My adopted state of Kentucky figured prominently in the news this year, thanks to one recalcitrant county clerk who chose to make a spectacle of herself over same-sex marriage. The whole sorry episode got me thinking about the value of a certain level of sophistication and how a lack of it can lead to all kinds of problems in business and life. Whoever coined the phrase 'what you don't know won't hurt you' obviously didn't know much.
That's why I'm concerned about the new U.S. Securities and Exchange Commission rules that make it easier for anyone to invest in startups. I'm afraid a lot of poor schmucks are going to lose their shirts--or a good chunk of their clothing budget, at least--because they don't understand the serious risks involved.
The rules, which take effect in a few months, remove income limits and allow anyone to invest up to $2,000 or 5 percent of their annual income or net worth, whichever is higher, in crowd-funded startups on SEC-registered sites. That means that our dear county clerk Kim Davis, who is reportedly paid $80,000 a year, will be able to invest $4,000 annually for a stake in whatever strikes her as a money-making proposition, in hopes of vast riches in the future--a special kind of "rapture." Given what I assume is her limited business background, I don't see how that can possibly represent progress. She'd be much better off putting the money under a mattress.
Okay, so maybe some people wouldn't feel too sorry if Davis lost her nest egg. Imagine, then, someone who diligently works to bring home $40,000 a year, a nose-to-the-grindstone Bob Cratchit type. With that income, the person is lucky to save $2,000 a year. Soon, thanks to the SEC, he or she will have many more options for that hard-earned cash, and they'll probably sound more enticing than 401(k) accounts, mutual funds or even blue-chip stocks. Unfortunately, the new options will come with huge risks that optimists and the uninformed can easily overlook.
What most people don't understand is the difference between having a good idea and creating a successful business. There's a huge chasm between the two. I've seen many people with fabulous ideas run companies into the ground after they've barely taken off. Maybe they couldn't keep books or they didn't appreciate the complexities of manufacturing. There are as many ways to fail as there are get-rich-quick schemes.
In the good old days, people could donate to a startup and look forward to receiving a hat in return or maybe an invitation to a VIP party. Soon they'll be able to read about something--it could be a great idea or a harebrained scheme--and think, "Hey, that sounds like it will rake in millions! I want a piece of that!"
Wasn't the SEC created to prevent just that kind of thing?
Dreams of instant wealth are addictive. That's why states slap a hefty tax on them, just like cigarettes. That tax is called the lottery. With these new rules, the SEC is essentially creating a different kind of lottery, where visions of billion-dollar valuations instead of powerballs will dance in investors' heads.
Some people say the new rules will be more democratic; some say they'll benefit minority entrepreneurs who are too often left empty-handed when investors hand out the bigger bucks. Maybe they'll be right.
Or maybe the new rules will simply allow more people to lose their shirts--not just the rich schmucks who can most afford it, but the Bob Cratchits and, yes, even the Kim Davises of the world.