I am no angel, but I know a thing or two about losing money as an angel investor. Hopefully I have learned something along the way.
There is a very dangerous myth afoot that small investors are being held back from investing in start-ups by evil securities regulators who are intent on denying small investors the golden opportunity to get in on the ground floor of the next great success.
This is rubbish.
When it comes to investing, people really do need to be protected from themselves, and that is one of the key roles of securities regulation. Most people are terrible investors at the best of times, and when it comes to investing in a start-up story, very few people have any idea how likely they are to lose everything. This principle should not be dismissed lightly in the rush to make crowdfunding happen. At the very least it strongly augers in favour of a hard cap on the amount any investor can invest in any one crowdfunding deal.
Angel investing is a brutal crapshoot. It most certainly is not for the faint of heart or those who cannot afford to lose their investment. Facebook and Google are the exceptions that prove the rule. Most angel investments are complete, total losses – and I don’t mean small drops of the “I feel terrible because my portfolio of stocks went down 10%” type of whinging. I mean >90% of angel investments are total losses – complete, 100% loss of principle.
Of course, this is not to say that for investors ‘affluence = sophistication”, which is the basis for our current ‘accredited investor’ rules (only accredited investors, folks with financial assets >$1M or income >$200k/yr can invest in most private placements). But it does mean that we need to be very careful as we try to craft appropriate regulation to govern crowdfunding.