SEC Chairman Wants to Let More Main Street Investors In on Private Deals

[newwurldmn]

I would guess the vast majority of term sheets have a clause in them that says something like if you sell your shares pre-IPO then every shareholder of that class has to have the option to sell their shares with you on a pro-rata basis and buy the shares on a pro-rata basis, along with a bunch of other restrictions that make it basically impossible to sell any employee stock option/grant shares before a liquidity event. They sometimes make exceptions for senior people so they can move out of their studio in the East Bay to a 1 bedroom closer to the company (or other "quality of life benefits the company" type reasons) but that's the exception. I would think the VCs would basically lock this down going forward starting with all future first round term sheets because the last thing they want is insiders becoming less committed by diversifying away from the company, not to mention having to convince a bunch of random shareholders of whatever direction they want to take the company in. They're pretty pathological about wanting pigs not chickens.

Does that include non-key employees like programmers, etc?

One of my wife's friends cofounded a company (one you would know) that got sold. He had left years ago but couldn't cash out until then. They were relatively cash poor and income poor but were worth a lot in paper - that there was likely a buyer for.

 

[JSOP]

Very good points. I'll add that scamming is even more likely because of the very nature of startups, where even the legit ones can seem like they're operating in fantasy land both with the nature of their technology and the aggressiveness of their business plan. Much harder to detect a scam if you're not an expert in the space where that startup operates or have access to such experts.

Operating a venture based on unrealistic prospects or ideas/concepts/products that would not sell is one thing but at least they are operating a business set out to make money and some businesses fail and some succeed that's the nature of the beast and the risk that everybody who invest in businesses would have to take. What I am concerned about are those businesses who were set out to just defraud investors with elaborate schemes disguised as legitimate business ventures but never had any intention of making money but make away with people's money and also those Enron-like companies that knowing their businesses are failing choose to cook the books to hide the losses and exaggerate the gains to continue to extract or keep those mom and pop investors' money.

There is a reason why mom and pop investors were barred from private investment. It's not really because of the inherent high risk of the investment because face it, penny stocks are lot more risky or as risky and yet anybody is allowed to invest in those. No the reason why private investment had been barred from mom and pop investors is really the high incidence of fraud in private investment due to the lack of opportunity or means for closer scrutiny and lack of recourse against them when fraud did happen and the SEC still hasn't come up with effective means to curtail fraud and/or to protect investors and now they want to open this segment. It's like opening a zoo to spectators with animals not in their enclosures and telling the spectators it's exciting you will get higher reward being with animals so up close and personal.

SEC has even failed in regulating investments where there are regulations in place and now they want to open up investments to the public when there is no regulations.