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Haha that's fun, it is a ridiculous reality that casinos and negative-expected value games are regulated only at the state-level while the Federal Government pr

Haha that's fun, it is a ridiculous reality that casinos and negative-expected value games are regulated only at the state-level while the Federal Government pretends those money games don't exist and that it needs to take a paternal relationship over players of positive-expected value games like assets and securities. I feel like someone well funded and clever could find the right combination of judges to correct this reality. Make it a real free for all.

Tuna-Fish 6y ago
It's important to note that the financial regulation we have does not exist to regulate positive-EV games, it exists to regulate away outright scams. Not things where the principals are taking too many risks or where there are unknowables that sink the idea, but situations where the plan from the start is to attract investment, take it, and run away. (Elisabeth Holmes-style "fake it 'til you make it" is sort of in the middle here.) The part that is hard is that it's really very hard to do prevent outright scams without a lot of collateral damage. In general, scam artists are better at understanding and applying any rules than the regulators or the police. Successful ones are also better at marketing their scams to ordinary people than non-scam-artists are at marketing their real business proposals. (After all, a successful scam artist only needs to have skills about marketing their proposal, but a team that is building something real has to have those skills and skills that are useful for building something real.) Much like we know from history that bad money drives out the good, we also have overwhelming historical evidence that in a completely unregulated market, the scams and the amount of money they attract will massively overwhelm actual business. The regulations around the financial markets are "scam-driven", in the same way that FAA regulations are "funeral-driven". Every line of text exists because someone somewhere managed to steal so much money from so many people, that the victims managed to complain enough about how this shouldn't be possible that it became law. The natural progression of rules in both cases is towards less regulation, as everyone is perfectly aware that the regulation that exists is stifling and damaging, so over time the regulations are reduced and enforcement becomes more lax, until something like 737MAX or Madoff happens and regulations need to be tightened again. There is no chance that anyone will ever strike all these regulations down with enough funding and "the right judges", simply because anyone who understands the space understands that while the regulation we have is bad, the alternative is so, so much worse.
- vmception 6y ago
  Sounds like a Michael Lewis passage. I'm familiar with those points, your conclusion is a false dichotomy. > anyone who understands the space understands that while the regulation we have is bad, the alternative is so, so much worse. The current regulations around capital formation, and secondary markets are completely classist and need much greater reform. The regulators passionately believe in their paternal approach, there isn't a shady cabal plotting to keep not-rich people out of the markets, they should still be stopped nonetheless.
  - tptacek 6y ago
    The markets themselves are completely classist. Even if there were no accredited investment standard, no VC would want your money, and VC funds formed to capitalize on small investments from retail investors would underperform classic large-LP VC firms --- probably dramatically, possibly even comically. A basic thing to understand about the investment markets is that VC firms compete with each other for dealflow; simply having the right number of dollars isn't enough to get in on the real remunerative deals.
    - vmception 6y ago
      VCs would just retain their higher minimum investments and it doesn't need the state’s involvement. VCs compete for dealflow because dealflow is limited due to many currently unnecessary and expensive regulations. Trillion dollar companies got their “growth capital” in an IPO one year after their $8mm Series A. This doesn't happen anymore and generations of people have extremely limited exposure to “deal flow” and liquidity. Thats changing and if VCs want to keeping playing hot potato with Stanford dropout shares they are completely free to keep doing that.
      - tptacek 6y ago
        It would be interesting to see evidence to support your claim that eliminating the accredited investor standard would so expand available opportunities that there would cease to be competition for the best of them. If you can't support that argument, you're stuck with the same adverse selection problem you have now. Have at it! :)
tptacek 6y ago
Everybody in America knows that it's a bad idea to invest your retirement savings at the casino, and most people don't know that about arbitrary securities.
- vmception 6y ago
  If they remove the wealth test completely in favor of a new unsponsored test solely for accredited investor status, I will be satisfied
  - tptacek 6y ago
    That's nice and all, but --- all due respect --- nobody cares whether you're satisfied, and they're not going to remove the asset test, so if you have something to say, you're going to need to flesh it out beyond "this is the vmception standard".
    - Karunamon 6y ago
      Why not simply require education and completion of some exam? (And no, a college degree is not necessary nor what I'm talking about) That would serve the goal of keeping the clueless from getting scammed, while also eliminating the kind of legalized classism (and I'd argue, unconstitutional on its face by way of the equal protection clause) that accreditation status represents.
      - tptacek 6y ago
        That's exactly the new standard the SEC just promulgated. Get a Series 7, and go nuts. You'll probably have to spend some time apprenticing at a financial firm, but that seems like a reasonable hurdle if your goal is to become a professional investor. I still feel like the "classism" argument here is extremely weak. Not because investment opportunities aren't classist --- they are --- but changing 501(a) isn't going to fix that. They're structurally classist. Good bets don't want retail money, because retail investors are, as a cohort, a bunch of loons. It might never occur to you to sue over some random, mundane options allocation event, but I promise you, it would occur to someone in the cohort of retail investors. I really believe that retail investors do not have a functioning mental model of how startup investing works. It's hard enough to get people to diversify at all. To invest in startups, you have to place 10 bets, hoping that 1-2 winners pay for all the losers. Ordinary investors freak the fuck out when one of their positions goes to zero, which is the expected outcome in private company investment.

