6 ms·

Investing in Startups by Passing the Series 65

102 points by 18nleung 5y ago

cortesoft 5y ago
Matt Levine has written about the problems with opening up this kind of investing to everyone. One of the major differences between earth stage startup investments and normal public companies is that there is not an open market. Startups can choose their investors, and don't have to give the same price to all investors. So yes, if you get accreditation, you will be able to find a startup to invest in... however, it isn't going to be the best startups, and you aren't going to get the same valuation that big VCs get.
funshed 5y ago
I loved the get-out clauses. Though being from UK I am a little confused, you need authorisation to buy shares in a SME in the US?
Projectiboga 5y ago
There is still a catch, any firm using a Regulation D exception has to go public if their shareholder total goes over 500. The loophole is that they could require a minimum amount and for the smaller amounts to join together into their own fund.
loourr 5y ago
Prime example of why people should be allowed to do this kind of investing through a retirement account. Doesn't require you to have money, just knowledge.
jackcosgrove 5y ago
I thought the name of the game in VC was investing in 20+ companies and seeing what sticks. You would need enough money at that point that being an accredited investor would be a foregone conclusion according to the net worth standard. Investing several thousand here or there on one or two companies seems incredibly risky, riskier than what the pros are willing to tolerate.
- cbtacy 5y ago
  Yup. It's important to understand how the Power Law Curve applies to early stage investing.
- tedmiston 5y ago
  Correct. Much better idea statistically to just throw it into a good index fund if your goal is returns. Perhaps it could be useful if the goal is learning oriented.
- vc-doggie 5y ago
  Absolutely, this.
- dbish 5y ago
  Yes, I’m seeing a lot of younger people trying to play the angel investor game without the capital and without realizing many angels don’t make reasonable returns but it doesn’t matter to them because it’s play money and more a chance to support new ideas and learn about things. Personally, I put aside an amount I want to angel invest every year and assume it’s burned but I really couldn’t afford to do that in a responsible way until I was well beyond the accredited investor minimum point (in yearly income).
  - browningstreet 5y ago
    In regional hubs, a lot of the angel networks are retired people. Most of them, in my experience, are playing at being technologists or investors. They usually made some money in more traditional business endeavors. Usually gets a bit of traction in the local government / business lunch / community innovation scene.
hbcondo714 5y ago
For those of you who want more of an introduction to securities, checkout FINRA's Securities Industry Essentials (SIE) Exam. It's only $60 and open to anyone aged 18 or older, including students: https://www.finra.org/registration-exams-ce/qualification-exams/securities-industry-essentials-exam https://www.finra.org/registration-exams-ce/qualification-ex...
atlgator 5y ago
I've considered getting my Series 65 for this same reason, but my concern was how it would affect my other investments. e.g. your typical low-cost brokerage accounts with TD Ameritrade, Schwab, etc are not available for professionals. In fact, it seems like everything costs a lot more if you are a licensed professional.
- slowhand09 5y ago
  This derails any thoughts I had re Series 65...
- vineyardmike 5y ago
  Is this the case for having an accreditation at all makes you an active professional, or that acting professionally you can't use that firm for work? Eg. my broker (IBKR) lets me log in as a client, as a client of an advisor (who manages the account) or as an advisor (who manages an account). Would being a legal advisor prevent me from being a independent client?
- icedchai 5y ago
  How do they verify you are a “professional”?
- bertjk 5y ago
  Does passing Series 65 automatically make you a professional for these intents and purposes?
  - purplerabbit 5y ago
    Nope. There’s a difference between being accredited as an investment advisor and acting as an investment advisor or investment advisor representative. Source: I passed the series 65 and still use non-professional brokerage accounts
deleted 5y ago
[deleted]
iammisc 5y ago
Great writeup. Been thinking of doing the same thing. > the unspoken secret is that accreditation — at least when investing in individual startups, and especially if the founder is a good friend of yours — is just a box you can check that nobody verifies I've heard this as well, and it's a very sad thing, because it is one of those 'secrets' that if you knew, it'd open up a lot more opportunities for you. There are few 'secrets' separating the rich and poor, but this is unfortunately one of them.
- 1cvmask 5y ago
  There are so many examples of investors passing over friends as investments. In fact from anecdotal observation people do not invest in friends in general. It is people one or two removed who take the plunge.
  - robocat 5y ago
    Accepting money from friends is highly risky in my opinion. A friend might say they are willing to lose 100% of their investment, but if you fail and the money is gone, there is likely to be negative effects on your friendship from both parties. Also if the financial state of your friend changes, like getting a mortgage or losing their job, they can get buyers remorse. If you do make it big, then your friends might be annoyed they couldn’t invest (although if they are really twisted about it then perhaps they are not a great friend anyway).
  - cortesoft 5y ago
    This is probably smart. Running a startup is stressful enough without worrying that you are risking your friends and family's life savings.
    - sanderjd 5y ago
      On the other hand, this is how Warren Buffett got his start, and (from his biography Snowball) it seems to have been a strong motivator for him.
dogman144 5y ago
What's the minimum possible investment you'd need to be taken seriously by a startup - 5k, 10k, etc? What rounds would you look at mostly? Assuming it's gotta be seed-ish unless you're very liquid.
- toomuchtodo 5y ago
  It really depends on the startup, their traction, and your relationship with the founders. I've had folks ask for $10k-$20k for a seed round (the line between angel and seed is very blurry imho) with zero traction and a rough idea of the product market fit with a barely functioning MVP, and another team I spoke with wasn't talking to anyone without $100k to invest. Once you're past the seed stage, unless you're connected or an employee, it's $1MM+. I focus on seed stage as I'm seeking high risk high return exposure for this part of my portfolio (and I'm not liquid enough to participate without investing in a fund for Series A on, unless I'm leveraging as part of a transaction). (n=1, YMMV, accredited investor)
