The SEC, responsible for creating the rules designed to fulfill Congress’s mandate in Title III of the JOBS Act, included rules—known collectively as the 12g rule—that are a powerful disincentive for high-growth startups to use what the SEC calls “regulated crowdfunding.”
These rules stipulate that any company that takes on more than 500 individual investors or grows to a size greater than $25 million in assets must start filing regular disclosures just like a publicly traded company. It is all the pain of an IPO without the benefits of the IPO."
Alternately the SEC just recognizes that "crowdfunding" a corporation is just exactly what IPOs were supposed to be for and doesn't feel super happy about having to write the loop holes to their own regulations.
Exactly. No regulator has ever actively worked towards putting themselves out business. If crowdfunding were to succeed then people might start to consider why we have all this regulation, on the other hand if the SEC structures the rules such that only scammers make use of it then they can say "we tried this and it was a disaster so it is time to bring in more regulation".
A comment below the WSJ article by a crowdfunding lawyer says that "or" should be an "and", and that makes a huge difference, since a startup doesn't have to worry about the disclosures until they hit $25M.
I haven't heard a rationale for equity crowdfunding that makes sense to me. It sounds straightforwardly dangerous. The whole thesis for startup investing is that investors build large portfolios where the winners pay for the losers. A 2x return is a out-of-the-park home run for a retail investment in a public company, but is, mathematically, a failure for a startup investor, because only 1-2 companies in a portfolio of 10 will succeed.
Couldn't an equity crowdfunding investor spread their money around hundreds of companies as well, making smaller sub 1000 dollar bets. Or is there a minimum investment amount for this?
The main reason I'm skeptical of this approach is that I think the most promising companies won't do it, so the pool of companies doing equity crowdfunding will be low quality
It's not clear whether companies will be willing to take hundreds or thousands of small investments. Each one adds a non-negligible amount of overhead in investor communications, and at a certain threshold of investors, you trigger the same regulatory requirements as if you were actually a public company (issuing quarterly and annual financials).
Are you just assuming an equity crowdfunding investor (retail investor) has the resources or sophistication to do proper due diligence on hundreds of investments?
Maybe the interest rates are lower on these for borrowers because the cost of due diligence isn't included. Not maybe, actually.
I haven't looked too much into this space, but what about this rationale: the existing model pushes startups into 1000x-or-bust behavior, which contributes to the low success rate, which reinforces the need for high-risk growth followed by a spectacular cash-out. This could be driven by many factors, not least of which is the "brand name VC" model in which venture funds need a couple household name home runs to attract the best deals.
Perhaps the "crowd" model would allow the creation of smaller, lower-growth companies that could dominate a niche or region, and generate long-term dividend returns for investors rather than immediate capital gains. It could fill the space between debt and growth equity for companies that have ambitions beyond the lifestyle small business, but no potential to be breakout hits. Is there already a name for this kind of funding?
I don't understand. The "model" isn't the creation of venture capitalists; it's just mathematical reality. Whether you're shooting for 2x or 10x returns, the odds-on bet is that your company will fail. That's what new companies do. It's true of tech companies, barber shops, and restaurants. In a cohort of failing companies, the returns from successes must be higher to subsidize the losers.
> The "model" isn't the creation of venture capitalists; it's just mathematical reality.
Only if you invest in startups they way you play craps. The statistical distribution of outcomes is not predictive of the chances of a particular startup succeeding or failing. Some founding teams are virtually guaranteed to fail; some have a better than even chance to succeed. If you are willing to give up on the unicorns you can also eliminate most of the duds. Valley VCs are not willing to do that.
No, that's the model for firms with expertise in valuing companies. It's very trendy to suggest that big venture capital firms are throwing darts, but in fact they are competing for the best deals (which is another reason crowdfunding investors are at a disadvantage) and for the most part they are not spectacularly successful.
Venture capital firms aren't competing for "unicorns" simply out of vanity. They need to bet on firms with outsized returns because even in a cohort of pedigreed startups with plausible business plans and some degree of traction, most are going to fail.
Many of those failures are capable of generating reasonable incomes for employees and founders for years, but those incomes are not proxies for investment returns. That's another reason crowdfunding is dangerous: we have a skewed idea of "success", because to us, starting a company that lets us control our own destiny, build our resume, and earn a competitive salary for 10 years is a huge success. To a crowdfunding investor, the returns to investors are the only thing that matters.