Tuna-Fish 6y ago

It's important to note that the financial regulation we have does not exist to regulate positive-EV games, it exists to regulate away outright scams. Not things where the principals are taking too many risks or where there are unknowables that sink the idea, but situations where the plan from the start is to attract investment, take it, and run away. (Elisabeth Holmes-style "fake it 'til you make it" is sort of in the middle here.) The part that is hard is that it's really very hard to do prevent outright scams without a lot of collateral damage. In general, scam artists are better at understanding and applying any rules than the regulators or the police. Successful ones are also better at marketing their scams to ordinary people than non-scam-artists are at marketing their real business proposals. (After all, a successful scam artist only needs to have skills about marketing their proposal, but a team that is building something real has to have those skills and skills that are useful for building something real.) Much like we know from history that bad money drives out the good, we also have overwhelming historical evidence that in a completely unregulated market, the scams and the amount of money they attract will massively overwhelm actual business. The regulations around the financial markets are "scam-driven", in the same way that FAA regulations are "funeral-driven". Every line of text exists because someone somewhere managed to steal so much money from so many people, that the victims managed to complain enough about how this shouldn't be possible that it became law. The natural progression of rules in both cases is towards less regulation, as everyone is perfectly aware that the regulation that exists is stifling and damaging, so over time the regulations are reduced and enforcement becomes more lax, until something like 737MAX or Madoff happens and regulations need to be tightened again. There is no chance that anyone will ever strike all these regulations down with enough funding and "the right judges", simply because anyone who understands the space understands that while the regulation we have is bad, the alternative is so, so much worse.

vmception 6y ago
Sounds like a Michael Lewis passage. I'm familiar with those points, your conclusion is a false dichotomy. > anyone who understands the space understands that while the regulation we have is bad, the alternative is so, so much worse. The current regulations around capital formation, and secondary markets are completely classist and need much greater reform. The regulators passionately believe in their paternal approach, there isn't a shady cabal plotting to keep not-rich people out of the markets, they should still be stopped nonetheless.
- tptacek 6y ago
  The markets themselves are completely classist. Even if there were no accredited investment standard, no VC would want your money, and VC funds formed to capitalize on small investments from retail investors would underperform classic large-LP VC firms --- probably dramatically, possibly even comically. A basic thing to understand about the investment markets is that VC firms compete with each other for dealflow; simply having the right number of dollars isn't enough to get in on the real remunerative deals.
  - vmception 6y ago
    VCs would just retain their higher minimum investments and it doesn't need the state’s involvement. VCs compete for dealflow because dealflow is limited due to many currently unnecessary and expensive regulations. Trillion dollar companies got their “growth capital” in an IPO one year after their $8mm Series A. This doesn't happen anymore and generations of people have extremely limited exposure to “deal flow” and liquidity. Thats changing and if VCs want to keeping playing hot potato with Stanford dropout shares they are completely free to keep doing that.
    - tptacek 6y ago
      It would be interesting to see evidence to support your claim that eliminating the accredited investor standard would so expand available opportunities that there would cease to be competition for the best of them. If you can't support that argument, you're stuck with the same adverse selection problem you have now. Have at it! :)

tptacek 6y ago

Everybody in America knows that it's a bad idea to invest your retirement savings at the casino, and most people don't know that about arbitrary securities.

vmception 6y ago
If they remove the wealth test completely in favor of a new unsponsored test solely for accredited investor status, I will be satisfied
- tptacek 6y ago
  That's nice and all, but --- all due respect --- nobody cares whether you're satisfied, and they're not going to remove the asset test, so if you have something to say, you're going to need to flesh it out beyond "this is the vmception standard".
  - Karunamon 6y ago
    Why not simply require education and completion of some exam? (And no, a college degree is not necessary nor what I'm talking about) That would serve the goal of keeping the clueless from getting scammed, while also eliminating the kind of legalized classism (and I'd argue, unconstitutional on its face by way of the equal protection clause) that accreditation status represents.
    - tptacek 6y ago
      That's exactly the new standard the SEC just promulgated. Get a Series 7, and go nuts. You'll probably have to spend some time apprenticing at a financial firm, but that seems like a reasonable hurdle if your goal is to become a professional investor. I still feel like the "classism" argument here is extremely weak. Not because investment opportunities aren't classist --- they are --- but changing 501(a) isn't going to fix that. They're structurally classist. Good bets don't want retail money, because retail investors are, as a cohort, a bunch of loons. It might never occur to you to sue over some random, mundane options allocation event, but I promise you, it would occur to someone in the cohort of retail investors. I really believe that retail investors do not have a functioning mental model of how startup investing works. It's hard enough to get people to diversify at all. To invest in startups, you have to place 10 bets, hoping that 1-2 winners pay for all the losers. Ordinary investors freak the fuck out when one of their positions goes to zero, which is the expected outcome in private company investment.