Stock Market

Pre-IPO Investing: Not For You, Little Guy. Don't Worry Your Confused Little Head About It


Paul Boutin in the new Wired about one of the more aggravating allegedly pro-little guy investment rules that keeps the "unaccredited" out of being able to help with, or be helped by, investing in pre-Initial Public Offering companies. The details, and colorful explanations of how the obscure Rule 501 of Regulation D is hurting your ability to help yourself, poor li'l investor:

Here's a hot stock tip: Buy Facebook. Sure, the company's valuation has bounced around over the past six years, but now it's believed to be around $20 billion and likely to keep climbing….

Oh, but wait: You can't. Facebook isn't a public company. The only people who can invest in it already are millionaires…..

Here's how the current system works: Even though no IPO is in sight, a company can still give contractors, advisers, and employees equity to keep them fat, happy, and working. But SEC rules limit the number of shareholders to 500. To get around this, talent can be granted something called restricted stock units, which they can get without being official shareholders. Then the contractors, consultants, and employees who leave the company can sell their vested stakes privately in what's called a secondary market….

But the Securities and Exchange Commission doesn't let just anyone buy shares in a corporation that hasn't gone public. Pre-IPO sales are limited to "accredited investors," people with a demonstrated net worth of $1 million or a yearly income of $200,000. It's been that way since 1982, when Rule 501 of Regulation D of the Securities Act went into effect….So who hasbought pre-IPO Facebook stock? A reported 10 percent of the company went to the Russian investment group Digital Sky Technologies, whose backers include one of that country's richest oligarchs. In other words, the extremely wealthy.

Today, Rule 501 does less to protect widows and orphans than it does to prevent risk-savvy investors from playing the secondary market. Sharp, up-to-the-minute financial advice is no longer beyond the reach of the middle class….

…..As part of the financial reform bill introduced by senator Chris Dodd of Connecticut, Congress even tried to raise the bar to $2.3 million in the bank or $450,000 of income. The plan was dropped only after the Angel Capital Association, a trade group of US startup investors, screamed that it would drive two-thirds of them out of business.

It's time to lower the bar: The pre-IPO market should let everyone in.

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  1. I agree with this 100%.

    However, one word of advice. If you’re a small time investor (say $10K in your brokerage account) and your brokerage firm offers you to get in on an IPO, just say no. Chances are it’s a complete dog that’s undersubscribed and they’re only coming to you because their bigger customers already told them to scram.

    1. I agree with it, assuming the “buy facebook” really means “buy a short in facebook”.

  2. Looks like Rangel will be getting an ethics trial afterall:

    Chairman Zoe Lofgren, D-Calif., has made clear that she wants the committee to be unanimous ? leaving little chance for agreement without Rangel capitulating on virtually all counts.

    Many Democrats had urged Rangel to settle the case to avoid the prospect of televised hearings right before November congressional elections that will determine which party controls Congress next year.

    However, as Thursday’s public airing of the charges drew nearer, House Speaker Nancy Pelosi seem resigned to the case proceeding.

    “The chips will have to fall where they may politically,” she told reporters. Pursuing ethics cases against House members is “a serious responsibility that we have,” she said.

    @ SugarFree: the url is about 200 characters long.…..hpdHNyYW4-

    1. Ken Gross, an ethics and campaign-finance attorney in Washington, said that none of the charges would likely result in Mr. Rangel being kicked out of Congress. “The penalty is having to go through the trial process, more than anything that they will do at the end of the day,” Mr. Gross said. from wsj

      I think he should be “lynched”.

  3. And where the hell is my California meltdown crack?

  4. Note that as a result of the Dodd bill, the “affiliated investor” definition has gotten more onerous within the last week: The $1 million net worth requirement now specifically excludes the value of your primary residence. Not only that, but if you’re underwater on your mortgage (as half of Florida, Nevada and California area), the amount by which you’re underwater is subtracted from your net worth for purposes of the Reg D calculation.

  5. Reg D, especially as tightened up by Dodd-Frank, has always been about keeping the most high-return securities available only to the Big Boys.

    More oligarchical corporatism from Our Masters in DC.

    I’ve been looking mostly at Panama, but I’m hearing good things about Uruguay as well, although they have a tax bill being worked up that could take them right off the table.

    1. Uruguay still has its bank privacy laws, even though it is under pressure from international organizations (OECD) to join the “civilized” world.

  6. So the $1 mil limit is to keep the little schmucks from getting in on IPOs. Got it. But they’ll tell us it’s to protect “inexperienced” investors.

    I swear, the politicians must laugh at us all in private, because they fuck the people and tell them it’s for our own good, and the people don’t tar and feather them.

    1. We should have the arbitrary right, under the Constitution, to tar and feather anyone in political office at any time. Failure to submit to such tarring and feathering is grounds for immediate dismissal from office, without pay, pension, or delay.

      I’ll draft an amendment.

      1. Second!

      2. I’d settle for the right to administer a severe beating.

        1. Only when tar and feathers aren’t readily available. We respect the rule of law around here, after all.

          1. I don’t.

            1. By rule of law, I mean this two-by-four with a rusty spike sticking out of it. I call it “Rule of Law.”

              1. You’re just another shill for Big Tar and Big Feather.

      3. The Founders and their ilk didn’t wait for permission.

        1. That’s different. If we revolt, then we can do whatever we want to the former ruling class.

    2. Look, there’s the ruling class and there’s the rest of us. There would be no point in being a member of the ruling class if you couldn’t exclude the vast majority of Americans from your club.

  7. By the way, a ton of the investment equity in this world originates from friends and family.

    It was already getting hard enough to qualify investors. Mom and Pops, which are such a huge, important part of the entrepreneurial activity in this country, don’t get their start up equity from a bank.

