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.

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.

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.

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.

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.

> 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.

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! :)

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.

Not everyone understands the principle of the nest egg.

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".

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.

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.

Yep. When you make a private investment (and I have), you have to fully expect to never see that money again. The truth is you probably won't. One time I did get a return, and it was nothing to write home about. I would've been better off buying a tech ETF.

Historically, as an asset class, VC has routinely underperformed the S&P 500. Even on HN, which is full of startup people, the mental model people have about the investing business model is dominated by the outcomes of successful companies, rather than any notion of portfolios of successes and failures.

Another detail retail investors don't have: startup investors re-invest to keep pro-rate shares in future rounds. You have to keep feeding companies money to keep your share. Explain that to my Aunt Rita.

Another thing is, the LPs in VC funds aren't putting money in just because they think it'll be a super-successful investment that they want access to; some of them have portfolio allocation rules, and requirements to invest funds in things decorrelated from public markets. Which is just to say, a pension fund goes into these things with eyes wide open, unlike a skittish retail investor and his Lionel Hutzian legal advisors.

(In fact: you can apparently get a series 65 without sponsorship, so the new standard is exactly what you want it to be.)

That's.. wow. $175 and passing a test, and you're set for two years. That indeed eliminates the problems I had with the old system.

I basically had to fill out a form along these lines to be able to do options trading.

"Do you know what an option is?", "Do you trade regular stocks now?", "Do you understand you may lose all your money with options?".

I suspect my brokerage doesn't even actually review the form, they just want to avoid people complaining that they YOLO'd on a Tesla call and lost everything. Given how easy it was, I am kind of in favor of it - it seems important to have a very obvious and plain disclaimer on high risk strategies like this.

I think the naming is important. The questions you listed don't fully describe how sub-optimal margin trading is.

You can do options trading and not do margin trading - which is my preference based on my personal risk surface. Margin trading comes with a bunch of other things these days - having to post effectively a bond, keep a certain amount of cash in your money market, etc.

It's not a big deal. You pay a bit in interest while holding margin, but for the most part there's nothing wrong with having say 30% of your portfolio in margin while the market is rallying. Helps you get much better gains.

Still, options provide leverage compared to cash equities because the premium is cheaper than the stock price. And just as leverage can magnify profits on the way up, it can also magnify losses on the way down.

Would be great if we could do this to override all regulations that are meant to protect people from themselves, e.g.:

- Buying contact lenses without a 1+ year old or foreign prescription.

- Taking drugs.

- Online poker.

- Buying a Kinder Surprise chocolate.

- etc.

I agree. Additionally, regular limited liability corporations should be prohibited from serving this market. Only allow unlimited liability partnerships to do so. If you want to work outside of the usual legal protections then you have to own it.

What happens when the place that is "not up to code" catches fire and sets every other building on the block ablaze? What happens when enough novice investors lose their money to bad investments and scams that it sparks a recession?

Besides protecting individuals, regulations protect society from negative externalities generated by these risky activities. I think there's a huge opportunity to decriminalize sex work and drug-related crimes, but we should recognize that risky behavior puts more than just the immediate individuals involved at risk.

I removed that example from the list as I now see how it could be misinterpreted (I was only thinking of building codes that are meant to protect the tenants, not those that regard externalities).

Even without that example, your parent comment is dead on re: the historical reasons for regulating financial markets (and the historical reasons for fire codes -- the razing of cities like Chicago).

For example, consider the SEC.

The primary goal of the SEC upon its founding shortly after the great depression was to restore investor confidence in the securities market. Its goal was to improve trust in the financial system, and it achieved that goal in part by introducing regulations that help protect individual investors.

The fire analogy is actually a good one, since those policies also have historical roots in the razing of big portions of several large US cities (eg Chicago).

In a dense city, your purported distinction between fire codes that protect inhabitants and fire codes that protect cities/blocks is a false dichotomy. The way you prevent the block from burning is by preventing individual buildings from burning. Because in a dense city blocks are comprised of... well... densely packed buildings.