  - dogman144 5y ago
    thanks!
    - toomuchtodo 5y ago
      Happy to help.
- lmeyerov 5y ago
  As a founder, you don't want tons of small checks because of legal complications (> 99 entities on your cap table) and not a good ROI on your time initially + ongoing. A workaround is bringing in someone to run a syndicate on AngelList or some other bundling, making it their focus vs yours, and condensing to one entity. The result is, as an individual investor, you can focus on those syndicates. Two benefits are you can spread risk by doing a wide variety of small investments, and while following more experienced individuals.
  - 5y ago
jsjsbdkj 5y ago
If you're a college student and you put 1k into your friend's startup, is there a risk that's actually a negative signal for future investors? Do investors in a real series A want a cap table that has a bunch of friends and family chipping in a grand, or are they just going to ask to wipe the slate clean?
- funshed 5y ago
  Good Question..
  - mhb_eng 5y ago
    My experience with this, though this may not be the consensus view, was that participation from friends/family was generally a good sign, since founders clearly believe in the business to the point of pitching their friends to invest (and getting deals closed shows some evidence of sales ability).
- rmah 5y ago
  Your small investment is not, by itself, a negative signal. However, a lot small investors can lead to headaches down the road as once you pass the 99 investor threshold more regulations apply. Also, dealing with a bunch of investors is a PITA.
  - deleted 5y ago
    [deleted]
- enra 5y ago
  It doesn't matter much if the company is generally VC fundable or doing well. Ideally you have investors that can help you and the company, but if you have few friends there too, no-one should care. We raised some money from friends, family and angels at pre-seed, and at seed & series A, the VC didn't have single questions the cap table. But the companies should have legal counsel, and try to use the standard YC SAFEs not to give people some weird terms. Also as a startup founder, you should make clear to family/friends/non-professional investors that investing in the startup is very risky, and as a minor investor they don't really have any rights as an investor, except hopefully have some returns for their investment. There is some horror stories where someone gets their dentist as an investor and they start calling you every week about updates or show up at the office to chat about the business plan.
vmception 5y ago
The other aspect of this is that the door is open for an accreditation-specific test to become approved.
- gahays68 5y ago
  Check out Doriot.com / they're the first to submit an application to the SEC to become approved and have a product already in market
  - LurkingPenguin 5y ago
    Elizabeth wears turtlenecks daily and her startup has a star-studded board of directors with little relevant experience in its industry. You invest as much as you can access through a credit card cash advance because: a) FOMO b) YOLO c) TMI d) TL;DR e) ABCD
    - slowhand09 5y ago
      f:WallStreet Bets *your post wins the commentary for this entire thread.
ramraj07 5y ago
It’s interesting that OP living in a midtown apartment thought a 195 dollar Kaplan subscription is too much money and skimped on it while spending a lot of their time (wasting) on subpar material. Doesn’t exactly bode well for good investment acumen does it.
- fsckboy 5y ago
  > living in a midtown apartment he said he lived in the east village, took the test in midtown
- gregshap 5y ago
  The author said they were in college. In their defense its not uncommon to have loans or parent funding for the expensive apartment, but limited discretionary income and limited ability get money from the 'college' bucket to the discretionary bucket.
  - vineyardmike 5y ago
    > limited discretionary income and limited ability get money from the 'college' bucket to the discretionary bucket He did say he was funding college from a margin loan on his stock portfolio, however.
    - gregshap 5y ago
      Ha, didn't read that part. I wanted to attest to the experience of being a low budget student in a high cost-of-living city. The author might not necessarily be that!
      - vineyardmike 5y ago
        He does go to school at UCLA, and said he was in NYC for the test, so he may be just a frequent traveler to high COL areas.
- diab0lic 5y ago
  They do admit that mistake and adjusted their viewpoint in the article.
vincentmarle 5y ago
> found, however, that there was an “internet adviser exemption” for advisers that give advice entirely through the internet. That sounded like an exemption I could qualify for — I would just have to commit to not giving any face-to-face investment advice One thing I didn’t understand from this article is what “giving investment advice” has to do with being an accredited investor and investing into startups. Can someone clarify that?
- dragonwriter 5y ago
  > One thing I didn’t understand from this article is what “giving investment advice” has to do with being an accredited investor and investing into startups. Can someone clarify that? The article addresses this: the SEC accredited investor classification has several ways to qualify, the older ones are variants of “rich enough to presumably know what they are doing” and the newer ones added are “has one of a specified list of professional licenses/certifications that directly relate to knowing what they are doing with investments”, and the particular one that the author chose to pursue for that purpose was related to giving investment advice.
  - vincentmarle 5y ago
    Ok so he doesn't actually plan to give investment advice, he just wants the license to be considered an accredited investor. Got it, thanks!
- gregshap 5y ago
  Investing in startups generally requires being an accredited investor. To be an accredited investor they need to pass the Series 65 test and get licensed. Licensing can be state or federal, but federal is generally more convenient. Federal registration usually requires significant assets under management which the author certainly doesn't have, but the "internet adviser exemption" allows them to register federally (SEC) without the $ minimum.
jedberg 5y ago
> To be completely honest, in practice, this whole process of accreditation — at least right now, for the purposes of startup investing — was sort of unnecessary. As a relatively cash-poor college student, I don’t have much investable capital to begin with I mean I guess it was a fun learning experience, but I'm not sure why they would go through the trouble.

