Retort to Isenberg Harvard Business Review by David Drake
I [David Drake] would echo and add to Doug’s observations about Dan Isenberg’s 4/23/2012 Harvard Business Review “The Road to CrowdFunding Hell”.
The SEC isn’t the “good investment” police — they are the “fair/non-fraudulent investment” police. Today, I can go to my online brokerage account and buy an S&P 500 index ETF, or a 2x S&P index ETF — or I can buy an ETF that shorts or 2x shorts that same index. It isn’t logically possible that being ultra short and ultra long the S&P are both “good” investments (there may be complicated hedges/market timing plays for both, but the average retail investor probably isn’t that savvy). The point isn’t that some government entity is out there declaring each of these products “good” — the financial institutions draw up a huge document describing the strategy and disclosing the risks and fees, and investors are allowed to make their own decisions.
One of my first forays into ETFs involved buying a product that was short 30 year T-bills a few years back. I didn’t really understand it, and I got burned. Forget the “people are allowed to go to casinos” argument, because that belittles the charge of the SEC — how about “if ordinary, unsophicated, non-accredited retail investors are allowed to invest in exotic ETFs that track everything from gold, to oil, to soybeans, to emerging markets, to T-bills, long, short, 2x long, 2x short, merely by punching a ticker symbol into the “buy” field of their E-Trade account, then how is this really so different?” It ties back to Doug’s point about full and fair disclosure. The regulators have determined that so long as brokerage houses send enough quarterly literature to investors, investors are free to make their own investment choices, based on their own beliefs about the world. The world’s population is growing like crazy, but I’m free to go short commodities until the cows come home, and the SEC isn’t stepping in to say “hey man, this seems like a bad trade, we’re not going to allow you to take that position.” Nor should they.
It is patently paternalistic to try to limit investment opportunities to only those which some bureaucratic arm has determined is not only fair, but a good, likely-to-gain investment. It also is wildly impractical.
If you believe that unsophisticated investors cannot be trusted to choose investments for themselves even after full and fair disclosure, then taking that to its logical conclusion, non-accredited investors should be forbidden from investing in anything other than savings bonds or treasury bills. Anything else could risk losing their money, and non-accredited investors just aren’t financially savvy enough to be trusted to pick winners.
That isn’t the system we live in. Congress has determined, by large majority, that crowdfunding is worth a try. This means that, just like exotic ETFs, crowdfunded shares have been added to the category of investment products that ordinary retail investors are allowed to choose to buy after full and fair disclosure.
Founder/Chief Legal Officer
Vim Funding, Inc