> Many of those failures are capable of generating reasonable incomes for employees and founders for years, but those incomes are not proxies for investment returns.
That's part of my point. The current VC model causes failures of businesses that are viable going concerns, but not growing fast enough. They know they can make more overall by pushing a subset of those business to explode at the cost of killing most of the others. This also allows them to increase the velocity of their investments, further pressuring their startups to grow or fail fast. Their "cohort of pedigreed startups with plausible business plans and some degree of traction" should yield enough moderate successes to make investment profitable, as long as they are willing to play the long game.
Also, those incomes become proxies for investment returns once the company is stable enough to start paying distributions to its owners. Again, though, that ties up capital for the long term, which is anathema to the current VC crowd.
You're not rebutting me, but rather proving my point about how skewed definitions of "success" harm equity crowdfunding investors.
There is in fact very little value of a "going concern" to outside investors. These "going concerns" are successes for people directly involved, but are not successes for investors. Consider that distributions are the normal way partners and LLC members get paid, and also a huge source of lawsuits, because when management is just a small fraction of ownership, their incentives are to minimize distributions.
You will find few people on HN more pro-boostrap and anti-VC than me. My last company bootstrapped and ran 10+ years. We're bootstrapping this one. I agree with everything Pinboard says about investment versus funding from customer revenue.
But those arguments only have merit as long as you aren't taking outside money to build the business. As soon as you take outside money, your business plan must make sense to the investors.
> your business plan must make sense to the investors.
Would locking in dividends in the business plan allow the investors to become "directly involved" and make investment in a "going concern but not a unicorn" a rational choice for an investor?
I'll try to help you understand the parent's point. The current environment of VC-backed companies is such that almost all companies in the tech startup ecosystem are following high-risk, high-reward paths.
Barber shops and restaurants tend not to do this - they follow low-risk, low-reward paths. One reason for this is how they are funded - a bank giving a business loan for a restaurant might want to see a conservative plan to make one restaurant profitable within a few months of opening, to maximize the likelihood that their loan is repaid.
If there was a VC backed restaurant with equity financing, they might instead try to grow rapidly to a thousand locations to try to displace/disrupt McDonalds, all while losing money for several years, in the hope that they end up a multi-billion dollar chain. Obviously this is much more likely to fail and be worth nothing.
By adding a new form of funding that sits between a business loan and a VC equity deal, the hope is that you also create a new space of business plans that are more aggressive than the single-restaurant with debt plan but less aggressive than the "try to take on McDonalds" plan.
I understand the utility of that middle ground but not how equity crowdfunding provides it. The issue here is the failure rate for companies. Good companies fail routinely, and that includes companies that aren't on 100x trajectories. The high rate of failure requires higher returns from the winners. Accounting for realistic failure rates, I simply don't see how you can build a model that makes 2x returns from winners workable for outside investors.
It's certainly more dangerous than investing in IBM or Chipotle, but not obviously more dangerous than a number of things which we let adults purchase, including casino chips, time share properties, houses in California (which we'll subsidize your 5X leverage on), art history degrees (where capping it at 5X leverage would be refreshingly conservative), etc etc.
A $3,000 computer purchased today will depreciate to zero in 3~4 years, leaving you with hopefully some happy memories and a paperweight. Three $1k crowdfunding investments may do likewise. Do we distinguish them because they don't guarantee the paperweight?
I get the social purpose of e.g. preventing boiler room operations from extracting "investments" by retirees into businesses which are not actual businesses, but for businesses which are actual businesses which just happen to have 90% failure rates, "Distribute the risk among a group of people guaranteed to be at least middle class; and cap it at a figure lower than what they could reasonably spend on e.g. a wedding dress" seems to capture most of the social benefits of outlawing outright scams while also not outlawing middle class people from owning startup shares other than those they receive as compensation for services rendered.
Exactly this. This was what was sad about the dot com bust. People would not listen when I tried to explain that most of the companies they were putting their retirement funds into would die, and take their funds with it.
Nor should any normal retail investor purchase crowd-funded equity for retirement purposes. These are risky bets on immature companies with unproven products & business models and unvetted financials. I'm fairly certain that the majority of retail investors who are looking to put their money into crowd-funded equity will understand the higher risk associated with this new asset class.