More laissez faire strategies might work in much less dense areas like rural Kansas (not even suburbs -- have you seen a bad gas explosion?). And even then, only as long as you you're willing to really go it on your own -- if your attitude is "don't tell me what to do" rugged individualism then don't expect the time of day from insurance companies, banks offering mortgages, or fire departments. Buy in cash, no insurance, and put out your own fires.

Similarly, public and secondary financial markets are not your brother's laundromat or neighborhood bar. The best way to protect a large inter-connected financial system from collapses in investor confidence is to prevent obviously fraudulent bubbles from forming in the first place. Expecting individual investors to have confidence in valuations within completely unregulated marketplaces is like expecting the block be fine without thinking about how to prevent fires in any of the individual buildings.

This even extends to the "maybe something else might work in rural Kansas" example, where you replace actuaries and fire fighters with welfare/social security and medicaid.

I'm not sure how that makes the argument stronger: https://en.wikipedia.org/wiki/Grenfell_Tower_fire

I mean, would investing in FB, Shopify, Tesla, etc IPOs been a dumb investment?

How about Pets.com, eToys, Webvan, Kozmo, and hundreds of others from the dot com days? It's easy to look backwards and cherry pick success or failure. Timing is also very important. Many stocks go no where for years (like MSFT for most of the 2000's)

The difference being that while everyday plebs like you and me without a quarter million to sling around couldn't have touched those at IPO, there would have been nothing at all stopping me from plowing my entire net worth into their stocks once the IPO period was over.

Or companies like Enron. Pick a random crypto from coinmarketcap and their creators likely had better financials...

or Yahoo

Of course Yahoo--like many other dot-com stocks that IPOd--would have been a great investment if you got in early-on and got out before the crash.

So, yes, it can be all about the timing.

One key point in approaching an IPO is the company becoming significantly more transparent. For those companies and likely every single one there would have been a pre IPO point in time where only hindsight can say it was wise to invest then.

A lot of investment is about minimizing risk. If you want examples of hyped-up tech companies that failed after IPO, just look at the dotcom bubble, it wasn't that long ago.

Well if you want minimal risk don't invest. But it's not just about minimal risk but rather risk adjusted returns. Most people (outside of WSB) do not dump their entire portfolios in a single IPO.

Most people also don't have the capital or time to diversify, to make a significant number of investments into individual stocks. They are better off with an index fund.

You can put the majority of your money in an index fund and dabble in a few riskier investments with a few percentage points of your portfolio. With fractional shares even those with the smallest of portfolios can do this.

I think it was addressed in the article, partially with:

"[...] Private companies are not just where a lot of the fraud is, they’re also where a lot of the growth is. "

I believe his point was that money/wealth is not a good differentiator of sophistication, AND it puts an unnecessary bar to anybody investing in today's opportunities (to your point).

Instead, open up the investment but ensure people are aware and reminded of the risks. Hence the tongue-and-cheek "Dumb Investment Certificate" :)

> I believe his point was that money/wealth is not a good differentiator of sophistication, AND it puts an unnecessary bar to anybody investing in today's opportunities (to your point).

that doesn't mean it's an unreasonable bar. it's sort of like the opposite of "if you owe the bank a million dollars, it's your problem; if you owe the bank a billion dollars, it's their problem". if someone with a million dollars loses a large chunk of it to a bad investment, it's mostly just their problem. if someone with $10k loses a large chunk of it, it may become the (welfare) state's problem. if the state is going to guarantee that basic needs are met at some level, it's not unreasonable to prohibit people from doing risky things that are likely to lead to them drawing on the system. this is the essential tradeoff between freedom and security.

It's not only this. An environment where the only investment policy is caveat emptor is also an environment that will encourage more scammy investment opportunities. It is also in the state/community interest to make sure investments represent real growth opportunities and not just lining some huckster's pockets. You don't want the entire market itself to end up a market for lemons.

Probably a bit dumb to invest in any single stock if you aren't already pretty wealthy, but being public has a lot of reporting requirements that make it pretty hard for it to be an outright fraud.

With a public company, your investment might lose value, but you are probably not going to get completely ripped off. That's not the case if you invest in a private company without doing due diligence.

Do you mean buying the stock before the s-1? Only place would be secondary markets and you would not have access financial reports to make an informed decision. It would be a dumb investment.