I wrote about the Securities and Exchange Commission’s (SEC) approval of Title III of the JOBS act a few days ago. Basically, the new rules which are currently in a 90 day commenting period allow non-accredited investors including those with less than $100K in annual income to invest in startups. I concluded the piece by stating that, for non-accredited investors, “investing 10-20% of your annual savings in illiquid startups with low success rates while competing with professional investors who do the same for a living is a very risky game.”
In addition to the challenge of competing with professional investors for the best startups, another important risk for non-accredited investors is the potential for fraudulent representations made by startups. Startups are private companies that hold the potential for mouth-watering returns but have no obligation to share a standardized and externally verified set of information. Often, the potential for these returns can tempt investors to forgo proper due diligence on a startup’s claims. This piece shows many examples of such fraudulent claims.
Even professional investors have a tough time getting comprehensive and accurate information about a startup before investing. While we perform reference checks on a startup’s founders, and financial and legal due diligence on a startup’s operating history before investing, it’s physically not possible to fact check every piece of information that a startup shares. With a portfolio of over 60 companies, it’s statistically likely that there are pieces of material information about our startups that may have impacted our investment decision that we don’t know about. This risk is exacerbated for non-professional investors who have less time to vet each startup.