If the public and media have a glamorized, romantic view of the reality, what better way to train them than to let them get direct experience? That is, experience not mediated by the 'accredited investor' glass-barrier and carefully-calculated PR fluff pieces?
I think you overestimate the outcry/backlash during/after that necessary learning process. Trillions have been lost in homes the last decade, but very few of the government policies that goosed home prices and encouraged people of limited means to gamble their entire net worth on home ownership have been reversed. (People have learned to be wary, moreso than public policy has adjusted.) Billions have been gambled away as jurisdictions across the US have legalized gambling, and individuals have had to learn, but few if any places have undone gambling legalization, and more cities/states are discussing adding gambling. People with more hope than sense can lose all their money on eBay/Craigslist arbitrage, or margined public stock/option trading, or starting a restaurant/retail-store with friends. And there's no backlash demanding regulatory protection from these risky activities.
I think any backlash will be limited to actual scams, which is as it should be. The individual cases about fraud and malfeasance will be part of the public's learning process.
The "almost accredited investor" idea is a reasonable half-measure to begin the process of removing the discriminatory 'wealth test' from the process.
I would make it so any one of the following allow an individual to invest with the same freedom as someone who's inherited a million dollars or won a lottery:
• a college degree in economics, business, or law
• a related recognized accreditation (eg the 'Series 7' exams to work in certain financial-services roles)
• an amount equal to the desired private investment amount held in tax-advantaged investment accounts (IRA, Roth, etc) for at least 2 years. (For example, if you have $10K in such government-approved 'safe' accounts, you can also invest $10K in any private venture with the same assumption-of-competence that millionaires are granted.)
• an amount double the desired private investment held in public securities for at least 2 years. (For example, if you have $20K in public stocks/mutual funds, then you can invest $10K in any private venture with the same assumption-of-confidence that millionaires are granted.)
I don't particularly like any of these restrictions. If you can legally take $10K off a credit card cash advance, and use it to buy state lottery tickets, you ought to be able to take a chance on a friend's startup stock. But these weaker rules could provide the small dash of paternalism, and speed-bump against totally reckless investing, that helps us phase out the wealth-based-discrimination that rules today.
But lottery returns might be better than startup returns. In both cases, investor sentiment is hyper-focused on the very, very low probability event of a high return, but unlike startups, the lottery's returns are deliberately smoothed to keep people playing.
That doesn't make lotto better than startups; the lotto is obviously objectively much worse. But the financial outcome of an unsophisticated investment in startups is likely to be worse than a lottery ticket; if you buy a bunch of lottery tickets, you'll get something back. If you don't know the industry, investing in startups is like throwing your money away.
I think something people don't consider in these discussions is that the current startup ecosystem --- the one in which the majority of companies return zero to their investors! --- is the product of relatively sophisticated investment. It's not impossible for a huckster to get funded, but it's troublesome enough that truly fraudulent companies are the exception.
All that changes once you set up a structure that allows people to "fund" companies "retail".
There are already plenty of legal ways for people to "throw away" 100% of their money, as quickly as they'd like. It is only their own judgement, perhaps after being burnt or perhaps after watching others get burnt, that keeps these processes in check.
You're overestimating the effective payback of lotteries, for example. If someone "invests" $1000 in government scratchers, perhaps they'll technically get around $300 back on an expected-return basis. But they were playing to win, so that $300 is used to buy more scratchers. Lather, rinse, repeat: they're at zero. Within a day. Legally.
The only lesson to be learned there is: the government shouldn't offer, and the public shouldn't buy, rigged games.
Even the worst hopelessly-naive startup dream or haphazardly-structured equity investment offers a greater benefit to the participants and society, even when there's a 100% loss.
Someone was being paid a salary and devoting effort to a purpose as they burnt through the money. They'll do better next time.
The investors, too, will either drop out or better evaluate/structure the risks (and their tolerance for risk) the next time. People of all means (not just SEC-accredited millionaires) know to get started at something slowly, in measured amounts. That means the learning losses are effectively capped, while the social benefits coming from those who do manage to learn could grow very large.