I can't see any reason to accept the premise that equity crowdfunding investors are sophisticated. The entire point of deregulating equity --- which is what equity crowdfunding is --- is to allow unsophisticated investors to invest.
An unsophisticated investor can deduce that the risk profile of Coke is much different than that of a company with a penny stock trading at $0.05. Likewise, the majority of "unsophisticated" investors can probably deduce the difference in risk between investing in <bluechip> and <startup>. But we can't know for certain without conducting some kind of survey of the demographics and level of sophistication of the retail investor population.
As someone else pointed out - the SEC should be protecting investors/general public from unethical and illegal acts by the businesses, not from themselves and their own lack of knowledge. If you don't know what you're doing, you probably shouldn't be investing in the first place. Put your money in an ETF/savings account and only gamble what you're willing to lose in the equity crowdfunding market.
You can already do this. What startups want to do is market investments without dealing with public company disclosures, or the stigma of being an OTC public company.
No, but plenty of people (stupidly) gamble at a casino and hope for returns to fund their retirement, and no one is clamoring to outlaw gambling.
To expand on this analogy - gambling is legal because, as a society, we've decided that the upside of "entertainment value" outweighs the downside of "unsophisticated 'investors' (gamblers) may lose more money than they can afford to." If this is the case, it seems obvious to me that we should also accept crowdfunding, which has exactly the same downside, but infinitely more valuable upsides: normal investors get more opportunities for investment and businesses get access to more capital.
Securities regulations should protect investors from shady businesses doing illegal things, not from themselves.
Many, many, many people are clamoring to outlaw gambling in the very, very few places it is currently legal, myself included. Right now Draftkings and whatever that other one is are in the process of getting worked over by multiple state AGs for violating anti-gambling prohibitions.
Gambling is legal in only a tiny handful of places and in the few places where more casinos have recently been authorized, NY state (my state) included, it has been a hugely controversial decision. In NY State, the rationale was certainly not that gamblers benefitted, but that the added tourist attraction of creating casinos in depressed communities will boost the local economy. I think this was a patently bad decision and I'm certain that history will bear me out, that the local economies will not suddenly prosperous and quite to the contrary, all of the low grade crime associated with risk seekers, substance abusers and the profligate will now infect these communities as well.
The whole reason we have the SEC in the first place is to protect the credulous from the sharks.
I don't anticipate this type of crowdfunding taking off, quite honestly, and I don't know that this is a problem. We want the middle classes putting their assets in places safer than just betting them on papa's mustache in the third - which is what unsophisticated startup investing basically is. Except there is a much greater chance that a random horse picked with a dartboard is going to have a return than a random startup will.
I really don't think we need to concede the equivalence between restricting equity crowdfunding and outlawing gambling. Gambling is legal because, as marketed, it's an entertainment product. Equity crowdfunding is restricted because it's an investment product.
Similarly, GNC can sell all sorts of useless nutritional supplements, but the FDA is all up in the business of anyone trying to sell a new medication.
Reminder: you can take money from non-accredited investors; it's just so complicated that it's not practical to do so at scale and with strangers.
> Reminder: you can take money from non-accredited investors
My understanding is that it's only legal if investors approach you, or if you solicit individual investors on a one-by-one basis. It's illegal to simply announce that you're publicly accepting investment. I wholeheartedly agree that the marketing of these types of offerings need to be tightly regulated, but as it stands today, it's effectively impossible to participate (as an investor) without having a personal connection to the business.
That's correct, and what I mean about it being difficult to accept non-accredited money at scale. Which is the difference between being able to invest, and being able to market an investment.
So, let's say I market the crowdfunding shares as an entertainment product. Then it could become a legal model?
Relatedly, I had the idea to sell small shares of (legit, regulated) far-out-of-the-money options as lottery tickets. As investment products, they're legal, but work like lottery tickets in that you have a tiny chance of winning big (e.g. if the underlying security has a sudden, sharp shift in price).
>A $3,000 computer purchased today will depreciate to zero in 3~4 years, leaving you with hopefully some happy memories and a paperweight.
My desktop contains many parts manufactured more than four years ago and it is still useful. In fact, it no longer matters how many dollars of value you think it is worth, it is still effective, consuming only electricity and my time.
"startup investing" depends on your definition of startup.
For example, a person that has applied for a patent - no VC would call that a startup, but perhaps those with intimate knowledge of what the patent will lead to may indeed call that a startup.
