I'm just waiting for this to blow up like it did right before all these rules were added (i.e. the great depression). Startup investments are hugely speculative, the vast majority turn a lot of cash into nothing. The public is risk adverse; look at the last financial downturn, there is still a subset of people pushing legislated guaranteed stock market returns because they don't understand the risk/return relationship. As soon as a few people lose all their money, this whole scheme is going to violently implode.
Consider this, the 10-year early stage VC performance was 3.9% [1], with late stage and expansion focused funds at 9.3%. Average VC returns were 6.1%. By comparison, the DJIA returned 8.6%, the NASDAQ returned 10.3%, and the S&P 500 returned 8%. Private, non-qualified investors are going to get slaughtered. VCs are professional investors and their overall industry returns are awful. In addition, private investors have no connections. Those returns include VC's that now routinely liquidate failing companies to other portfolio companies and their LP's as "talent acquisitions", where they recover their investment through their liquidation preference; Joe six-pack won't be able to do that, he will just lose all his money.
The average mutual fund generates below market returns in the long run. If the average fund manager, a professional that spends 100% of their time trying to find strong opportunities for investment can't consistently generate excess returns, does anybody actually believe that the public will be able to? This is only compounded by the extreme risk and volatility of startup investing. Maybe you hand-wave this off, and say the average fund manager is stupid, and maybe they are, but I'd bet they are nowhere near as stupid as the average member of the general public, just go read some YouTube comments.
My bet is that late-stage and expansion deals still go to the VC crowd because they can bring mountains of cash, fast, with connections. The early-stage funding, with the 3.9% long-term returns will go to the public, with even lower than historic returns. As soon as the public figures out that they are hundreds of times more likely to get wiped out than become billionaires, this whole mess will get legislated away again.
Having lived through the first dot-com bubble, my belief was that it was facilitated in part by unsophisticated investors chasing outsized returns (the so called "retail" investors). The startup market largely escaped the 'bubble' fate by virtue of the fact that the bar for investing in startups was high enough that the people who qualified either understood the risks are were willing to lose everything in their bet (pure gamblers).
My fear is that opening up startup investing to a wider pool will not only fund a lot of startups that should not have been funded (just like the dot.com boom rewarded companies that should not have been rewarded) it will result in a catastrophic correction down the road where a lot of people will have lost everything and will be asking the government to use taxpayer money to make them whole again.
Take a step back and look at the secondary market offerings like Twitter.
A company with a speculative run-up and no business model is very high risk. Also, the limiting reagent in secondary market trading is investor count. At 500, the company has to go public, so many companies contractually limit secondary sales to avoid the additional reporting requirements.
Consider this, the 10-year early stage VC performance was 3.9% [1], with late stage and expansion focused funds at 9.3%. Average VC returns were 6.1%. By comparison, the DJIA returned 8.6%, the NASDAQ returned 10.3%, and the S&P 500 returned 8%. Private, non-qualified investors are going to get slaughtered. VCs are professional investors and their overall industry returns are awful. In addition, private investors have no connections. Those returns include VC's that now routinely liquidate failing companies to other portfolio companies and their LP's as "talent acquisitions", where they recover their investment through their liquidation preference; Joe six-pack won't be able to do that, he will just lose all his money.
The average mutual fund generates below market returns in the long run. If the average fund manager, a professional that spends 100% of their time trying to find strong opportunities for investment can't consistently generate excess returns, does anybody actually believe that the public will be able to? This is only compounded by the extreme risk and volatility of startup investing. Maybe you hand-wave this off, and say the average fund manager is stupid, and maybe they are, but I'd bet they are nowhere near as stupid as the average member of the general public, just go read some YouTube comments.
My bet is that late-stage and expansion deals still go to the VC crowd because they can bring mountains of cash, fast, with connections. The early-stage funding, with the 3.9% long-term returns will go to the public, with even lower than historic returns. As soon as the public figures out that they are hundreds of times more likely to get wiped out than become billionaires, this whole mess will get legislated away again.
[1]: http://www.avc.com/a_vc/2013/02/venture-capital-returns.html