Published in the San Diego Union-Tribune, March 13, 2023
by Neil Senturia
So you want to be an “angel investor.” You already know that anyone can invest in the public markets (e.g., stock exchanges), but to get in on the really good stuff, you need to explore the private markets, the deals that are not yet available to the normal schmo who doesn’t know the right people.
If you want to increase your net worth, you are going to go look for the next Meta or Tesla (when they were still private) and try to avoid the Theranos/FTX debacle. But the search is treacherous, fraught with land mines, and to begin the journey you need to be an “accredited investor.” This is a legal category, essentially a wealth/income test. A ballpark definition would be if you make $200,000 per year for the last two years or have at least $1 million of net worth, excluding your house, then you are deemed to be sophisticated enough to lose your shirt without a legal place to cry foul.
There is an ongoing discussion in Congress to ease those accredited rules, to make it easier for the little guy to get into private deals, and there is also discussion to tighten the rules to keep the little guy from acting on his own stupidity and getting fleeced.
Matt Levine, a columnist for Bloomberg News, has proposed a solution that I think is elegant. He says that anyone should be able to invest in a portfolio of public companies, reviewed by the SEC, and who file a standard 10-K earnings report. Still no guarantees, but at least a reasonable snapshot of the approximate truth.
But if you want the good stuff, Levine suggests you need a “Certificate of Dumb Investment.”You can apply for one at the local SEC office. Here is what the certificate says in very large letters: “I want to buy a dumb investment. I understand that the person selling it will almost certainly steal all my money. Further, I agree that I will never, under any circumstances, complain to anyone when this investment inevitably goes wrong.”
The “I was a stupid dentist that didn’t understand what I was buying” defense will no longer work.
Levine’s investor certificate has a further addendum. “I acknowledge that I am an idiot, that I am being swindled by someone smarter than I am, and I hereby kiss all my money goodbye. Let’s do it.”
And then to make it work both ways, Levine suggests that if the promoter sells a dumb, non-approved investment without requiring this certificate from the investor, he goes to prison. That Catch-22 might give some folks pause for sure.
Republicans in Congress are proposing a bill that lets the investor “self-certify as an accredited investor.” It would indicate that the investor has done due diligence, is sophisticated and acknowledges the risk of total loss, but wants to do it anyway.
Some of you might know Barbara Bry and I wrote a book, “I Did It,” which is about Gina Champion-Cain’s $400 million Ponzi scheme. Over eight years, there were approximately 375 investors who participated in the “liquor license lending” program. The vast majority of them stated somewhere in the various documents they signed that they were “accredited.”
The license program was a complete fraud. Like Bernie Madoff, who never actually ever purchased a single share of stock, in the Champion-Cain scheme, the funds were never invested in real liquor licenses. That’s why a Ponzi works so well — until it doesn’t.
The TV show “American Greed” never seems to run out of material. It has been showing various “cons” for 15 years.
When I was younger, accredited and stupid, I invested in a macadamia nut farm in Costa Rica and lost my shirt. The promoter did not tell me about the soon-to-arrive 100-year blossom blight (seems we bought in year 97). The only nut in that deal was me.
Look, investment and capital formation are central to our country and to the entrepreneurial ecosystem. Investment is mother’s milk to the startup founder, and yes, it comes with risk. I believe in those dreams, and I support the challenge to change the world for the better.
Maybe “accredited” is simply another way of saying you can afford to support the dreamer.
Rule No. 752:
“Don’t stop believing.” — Journey