Another example are "stealth startups" - we explicitly refer to them as startups yet many are merely patents with maybe a partially working prototype but no product yet.
There are instances where both of those examples are combined (sole inventor + operating in stealth). Just because the entity doesn't fit the profile of "startup" for VC's doesn't mean there isn't room for that type of "startup investing".
> I haven't heard a rationale for equity crowdfunding
> that makes sense to me.
My take is that it's political, meaning that we're trying to avoid the perception that only industry insiders can participate in and benefit from these types of investments. I've read some press about how companies are taking longer to go public, and that by the time they do, there's very little growth left.
(edit: Crowdfunding seems to me like an attempt to allow "retail" investors to participate in pre-IPO investments.)
It's a real problem that startup investment potentially further levers capital for rich people, but direct equity crowdfunding is not the right solution. As a way of improving financial outcomes for regular investors, equity crowdfunding is a radium tonic.
I sort of agree but do see some other value beyond a wider universe of capital draw on: there's some marketing value and I think an even stronger effect is a lot more people with "skin in the game" no matter how little skin it actually is.
But for vast majority of people, I don't think they should be going in more than $1-5k per company.
Pension funds and mutual funds are some of the largest crowd funded entities on the planet. The former lacks transparency and has too many middlemen, and the later is far more limited in it mandate and typically is restricted to public markets.
If congress wants to bring small non-accredited investors into the private markets and increase access to capital for small companies, there needs to be mechanisms in place to do it as a pool vehicle that invests in one or more underlying companies managed by a platform because companies don't want to disclose IP, not deal with a lot of small investors.
Moreover, the regulatory, compliance, and accounting overhead single investor needs to be very low (sub $100). Any broker-dealer model will carry a significant tax unless the SEC/FINRA lighten the regulatory burden for broker-dealers (which is very high).
who are these "companies don't want to disclose IP"?
Software startups disclose their IP whether through traditional IP protection (copyrights, trademarks, patents) - or open source. Those relying on trade secrets do not disclose their IP to investors.
> The worry, voiced by many, is that the pool of startups using equity crowdfunding will consist mostly of lower-quality companies that couldn’t get funding by other means.
Yes, of course. When you can't get the "smart" money, you try to go public or raise money from someone who won't or can't be involved with the actual business, right? The highest quality funding comes with expertise and guidance and is more than just a check.
I've been wondering for a while if it would be more viable to crowdfund VCs or angels in place of limited partners. That way there are full time people dedicated to due diligence, risk management via diversified portfolios, etc. Of course, similar risks still apply and bankrolling start ups may or may not be the best way to ROI.
Traditional product crowdfunding, a la Kickstarter, is meant to act as product pre-sales (debt financing). I think we're starting to move further away from flashy CGI promising us a concept (and subsequently squandering investment money) towards more mature companies able to actually deliver. Though this is taking the magic out for those makers with fewer resources, it's certainly better for the backers.
Equity crowdfunding is... very risky business. This is where mom and pop can get involved. If professional investors routinely lose out of the majority of their investments, Joe Everyman is in for a ride. But should he be protected? The first line of investment are usually the 3 F's -- family, friends, and fools. By making these type of investments more networked and liquid (particularly the fools part), more startups could raise capital at the expense of fools. I guess we saw that didn't work out too well about a decade-and-a-half ago, because there will always be more swindlers than legitimate entrepreneurs.
52 comments
[ 3.8 ms ] story [ 106 ms ] threadThe SEC, responsible for creating the rules designed to fulfill Congress’s mandate in Title III of the JOBS Act, included rules—known collectively as the 12g rule—that are a powerful disincentive for high-growth startups to use what the SEC calls “regulated crowdfunding.”
These rules stipulate that any company that takes on more than 500 individual investors or grows to a size greater than $25 million in assets must start filing regular disclosures just like a publicly traded company. It is all the pain of an IPO without the benefits of the IPO."
That, and a few other arguments, here as well: https://news.ycombinator.com/item?id=10481136
The main reason I'm skeptical of this approach is that I think the most promising companies won't do it, so the pool of companies doing equity crowdfunding will be low quality
Maybe the interest rates are lower on these for borrowers because the cost of due diligence isn't included. Not maybe, actually.
Perhaps the "crowd" model would allow the creation of smaller, lower-growth companies that could dominate a niche or region, and generate long-term dividend returns for investors rather than immediate capital gains. It could fill the space between debt and growth equity for companies that have ambitions beyond the lifestyle small business, but no potential to be breakout hits. Is there already a name for this kind of funding?