    So, it isn’t just that it’s hard on investors who want to invest in start up companies; it’s that making it harder for Mom and Pop entrepreneurs to raise equity so they can get a loan is getting harder too.

    And that’s a stupid thing to do to a really important sector of the economy–probably the most important part of the economy for growth. New growth isn’t comin’ from old companies doing things the old way…

    And that’s just another artificial barrier for entrepreneurs.

    If the Obama Administration had any idea what they were doing at all, they’d stay up late every night trying to think up new ways to make it easier for entrepreneurs to raise equity–but noooOOOOOoooo!

    1. “If the Obama Administration had any idea what they were doing ”

      They know exactly what they’re doing. Either that, or they’re completly, absolutely, stupid beyond belief.

      To paraphrase what LeMay said – No one can tell if they’re incompentent, unfortinate or malicious, as the end result is the same. Policies that activly destroy the wealth and well being of the country.

  8. Reg D, especially as tightened up by Dodd-Frank,

    This right-wing talking point about Chris Dodd or Barney Frank being in any way responsible for the Dodd?Frank Wall Street Reform and Consumer Protection Act of 2010 is a discredited dittohead conspiracy theory. If anything, Dodd and Frank are libertarians.

    1. I’m so ashamed.

    2. “If anything, Dodd and Frank are libertarians.”

      I remember when Frank answered questions about whether TARP oversight was hurting the banking industry by saying that if they didn’t like it they should pay the money back…

      That was about a week after his committee signed off on a bill that specifically prohibited banks that received TARP funds from paying them back!

      He isn’t a libertarian. If Frank is anything, he’s a liar.

    3. +10

    4. If that was your thought, it was overpriced at a penny.

      1. Lighten up, Francis, his tongue was so far in his cheek that he nearly fell over.

  9. From what I read, when a company goes public, it picks a firm to handle the IPO, and that firm has a right to notify all of it’s clients about the IPO first.

    So, if you aren’t a client of that firm, then you have no chance on getting in on an IPO.

  10. pro-little guy

    And by this, I assume they mean “teh childrenz”.

    So this is OK then.

  11. Agree 100%.

    In addition, it’s often difficult to get in on any kind of IPO. I made the stupid mistake of buying LimeLight Networks when it IPOed.

    Here’s the deal … if you were an “institutional investor”, you got in at the IPO price that LLNW was asking (I think it was $12 a share). But if you were a small investory with an Ameritrade account (i.e. me), you had to buy it on the secondary market. That is, after the institutional investors sold their shares at $20/share.

    So basically the way most IPOs are structured allows large insitutional investors to make a killing buying stock at $12 and selling it at $20 ON THE SAME DAY.

    1. And indeicentally, I don’t see how this could really do anything to “protect small investors”.

      All it means is I’m not let in on the sweetheart deal of buying at $12 and then selling to stupid schmucks at $20.

      1. It makes you wonder why companies tolerate it. Essentially 40% of the capital raised is going to large institutional investors as a fee.

      2. A while back I dated a girl who worked in the investment field, and she explained some of this to me. The whole reason that IPO prices are always lower than secondary market prices is not because the fat cats want to help out their buddies and screw the little guys. (Well, not just because of it.) It’s because that’s pretty much the only guaranteed way to raise money.

        Consider an IPO of a stock which is expected to trade at around $20. Where do you price your IPO? $20? Why would anyone buy it, then? You have to price it lower in order to attract investors in the first place. As for why it’s limited to institutional investors, that’s something I know less about, but I suspect it’s just simpler on some levels, just like most people get one business loan for, say, $20,000, and not twenty thousand loans of one dollar each. It may be to reduce uncertainty – better to definitely sell all your IPO shares for $50 million by dealing with a few institutional clients than throw the doors open and see what happens and hope you get as much money. People like certainty, even if the certain return is slightly lower.

        1. Of course, of course. But the difference is always so extreme. If the expected price on the first day is $20, then a more reasonable price for the stock would be $19.50-$19.75. Still not a bad return.

          The whole thing is a fraternity focused on reaping the reward while pushing the risk off on the little guy.

  12. This isn’t really about IPOs. The “accredited investor” rules mostly harm private money raising efforts, because (a) you can’t publicly advertise, unlike the licensed securities broker selling you a pump-and-dump IPO, and (b) most people don’t have a bunch of millionaire friends to raise money from (see rule (a)).

  13. Oh yeah, another thing. A side effect of the new rules (one I’m sure they will claim is unintended) is that a lot more people will be pushed out of the private equity markets and into the public ones, where the Wall Street brokerage houses can make money off them.

  14. I would never confuse the little head!

  15. “It’s time to lower the bar: The pre-IPO market should let everyone in.”

    Damn. Fucking. Straight.

  16. As soon as this happens, Obama will demand 10 million rules to protect small investors, with the net effect that it will be much more difficult to make private stock offerings.

    Fun fact — Apple Computer was barred from selling pre-IPO stock in Illinois.

    1. “the net effect that it will be much more difficult to make private stock offerings”

      That’s already here. With home equity no longer qualifying you for accredited investor status, I’d estimate that a good 1/3 of previously available investors no longer qualify.

      1. It’s already harder than it is?


  17. We would not need these rules if investors would just take responsibility, do their homework and not blame everyone else for their mistakes.

  18. Before going public in 2019, Uber opened up a pre IPO investment for high funds and well-off private investors. The company is believed to be valued as high as $120 billion. This demand is making private investors dribble with the chance to invest in the company before they go public and earn more.

  19. Pre-IPO is set up before the company go public. It is often done without a prospectus and take place at a time when there is no brokers in place of the company or endorsing the float.

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