102 points by 18nleung 5y ago

Matt Levine has written about the problems with opening up this kind of investing to everyone. One of the major differences between earth stage startup investments and normal public companies is that there is not an open market. Startups can choose their investors, and don't have to give the same price to all investors. So yes, if you get accreditation, you will be able to find a startup to invest in... however, it isn't going to be the best startups, and you aren't going to get the same valuation that big VCs get.

funshed 5y ago

I loved the get-out clauses. Though being from UK I am a little confused, you need authorisation to buy shares in a SME in the US?

Projectiboga 5y ago

There is still a catch, any firm using a Regulation D exception has to go public if their shareholder total goes over 500. The loophole is that they could require a minimum amount and for the smaller amounts to join together into their own fund.

loourr 5y ago

Prime example of why people should be allowed to do this kind of investing through a retirement account. Doesn't require you to have money, just knowledge.

jackcosgrove 5y ago

I thought the name of the game in VC was investing in 20+ companies and seeing what sticks. You would need enough money at that point that being an accredited investor would be a foregone conclusion according to the net worth standard. Investing several thousand here or there on one or two companies seems incredibly risky, riskier than what the pros are willing to tolerate.

cbtacy 5y ago
Yup. It's important to understand how the Power Law Curve applies to early stage investing.
tedmiston 5y ago
Correct. Much better idea statistically to just throw it into a good index fund if your goal is returns. Perhaps it could be useful if the goal is learning oriented.
vc-doggie 5y ago
Absolutely, this.
dbish 5y ago
Yes, I’m seeing a lot of younger people trying to play the angel investor game without the capital and without realizing many angels don’t make reasonable returns but it doesn’t matter to them because it’s play money and more a chance to support new ideas and learn about things. Personally, I put aside an amount I want to angel invest every year and assume it’s burned but I really couldn’t afford to do that in a responsible way until I was well beyond the accredited investor minimum point (in yearly income).
- browningstreet 5y ago
  In regional hubs, a lot of the angel networks are retired people. Most of them, in my experience, are playing at being technologists or investors. They usually made some money in more traditional business endeavors. Usually gets a bit of traction in the local government / business lunch / community innovation scene.

