The Movement to Ban Dumb Tech Investors is Growing

One of the most interesting and tectonic shifts in the world of tech start-ups has been the emergence of robust markets for buying and selling private shares.

The SEC’s announcement last week that it is was considering relaxing the rules around private shares was met with strong reaction from the VC community.

New York investor Roger Ehrenberg penned a post this morning for Fortune arguing that the private markets were in need of some rationality. He focused quite a bit on the accredited investor, since only they are allowed to purchase priavte shares.

An accredited investor is defined by the SEC as, among other criteria: a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase.

That’s not a  terribly high barrier for entry between two people. And considering the current climate for tech start-ups, Ehrenberg points out, “Weakening the already-broken accredited investor rules would only lead to greater numbers of fools rushing in at precisely the wrong time.”

First Mark Capital’s Lawrence Lenihan described the problem to Betabeat yesterday. “Just because you can afford to buy a car, doesn’t mean you know how to drive one.”

A potential solution, put forth by Lenihan and Barry Silbert, CEO of SecondMarket, is a standardized test to determine whether or not an investor is intelligent enough to be “accredited”, that is, make sound investments in a private market where there is less information available.

But what kind of test could really determine intelligence when it comes to investing in young tech companies? Take yourself back to 2003. Number two pencils only please.

The social network with the best business model is:

  1. Friendster
  2. Beebo
  3. Myspace
  4. Facebook

The notion that we might find a magic formula for a accredited investor, beyond someone who can afford to wager their money in the markets, belies the simple truth experienced VCs learned the hard way. You don’t always, or often, pick winners.

UPDATE: As a continuing side note on the world of accredited investors, its worth checking out Dennis Berman’s piece of stunt journalism in the Wall Street Journal. Berman managed to sign up his dear old grandma for Sharepost, and since she qualified as an accredited investor, let her jump into the frenzy for buying up shares in Facebook. The catch? She’s been dead for twenty years.

  The Movement to Ban Dumb Tech Investors is Growing