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> Our securities markets work According to what standard? Is the fact that I can’t invest $5000 in my friend’s startup an example of our securities markets “wo

> Our securities markets work According to what standard? Is the fact that I can’t invest $5000 in my friend’s startup an example of our securities markets “working”? Not according to any rationally justifiable standard. Certainly the impulse to protect grandma’s life savings from predatory fraud is a good one. But the proper way to better society is through empowering individuals to make better decisions. An example of a better system along this principle would be a local (county/state) investment office that you go through that checks over the terms of the deal to make sure the terms are legal and the parties are fully aware of what they’re getting themselves into. That would protect against fraud, without violating my right to freely and consensually associate with other consenting adults. “Others might do a bad thing, therefore you should be banned from doing a good thing” is not a logically coherent standard — yet that is the essential argument of the SEC and it’s “accredited investor” protections. Your view that these markets are “working” is merely an indication that you lack imagination. How much better would the world be if there weren’t arbitrary restrictions on economic exchange? It’s impossible to know, but history shows that advancements in liberty and justice have breed unprecedented wealth.

bpt3 6y ago
What exactly is stopping you from investing $5000 in your friend's startup?
- voxic11 6y ago
  Presumably Rule 506(b) which prevents fundraising from nonaccredited investors. There is an exception for up to 35 non-accredited investors but taking money from even one non-accredited investor greatly increases the disclosure requirements on your startup. So the startup would essential need to do disclosure as though it were a public company. https://www.sec.gov/smallbusiness/exemptofferings/rule506b https://www.sec.gov/smallbusiness/exemptofferings/rule506b
  - JumpCrisscross 6y ago
    > the startup would essential need to do disclosure as though it were a public company Not quite that onerous. But the start-up and investor would each need to spend at least $5,000 on legal diligence. This would likely be true with or without the rule—if you don’t understand the preferred investors’ terms, you aren’t qualified to invest.
  - bpt3 6y ago
    Rule 506(b) doesn't prevent it entirely, and keep in mind that the vast majority of companies aren't venture backed startups, and I believe would be covered under Rule 504. You absolutely don't need to do disclosure like a public company if you have non-accredited investors.
- deleted 6y ago
  [deleted]
- otoburb 6y ago
  To cross all the t's and dot all the i's, you might be able to join a friends-and-family round under Rule 504, but your founder friend should still do the due diligence to ensure the participating friends and family investors reside in states where such an offering is exempt from registration/qualification under state blue-sky laws[1]. IANAL. Hopefully your founder friend will have had a startup attorney to ask about all of this. [1] https://www.law.cornell.edu/wex/blue_sky_law https://www.law.cornell.edu/wex/blue_sky_law
  - bpt3 6y ago
    Any founder who is looking to take funding from anyone should have a startup attorney to ask about this.
elliekelly 6y ago
> “Others might do a bad thing, therefore you should be banned from doing a good thing” is not a logically coherent standard — yet that is the essential argument of the SEC and it’s “accredited investor” protections. No. That is not remotely close to summarizing the SEC’s stance on accredited investors or the regulations the SEC enforces to protect retail investors. The securities regulations are, at their core, a disclosure regime. They aren’t intended to police for bad investments and they aren’t intended to prevent you or I or anyone else from making stupid decisions with our money. They’re merely about how much information must be furnished to potential investors before they invest. That’s it. If you want to sell securities to everyday folks, they have to be registered. Full stop. Any unregistered sale is an exemption to the rule but anyone can register their securities for sale and provide potential investors with a prospectus and some basic information about the investment. Generally speaking the registration and disclosure requirements are eased or exempted for people with a higher income not because they’re smarter and can avoid bad investments or because they’re better situated financially to absorb the loss. It’s because they have the resources to do the diligence and hire people ask the questions and get the necessary information to make the investment. Think of it as outsourced compliance. Rather than the entity paying for the cost of registering the securities and everything that entails the investors pay for it up front. And that makes sense. If I have a question about Apple’s prospectus I can’t ring Tim Cook and ask for more information. What you see in the disclosures is what you get. But if I’m one of the 35 unaccredited investors in my friend’s company and I have a question I can absolutely call the CEO and get the answers. And now think about the middle ground: JFrog, for example, before they filed their S-1. If you or I invested $5,000 and we had a question about operations do you think we’d get answers? No way. If Elon Musk invested and he had the exact same question do you think he’d get answers? Of course.

bpt3 6y ago

What exactly is stopping you from investing $5000 in your friend's startup?

voxic11 6y ago
Presumably Rule 506(b) which prevents fundraising from nonaccredited investors. There is an exception for up to 35 non-accredited investors but taking money from even one non-accredited investor greatly increases the disclosure requirements on your startup. So the startup would essential need to do disclosure as though it were a public company. https://www.sec.gov/smallbusiness/exemptofferings/rule506b https://www.sec.gov/smallbusiness/exemptofferings/rule506b
- JumpCrisscross 6y ago
  > the startup would essential need to do disclosure as though it were a public company Not quite that onerous. But the start-up and investor would each need to spend at least $5,000 on legal diligence. This would likely be true with or without the rule—if you don’t understand the preferred investors’ terms, you aren’t qualified to invest.
- bpt3 6y ago
  Rule 506(b) doesn't prevent it entirely, and keep in mind that the vast majority of companies aren't venture backed startups, and I believe would be covered under Rule 504. You absolutely don't need to do disclosure like a public company if you have non-accredited investors.
deleted 6y ago
[deleted]
otoburb 6y ago
To cross all the t's and dot all the i's, you might be able to join a friends-and-family round under Rule 504, but your founder friend should still do the due diligence to ensure the participating friends and family investors reside in states where such an offering is exempt from registration/qualification under state blue-sky laws[1]. IANAL. Hopefully your founder friend will have had a startup attorney to ask about all of this. [1] https://www.law.cornell.edu/wex/blue_sky_law https://www.law.cornell.edu/wex/blue_sky_law
- bpt3 6y ago
  Any founder who is looking to take funding from anyone should have a startup attorney to ask about this.

elliekelly 6y ago

> “Others might do a bad thing, therefore you should be banned from doing a good thing” is not a logically coherent standard — yet that is the essential argument of the SEC and it’s “accredited investor” protections. No. That is not remotely close to summarizing the SEC’s stance on accredited investors or the regulations the SEC enforces to protect retail investors. The securities regulations are, at their core, a disclosure regime. They aren’t intended to police for bad investments and they aren’t intended to prevent you or I or anyone else from making stupid decisions with our money. They’re merely about how much information must be furnished to potential investors before they invest. That’s it. If you want to sell securities to everyday folks, they have to be registered. Full stop. Any unregistered sale is an exemption to the rule but anyone can register their securities for sale and provide potential investors with a prospectus and some basic information about the investment. Generally speaking the registration and disclosure requirements are eased or exempted for people with a higher income not because they’re smarter and can avoid bad investments or because they’re better situated financially to absorb the loss. It’s because they have the resources to do the diligence and hire people ask the questions and get the necessary information to make the investment. Think of it as outsourced compliance. Rather than the entity paying for the cost of registering the securities and everything that entails the investors pay for it up front. And that makes sense. If I have a question about Apple’s prospectus I can’t ring Tim Cook and ask for more information. What you see in the disclosures is what you get. But if I’m one of the 35 unaccredited investors in my friend’s company and I have a question I can absolutely call the CEO and get the answers. And now think about the middle ground: JFrog, for example, before they filed their S-1. If you or I invested $5,000 and we had a question about operations do you think we’d get answers? No way. If Elon Musk invested and he had the exact same question do you think he’d get answers? Of course.