hbcondo714 5y ago

For those of you who want more of an introduction to securities, checkout FINRA's Securities Industry Essentials (SIE) Exam. It's only $60 and open to anyone aged 18 or older, including students: https://www.finra.org/registration-exams-ce/qualification-exams/securities-industry-essentials-exam https://www.finra.org/registration-exams-ce/qualification-ex...

atlgator 5y ago

I've considered getting my Series 65 for this same reason, but my concern was how it would affect my other investments. e.g. your typical low-cost brokerage accounts with TD Ameritrade, Schwab, etc are not available for professionals. In fact, it seems like everything costs a lot more if you are a licensed professional.

slowhand09 5y ago
This derails any thoughts I had re Series 65...
vineyardmike 5y ago
Is this the case for having an accreditation at all makes you an active professional, or that acting professionally you can't use that firm for work? Eg. my broker (IBKR) lets me log in as a client, as a client of an advisor (who manages the account) or as an advisor (who manages an account). Would being a legal advisor prevent me from being a independent client?
icedchai 5y ago
How do they verify you are a “professional”?
bertjk 5y ago
Does passing Series 65 automatically make you a professional for these intents and purposes?
- purplerabbit 5y ago
  Nope. There’s a difference between being accredited as an investment advisor and acting as an investment advisor or investment advisor representative. Source: I passed the series 65 and still use non-professional brokerage accounts

deleted 5y ago

[deleted]

iammisc 5y ago

Great writeup. Been thinking of doing the same thing. > the unspoken secret is that accreditation — at least when investing in individual startups, and especially if the founder is a good friend of yours — is just a box you can check that nobody verifies I've heard this as well, and it's a very sad thing, because it is one of those 'secrets' that if you knew, it'd open up a lot more opportunities for you. There are few 'secrets' separating the rich and poor, but this is unfortunately one of them.

1cvmask 5y ago
There are so many examples of investors passing over friends as investments. In fact from anecdotal observation people do not invest in friends in general. It is people one or two removed who take the plunge.
- robocat 5y ago
  Accepting money from friends is highly risky in my opinion. A friend might say they are willing to lose 100% of their investment, but if you fail and the money is gone, there is likely to be negative effects on your friendship from both parties. Also if the financial state of your friend changes, like getting a mortgage or losing their job, they can get buyers remorse. If you do make it big, then your friends might be annoyed they couldn’t invest (although if they are really twisted about it then perhaps they are not a great friend anyway).
- cortesoft 5y ago
  This is probably smart. Running a startup is stressful enough without worrying that you are risking your friends and family's life savings.
  - sanderjd 5y ago
    On the other hand, this is how Warren Buffett got his start, and (from his biography Snowball) it seems to have been a strong motivator for him.

dogman144 5y ago

What's the minimum possible investment you'd need to be taken seriously by a startup - 5k, 10k, etc? What rounds would you look at mostly? Assuming it's gotta be seed-ish unless you're very liquid.

toomuchtodo 5y ago
It really depends on the startup, their traction, and your relationship with the founders. I've had folks ask for $10k-$20k for a seed round (the line between angel and seed is very blurry imho) with zero traction and a rough idea of the product market fit with a barely functioning MVP, and another team I spoke with wasn't talking to anyone without $100k to invest. Once you're past the seed stage, unless you're connected or an employee, it's $1MM+. I focus on seed stage as I'm seeking high risk high return exposure for this part of my portfolio (and I'm not liquid enough to participate without investing in a fund for Series A on, unless I'm leveraging as part of a transaction). (n=1, YMMV, accredited investor)
- dogman144 5y ago
  thanks!
  - toomuchtodo 5y ago
    Happy to help.
lmeyerov 5y ago
As a founder, you don't want tons of small checks because of legal complications (> 99 entities on your cap table) and not a good ROI on your time initially + ongoing. A workaround is bringing in someone to run a syndicate on AngelList or some other bundling, making it their focus vs yours, and condensing to one entity. The result is, as an individual investor, you can focus on those syndicates. Two benefits are you can spread risk by doing a wide variety of small investments, and while following more experienced individuals.
- 5y ago

jsjsbdkj 5y ago

If you're a college student and you put 1k into your friend's startup, is there a risk that's actually a negative signal for future investors? Do investors in a real series A want a cap table that has a bunch of friends and family chipping in a grand, or are they just going to ask to wipe the slate clean?

