about this? Right now, the way the regulations are set up, it seems like such a small minority of people have access, that it isn't worth worrying about. But $1M is really just an arbitrary number.

[JoeAltmaier]

The crash was widely construed to be because of the ignorant public essentially betting on the stock market, with resulting instability. Wise, rich investors would invest and leave their money for years at a time.

The resulting rules changes can be revisionist-history interpreted as protecting the 99%. But remember at the time, the gilded age had passed; labor reforms were in place etc (Teddy Roosevelt, 1910s) and laws such as these were under fierce scrutiny for favoritism.

Still, today it does what it does regardless of the initial impetus. And what it does is prevent most people from playing most games.

[a_c_s]

Comparing the light regulation of the past to the current strict regulation, sure the current regulation is better.

But legally anointing an "accredited investor" class based on their current financial resources clearly advantages the rich over the poor. There are other ways to protect investors without categorically denying opportunities for savvy, non-wealth individuals (and people who are currently wealthy also deserve protection from fraudsters).

[refurb]

I'm not saying an advantage isn't given to the wealthy, I'm just challenging the idea that that was the driver for the regulation.

To be honest, the gov't is kind of stuck here. Let people make their own choices and they blame someone else. "I didn't know the mortgage rate was only a teaser!!"

At least with the credited investor regulations, if they lose money, nobody has sympathy for them.

[sjg007]

The new SEC rules that just went into effect should allow this right?

[themagician]

No. In fact, the SEC is trying to raise the limit to $2.5 million now because there are too many millionaires.

[Spooky23]

Gambling goes beyond table games. Pre-IPO startups are more like the propositions bet on at a sports book or racetrack.

Actually, there are a lot of parallels between a startup and a racehorse. If you evaluate a horse's past performance, trainer, position in the field, etc you can bend the odds. It's still gambling!

[pthreads]

"Collectively, we owe it to founders and investors, and the economy, to create reliable secondary markets. That’s why Equidate was founded."

No we don't! There are no reliable secondary markets and there is not going to be one simply because they are based on pure speculation. It exists for one reason only - shareholders of pre-IPO companies don't want to wait years and hence are willing to trade their shares for immediate cash.

Secondary markets are just another way to create derivates. And we all know how unregulated derivates turned out!

[yellowstuff]

Valuing anything illiquid will involve a mix of rational analysis of inherent value and speculation, they can't really be separated. Pre-IPO companies are very illiquid and so could be prone to bubbles, and many knowledgeable people claim they are in a bubble right now. However, claiming that secondary markets are by necessity pure speculation is simply incorrect.

Your last paragraph doesn't make any sense to me. Mostly people sell equity shares on secondary markets. Equity shares are not derivatives. They can also sell stock options, which are derivatives, but are not created when they are sold on a secondary market. It sounds to me like all you know is that the word "derivatives" is scary, so things you don't like must be derivatives.

[sohailprasad]

"It exists for one reason only - shareholders of pre-IPO companies don't want to wait years and hence are willing to trade their shares for immediate cash."

Yes, secondary markets are designed to provide liquidity to shareholders in pre-IPO companies. At the same time, most investors who want access to pre-IPO stocks have no ability to participate. Value creation has increasingly shifted from the public markets toward private markets. Consider eBay, which was valued at $32 million in 1996 and went public with a $1.9 billion valuation in 1998 (a 60x gain), compared to Twitter which went public in 2013 at a $24 billion valuation, a 657x gain from their $35 million valuation in 2007.

Why should those who are extremely wealthy and well connected be the only investors with access to such investments?

[maaku]

Because you cherry-picked the examples and chose not to mention the vast majority of companies who's value went to zero?

[sroussey]

Indeed, if one could pick so well, then the public market is a great place and more liquid.

[SeoxyS]

I think you misunderstand what a secondary market and a derivative is. They're orthogonal concepts.

A secondary market is any market where securities are traded not with the company, but with a third party. The big stock exchanges (NYSE, Nasdaq) are primarily secondary markets (only IPOs are primary, and even then, the primary transaction is to underwriters who then resell the stock as a secondary to other investors in the IPO).

A derivative is whether you're selling a real share, or something else based on that share. A derivative can be both primary or secondary. Employee stock options are derivatives, and what Equidate trades is also a derivative. If you sell your stock directly to a buyer in a secondary transaction, then it's not a derivative, and the company usually has the right to intercept the transaction (the right of first refusal).

[DeBraid]

Blaming derivatives is like citing the automobile for the reckless actions of the drunk driver behind the wheel. Derivatives are not inherently evil, nor is any 1 (longstanding) asset class.

[shanemhansen]

But yet we still allow drinking, but drunk driving is illegal. We don't blame derivatives, we blame the reckless users of derivatives for the damages they caused.

[kelukelugames]

Hi, I know people have sold my company's shares on the secondary market before. Is there a way to find out the selling price?

[ryan-c]

The best way is to ask them - my experience has been that people tend to be fairly comfortable discussing per share prices.

I used to work at Palantir. If I want to know what my shares are worth, GSV (which is publicly traded) owns Palantir common and preferred shares (as well as shares in several other private companies) and reports a fair market value in their public 10-Q and 10-K filings. This is useful as a baseline sanity check. There are also enough interested buyers that it's feasible to get multiple price quotes.

[aluhut]

"If they have liquidity they can start something new — perhaps a cure to disease, a new media company, or one that launches rocket ships."

Just out of interest: do anybody buy this bullshit today? Do you talk like this in public?

[q2]

>>> Do you talk like this in public?

Honest question: What is wrong with above sentence?

[aluhut]

The examples are so ridiculously overhyped, I just can't believe anybody besides religious leaders would talk like that. Considering the persons position within this topic, makes the whole thing even weirder.

[9297230]

BTW, you have a couple typos in your website copy: "All you have do do is list you shares, prove your ownership"