Nannies, Grannies, & Leveling the Playing Field

In last week's Republican presidential debate, Ron Paul highlighted the recurring theme of the Nanny State. After mentally traversing the landscape of liberty, automobiles, and my mother's blue Corvair, I got to the point at hand -- whether the broad connotations associated with the Nanny State might have explanatory power within the retail investment marketplace.

I concluded that "Nanny State" actually comes up short, but "Granny State" is pretty close to spot-on.

In the political world, "nanny" is just a figurative or symbolic reference. If "nanny" were to become an actual persona of sorts, ever so slightly resembling Mary Poppins, the Nanny State might start looking desirable to the vast (if honest) majority.

In the investment world, however, "granny" is mostly the stuff of a chemistry experiment -- a litmus test used to determine who gets access and who doesn't. Although seemingly well intentioned, visions of putting Grandma out on the street have provided much justification for protecting her from herself, especially when windfall profit-making is at issue.

This year, a more realistic version of the "fake grandma" scheme was brazenly put forth, using someone who was already dead. The setup was done by the Wall Street Journal reporter Dennis Berman, whose grandmother posthumously became an actor in the investor approval process for SharesPost, a company that "connects leading venture-backed private companies and their shareholders with the investment community and provides the information, tools and assistance they need to transact."

SharesPost, as Berman simply explained in his post, is one of the hot new markets for buying and selling nonpublic technology companies. The site requires users to designate themselves as what the SEC calls "accredited investors," with financial assets of at least $1 million or annual family income of more than $300,000. These thresholds -- set in 1982, when just over 1% of US households qualified -- haven't been reset for inflation, so now nearly 7% of US households qualify.

Along with SharesMarket (another online marketplace for private investments), SharesPost has been most visible in its role of facilitating the internal trade of Facebook shares. I've covered that subject more broadly in previous posts. (See: Note to Facebook: Do Your Own CSOP.)

As a test, Berman submitted his late grandmother's name as a potential SharesPost accredited investor. Guess what? Granny was most certainly approved by the SharesPost accreditation process, as performed by its unknown affiliated broker/dealer. At this point, Berman ended the ruse without ever attempting to make a trade.

SharesPost CEO Dave Wier was quick to give assurances that this granny poseur would never have been able to execute an actual trade. Maybe she -- really he, ahem -- might have been fortunate enough as an accredited investor to talk personally at some point with Facebook CEO Mark Zuckerberg. Grandma did not appear to be interested.

In the meantime, the approval process for SharesPost remains secret sauce. But what was the real problem with Grandma? Was it that she was dead? Potentially nefarious? Old and with a possible case of dementia? A Social Security recipient? On a fixed income? Someone with little net worth? Why pick her unless it was in some part about that dramatic visual of a "feed the birds" kind of bag lady?

Now this is where I start to have a big problem, and certainly not with SharesPost. Those of you who have read my previous posts know I am all about democratizing the investment process -- lowering the barriers to entry, fostering transparency, and increasing visibility, opportunity, and access. This is the revolution birthed by online retail trading platforms, systems, services, and companies, and I am proud to have personally been a part of this transformation.

But why stop here? To do so means believing in highly regulated public markets, so that we can assuage any guilt about beggaring-thy-grandma. This fails to recognize that the only time Grandma or anyone else does anything but get lucky in financial markets is when capital actually gets transformed into something useful.

Today's regulated public markets are little to nothing about transforming capital into something useful, as evidenced by the fact that most companies simply access retained earnings for this purpose. (No wonder it is so hard to get out of a recession. New firms don't have retained earnings, and those that have them are hoarding them).

Participation as an "investor" in the stock market does nothing to change this reality, unless you are nothing but a buyer putting a happy face on market sentiment and possibly a hole in your wallet.

Unless there is skin in the game -- digging in, seeking knowledge, giving a whit about a company and its offerings, really supporting what the company is and what it does -- no one is really "investing" in anything. The people who do their homework come in all shapes and sizes (and ages, of course).

Some will be able to risk less than others will both proportionally and on a net basis, but that doesn't translate into not being able to play. And most initial public offerings have become all about not being able to play -- the equivalent of a political set-aside, or an earmark. This description is a good one no matter what you think about Ron Paul or the Nanny State.

Some will say that no matter how informed the grannies are, dealing with them is too expensive. But it was the expense associated with publicly-regulated markets that presented the opportunity to create alternative market mechanisms in the first place. Because SharesPost and SharesMarket have a direct public offering-like platform and market, (See: Loyal3: Twist a Concept & Trademark It), the transaction and compliance costs are commensurately lower than traditional Wall Street-facilitated trades.

I see a bigger playground, more playmates, more to play on, and more to play with. Furthermore, no one can tell Grandma she can't swing.