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.
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.
> 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.
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.
Have at it! :)
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.
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.
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.
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.