funshed 5y ago
Good Question..
- mhb_eng 5y ago
  My experience with this, though this may not be the consensus view, was that participation from friends/family was generally a good sign, since founders clearly believe in the business to the point of pitching their friends to invest (and getting deals closed shows some evidence of sales ability).
rmah 5y ago
Your small investment is not, by itself, a negative signal. However, a lot small investors can lead to headaches down the road as once you pass the 99 investor threshold more regulations apply. Also, dealing with a bunch of investors is a PITA.
- deleted 5y ago
  [deleted]
enra 5y ago
It doesn't matter much if the company is generally VC fundable or doing well. Ideally you have investors that can help you and the company, but if you have few friends there too, no-one should care. We raised some money from friends, family and angels at pre-seed, and at seed & series A, the VC didn't have single questions the cap table. But the companies should have legal counsel, and try to use the standard YC SAFEs not to give people some weird terms. Also as a startup founder, you should make clear to family/friends/non-professional investors that investing in the startup is very risky, and as a minor investor they don't really have any rights as an investor, except hopefully have some returns for their investment. There is some horror stories where someone gets their dentist as an investor and they start calling you every week about updates or show up at the office to chat about the business plan.

vmception 5y ago

The other aspect of this is that the door is open for an accreditation-specific test to become approved.

gahays68 5y ago
Check out Doriot.com / they're the first to submit an application to the SEC to become approved and have a product already in market
- LurkingPenguin 5y ago
  Elizabeth wears turtlenecks daily and her startup has a star-studded board of directors with little relevant experience in its industry. You invest as much as you can access through a credit card cash advance because: a) FOMO b) YOLO c) TMI d) TL;DR e) ABCD
  - slowhand09 5y ago
    f:WallStreet Bets *your post wins the commentary for this entire thread.

ramraj07 5y ago

It’s interesting that OP living in a midtown apartment thought a 195 dollar Kaplan subscription is too much money and skimped on it while spending a lot of their time (wasting) on subpar material. Doesn’t exactly bode well for good investment acumen does it.

fsckboy 5y ago
> living in a midtown apartment he said he lived in the east village, took the test in midtown
gregshap 5y ago
The author said they were in college. In their defense its not uncommon to have loans or parent funding for the expensive apartment, but limited discretionary income and limited ability get money from the 'college' bucket to the discretionary bucket.
- vineyardmike 5y ago
  > limited discretionary income and limited ability get money from the 'college' bucket to the discretionary bucket He did say he was funding college from a margin loan on his stock portfolio, however.
  - gregshap 5y ago
    Ha, didn't read that part. I wanted to attest to the experience of being a low budget student in a high cost-of-living city. The author might not necessarily be that!
    - vineyardmike 5y ago
      He does go to school at UCLA, and said he was in NYC for the test, so he may be just a frequent traveler to high COL areas.
diab0lic 5y ago
They do admit that mistake and adjusted their viewpoint in the article.

vincentmarle 5y ago

> found, however, that there was an “internet adviser exemption” for advisers that give advice entirely through the internet. That sounded like an exemption I could qualify for — I would just have to commit to not giving any face-to-face investment advice One thing I didn’t understand from this article is what “giving investment advice” has to do with being an accredited investor and investing into startups. Can someone clarify that?

dragonwriter 5y ago
> One thing I didn’t understand from this article is what “giving investment advice” has to do with being an accredited investor and investing into startups. Can someone clarify that? The article addresses this: the SEC accredited investor classification has several ways to qualify, the older ones are variants of “rich enough to presumably know what they are doing” and the newer ones added are “has one of a specified list of professional licenses/certifications that directly relate to knowing what they are doing with investments”, and the particular one that the author chose to pursue for that purpose was related to giving investment advice.
- vincentmarle 5y ago
  Ok so he doesn't actually plan to give investment advice, he just wants the license to be considered an accredited investor. Got it, thanks!
gregshap 5y ago
Investing in startups generally requires being an accredited investor. To be an accredited investor they need to pass the Series 65 test and get licensed. Licensing can be state or federal, but federal is generally more convenient. Federal registration usually requires significant assets under management which the author certainly doesn't have, but the "internet adviser exemption" allows them to register federally (SEC) without the $ minimum.

jedberg 5y ago

> To be completely honest, in practice, this whole process of accreditation — at least right now, for the purposes of startup investing — was sort of unnecessary. As a relatively cash-poor college student, I don’t have much investable capital to begin with I mean I guess it was a fun learning experience, but I'm not sure why they would go through the trouble.