For the past few days I’ve been listening to an incredibly good podcast called StartUp. Its made by Alex Blumberg of Planet Money fame, and in it he documents how he’s building his own podcasting company. Its an amazingly personal and nearly realtime view into the process of forming a company, raising capital, and having a family.
Episode 7, “How Listeners Become Owners,” goes into detail on Alex’s discovery that despite the JOBS Act being signed into law in December 2012, non-accredited investors still are unable to actually make investments in privately held companies that fundraise publicly. The intention of the lawmakers is good – to protect folks who don’t have a background in finance from making risky decisions and losing all their money.
The problem as I see it is that individuals who aren’t accredited investors have plenty of other insanely risky ways of losing huge, unlimited amounts of their money on all sorts of things, including government-operated lotteries. The notion that individuals shouldn’t be able to choose to put money into risky opportunities as a way of making returns is silly and paternalistic. Anyone who says otherwise but fails to similarly condemn state lotteries, private gambling enterprises, and public securities exchanges is a hypocrite.
I don’t dispute that people with good intentions are trying to figure out how to prevent people from being swindled in private stock sales, and I do think there is a role in this space for regulators to guide the process. But the current rules are simply not working, and are in fact preventing lots of educated people from making informed, rational decisions about their finances.
For example, a hypothetical economics professor at a small university is unlikely to meet either the income or asset requirements under current accreditation rules, but is likely to be a person entirely capable of evaluating a risky investment opportunity.
This person can, under current law, open an eTrade account and put every dime they have into a huge variety of risky securities. Or go to Atlantic City and put it all on black at a roulette table. Or buy a huge pile of MegaMillions tickets (odds of winning $1M are 1 in 18,492,204; the jackpot is a ludicrous 1 in 258,890,850).
But they can’t put $2,000 into an early stage company until the SEC finally gets moving on adopting Title III of the JOBS Act, which is the section that allows non-accredited investors to participate in publicly solicited securities offerings. Until this happens, small investors aren’t being protected from risk, they’re just being shut out of opportunity.