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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

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! :)
    - JumpCrisscross 6y ago
      > VCs compete for dealflow because dealflow is limited due to many currently unnecessary and expensive regulations This is way off. At the growth capital level, terms for QPs ($5+ million) and QIBs ($100+ million) are night and day. (Accredited investors aren’t on the field. To say nothing of smaller fish.) This partly stems from liability. Small investors have an easier time convincing regulators, judges and juries they got screwed and deserve compensation. It also deals with sophistication. A complex win-win structure might not market well, but they regularly happen with hedge funds. But it is mostly about efficiency. A single institutional investor setting deal terms will fill the rest of the deal on their brand. That lets you negotiate once and be certain of closing. You get a tight list of LPs or investors and know no cheques will bounce. If someone misbehaves, you can complain to the lead who will tell them to knock it off or risk losing future deal flow. Capital markets have economies of scale. Just looking at venture secondary markets, pricing on SharesPost and EquityZen is regularly 20% to 50% worse than what even a moderate cheque writer could get. And that’s before considering the preferences on better classes of stock.

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! :)
  - JumpCrisscross 6y ago
    > VCs compete for dealflow because dealflow is limited due to many currently unnecessary and expensive regulations This is way off. At the growth capital level, terms for QPs ($5+ million) and QIBs ($100+ million) are night and day. (Accredited investors aren’t on the field. To say nothing of smaller fish.) This partly stems from liability. Small investors have an easier time convincing regulators, judges and juries they got screwed and deserve compensation. It also deals with sophistication. A complex win-win structure might not market well, but they regularly happen with hedge funds. But it is mostly about efficiency. A single institutional investor setting deal terms will fill the rest of the deal on their brand. That lets you negotiate once and be certain of closing. You get a tight list of LPs or investors and know no cheques will bounce. If someone misbehaves, you can complain to the lead who will tell them to knock it off or risk losing future deal flow. Capital markets have economies of scale. Just looking at venture secondary markets, pricing on SharesPost and EquityZen is regularly 20% to 50% worse than what even a moderate cheque writer could get. And that’s before considering the preferences on better classes of stock.