Only if you invest in startups they way you play craps. The statistical distribution of outcomes is not predictive of the chances of a particular startup succeeding or failing. Some founding teams are virtually guaranteed to fail; some have a better than even chance to succeed. If you are willing to give up on the unicorns you can also eliminate most of the duds. Valley VCs are not willing to do that.
Venture capital firms aren't competing for "unicorns" simply out of vanity. They need to bet on firms with outsized returns because even in a cohort of pedigreed startups with plausible business plans and some degree of traction, most are going to fail.
Many of those failures are capable of generating reasonable incomes for employees and founders for years, but those incomes are not proxies for investment returns. That's another reason crowdfunding is dangerous: we have a skewed idea of "success", because to us, starting a company that lets us control our own destiny, build our resume, and earn a competitive salary for 10 years is a huge success. To a crowdfunding investor, the returns to investors are the only thing that matters.
That's part of my point. The current VC model causes failures of businesses that are viable going concerns, but not growing fast enough. They know they can make more overall by pushing a subset of those business to explode at the cost of killing most of the others. This also allows them to increase the velocity of their investments, further pressuring their startups to grow or fail fast. Their "cohort of pedigreed startups with plausible business plans and some degree of traction" should yield enough moderate successes to make investment profitable, as long as they are willing to play the long game.
Also, those incomes become proxies for investment returns once the company is stable enough to start paying distributions to its owners. Again, though, that ties up capital for the long term, which is anathema to the current VC crowd.
There is in fact very little value of a "going concern" to outside investors. These "going concerns" are successes for people directly involved, but are not successes for investors. Consider that distributions are the normal way partners and LLC members get paid, and also a huge source of lawsuits, because when management is just a small fraction of ownership, their incentives are to minimize distributions.
You will find few people on HN more pro-boostrap and anti-VC than me. My last company bootstrapped and ran 10+ years. We're bootstrapping this one. I agree with everything Pinboard says about investment versus funding from customer revenue.
But those arguments only have merit as long as you aren't taking outside money to build the business. As soon as you take outside money, your business plan must make sense to the investors.
Would locking in dividends in the business plan allow the investors to become "directly involved" and make investment in a "going concern but not a unicorn" a rational choice for an investor?
Barber shops and restaurants tend not to do this - they follow low-risk, low-reward paths. One reason for this is how they are funded - a bank giving a business loan for a restaurant might want to see a conservative plan to make one restaurant profitable within a few months of opening, to maximize the likelihood that their loan is repaid.
If there was a VC backed restaurant with equity financing, they might instead try to grow rapidly to a thousand locations to try to displace/disrupt McDonalds, all while losing money for several years, in the hope that they end up a multi-billion dollar chain. Obviously this is much more likely to fail and be worth nothing.
By adding a new form of funding that sits between a business loan and a VC equity deal, the hope is that you also create a new space of business plans that are more aggressive than the single-restaurant with debt plan but less aggressive than the "try to take on McDonalds" plan.
A $3,000 computer purchased today will depreciate to zero in 3~4 years, leaving you with hopefully some happy memories and a paperweight. Three $1k crowdfunding investments may do likewise. Do we distinguish them because they don't guarantee the paperweight?
I get the social purpose of e.g. preventing boiler room operations from extracting "investments" by retirees into businesses which are not actual businesses, but for businesses which are actual businesses which just happen to have 90% failure rates, "Distribute the risk among a group of people guaranteed to be at least middle class; and cap it at a figure lower than what they could reasonably spend on e.g. a wedding dress" seems to capture most of the social benefits of outlawing outright scams while also not outlawing middle class people from owning startup shares other than those they receive as compensation for services rendered.
It's a good point, though. "Normal" people should be protected against themselves in their financial decisions.
As someone else pointed out - the SEC should be protecting investors/general public from unethical and illegal acts by the businesses, not from themselves and their own lack of knowledge. If you don't know what you're doing, you probably shouldn't be investing in the first place. Put your money in an ETF/savings account and only gamble what you're willing to lose in the equity crowdfunding market.