And if everyone with less than a million dollars is so clumsy with money they can't possibly learn, we shouldn't let them buy stock/options, leveraged real estate, or lottery tickets, either.
First, I'm stating a simple fact: the payoff structure for Lotto is different from that of startup investing. It's different in a way that affects the outcome for normal people.
Second, loss aversion is loss aversion. It will cause people to double down on startup shares just the same as they do on lotto tickets.
Finally, I reject completely the idea that it's a win for society to encourage people to burn money because startups are somehow worthwhile even when they fail. That's not how the economy works, and it's not what the startup ecosystem needs.
Lottery tickets are evil. We would be better off without them. You picked an unfortunately useful example with which to throw crowdfunding into relief.
Startups are worthwhile even when they fail. They are practice within an operating domain where learning over time happens, and positive-sum outcomes are possible, and individuals' incentives towards improvement create social benefits.
On the other hand, there is no chance that tomorrow, with more experience, someone will be a better lottery-ticket-buyer than today. The activity throws off no lessons for those involved or outside observers about what technologies or partnerships or businesses might work in the future. And yet that gambling is legal and easy for people of any net worth, while non-millionaires face legal deterrents for startup investing.
I didn't suggest 'encouraging people to burn money' on startups. There's no talk of creating subsidies or tax-advantages over other investments. Every check-writer needs to make their own calculation about the returns they expect, and the losses they can handle.
But it's their own damn money! How about we just remove the ancient, patronizing net-worth discrimination that makes it harder for non-millionaries to engage in private investing than other activities just as risky and more destructive?
It'd be a win for society to let 'normal people' of all wealth levels practice their competencies in a non-rigged, learnable, positive-sum business domain. When you say, "If you don't know the industry, investing in startups is like throwing your money away", that's not a bug, that's a feature. The losses would start the learning, and participants would improve or select-out very quickly. And the overall economy progresses in exactly that way: needing many small investigational failures to train the young, explore the possibility space, and lay the foundation for later big successes.
I think you overestimate the outcry/backlash during/after that necessary learning process. Trillions have been lost in homes the last decade, but very few of the government policies that goosed home prices and encouraged people of limited means to gamble their entire net worth on home ownership have been reversed. (People have learned to be wary, moreso than public policy has adjusted.) Billions have been gambled away as jurisdictions across the US have legalized gambling, and individuals have had to learn, but few if any places have undone gambling legalization, and more cities/states are discussing adding gambling. People with more hope than sense can lose all their money on eBay/Craigslist arbitrage, or margined public stock/option trading, or starting a restaurant/retail-store with friends. And there's no backlash demanding regulatory protection from these risky activities.
I think any backlash will be limited to actual scams, which is as it should be. The individual cases about fraud and malfeasance will be part of the public's learning process.
The "almost accredited investor" idea is a reasonable half-measure to begin the process of removing the discriminatory 'wealth test' from the process.
I would make it so any one of the following allow an individual to invest with the same freedom as someone who's inherited a million dollars or won a lottery:
• a college degree in economics, business, or law
• a related recognized accreditation (eg the 'Series 7' exams to work in certain financial-services roles)
• an amount equal to the desired private investment amount held in tax-advantaged investment accounts (IRA, Roth, etc) for at least 2 years. (For example, if you have $10K in such government-approved 'safe' accounts, you can also invest $10K in any private venture with the same assumption-of-competence that millionaires are granted.)
• an amount double the desired private investment held in public securities for at least 2 years. (For example, if you have $20K in public stocks/mutual funds, then you can invest $10K in any private venture with the same assumption-of-confidence that millionaires are granted.)
I don't particularly like any of these restrictions. If you can legally take $10K off a credit card cash advance, and use it to buy state lottery tickets, you ought to be able to take a chance on a friend's startup stock. But these weaker rules could provide the small dash of paternalism, and speed-bump against totally reckless investing, that helps us phase out the wealth-based-discrimination that rules today.