To expand on this analogy - gambling is legal because, as a society, we've decided that the upside of "entertainment value" outweighs the downside of "unsophisticated 'investors' (gamblers) may lose more money than they can afford to." If this is the case, it seems obvious to me that we should also accept crowdfunding, which has exactly the same downside, but infinitely more valuable upsides: normal investors get more opportunities for investment and businesses get access to more capital.
Securities regulations should protect investors from shady businesses doing illegal things, not from themselves.
Gambling is legal in only a tiny handful of places and in the few places where more casinos have recently been authorized, NY state (my state) included, it has been a hugely controversial decision. In NY State, the rationale was certainly not that gamblers benefitted, but that the added tourist attraction of creating casinos in depressed communities will boost the local economy. I think this was a patently bad decision and I'm certain that history will bear me out, that the local economies will not suddenly prosperous and quite to the contrary, all of the low grade crime associated with risk seekers, substance abusers and the profligate will now infect these communities as well.
The whole reason we have the SEC in the first place is to protect the credulous from the sharks.
I don't anticipate this type of crowdfunding taking off, quite honestly, and I don't know that this is a problem. We want the middle classes putting their assets in places safer than just betting them on papa's mustache in the third - which is what unsophisticated startup investing basically is. Except there is a much greater chance that a random horse picked with a dartboard is going to have a return than a random startup will.
Similarly, GNC can sell all sorts of useless nutritional supplements, but the FDA is all up in the business of anyone trying to sell a new medication.
Reminder: you can take money from non-accredited investors; it's just so complicated that it's not practical to do so at scale and with strangers.
My understanding is that it's only legal if investors approach you, or if you solicit individual investors on a one-by-one basis. It's illegal to simply announce that you're publicly accepting investment. I wholeheartedly agree that the marketing of these types of offerings need to be tightly regulated, but as it stands today, it's effectively impossible to participate (as an investor) without having a personal connection to the business.
Relatedly, I had the idea to sell small shares of (legit, regulated) far-out-of-the-money options as lottery tickets. As investment products, they're legal, but work like lottery tickets in that you have a tiny chance of winning big (e.g. if the underlying security has a sudden, sharp shift in price).
Many of the games at a casino are required by law to payout at a certain rate, though.
My desktop contains many parts manufactured more than four years ago and it is still useful. In fact, it no longer matters how many dollars of value you think it is worth, it is still effective, consuming only electricity and my time.
Your thesis is incorrect.
For example, a person that has applied for a patent - no VC would call that a startup, but perhaps those with intimate knowledge of what the patent will lead to may indeed call that a startup.
Another example are "stealth startups" - we explicitly refer to them as startups yet many are merely patents with maybe a partially working prototype but no product yet.
There are instances where both of those examples are combined (sole inventor + operating in stealth). Just because the entity doesn't fit the profile of "startup" for VC's doesn't mean there isn't room for that type of "startup investing".
(edit: Crowdfunding seems to me like an attempt to allow "retail" investors to participate in pre-IPO investments.)
But for vast majority of people, I don't think they should be going in more than $1-5k per company.
If congress wants to bring small non-accredited investors into the private markets and increase access to capital for small companies, there needs to be mechanisms in place to do it as a pool vehicle that invests in one or more underlying companies managed by a platform because companies don't want to disclose IP, not deal with a lot of small investors.
Moreover, the regulatory, compliance, and accounting overhead single investor needs to be very low (sub $100). Any broker-dealer model will carry a significant tax unless the SEC/FINRA lighten the regulatory burden for broker-dealers (which is very high).
Software startups disclose their IP whether through traditional IP protection (copyrights, trademarks, patents) - or open source. Those relying on trade secrets do not disclose their IP to investors.
Yes, of course. When you can't get the "smart" money, you try to go public or raise money from someone who won't or can't be involved with the actual business, right? The highest quality funding comes with expertise and guidance and is more than just a check.
There's not the same amount of visibility and accountability in startups as with companies on a publicly traded exchange.
Someone will lose their shirt, sue, and set precendent for how startups should now behave with unsophisticated investors.
Equity crowdfunding is... very risky business. This is where mom and pop can get involved. If professional investors routinely lose out of the majority of their investments, Joe Everyman is in for a ride. But should he be protected? The first line of investment are usually the 3 F's -- family, friends, and fools. By making these type of investments more networked and liquid (particularly the fools part), more startups could raise capital at the expense of fools. I guess we saw that didn't work out too well about a decade-and-a-half ago, because there will always be more swindlers than legitimate entrepreneurs.