I am on the email marketing list for a niche product. It’s out of my price range right now, but I have enjoyed learning more about the company. Tonight I received an email from them that was technically legal but morally dubious: they were offering the chance to buy private shares of their company.
For those who aren’t clear on what that means, here is a brief primer. Stock from companies like Apple, Microsoft, and Google are public stocks; you can buy and sell those on stock exchanges and through regular brokerage firms. You may remember when Facebook went public, which was when their stock went from private buyers and sellers to being available in the open market. Companies have a set amount of stock available (though they can release more), so outside of an initial or secondary public offering, buying and selling depends on having investors on both sides of the trade. In other words, the reason you can buy or sell stock in a big company quickly is because there’s someone on the other side looking to sell or buy, and in the case of a big public company, there’s always someone there.
On the other hand, a private company doesn’t trade on any stock exchanges. You can buy stock in a private company, but if you want to sell it, you can’t always just click a button and sell. The company may have restrictions on when you can sell stock, or you may run into an issue where there is no one willing to buy the stock from you, and the company isn’t necessarily obligated to take it off your hands. Because of that, for a long time, you could not buy shares of a private company unless you were an “accredited investor“, where your net worth and experience demonstrated that you understood the risks. Congress amended this recently to expand that definition dramatically, which is giving all sorts of startups a chance to invite the public to invest.
Here is the new standard to buy a private stock:
- (i) persons who are licensed in the securities industry (such as a registered broker or investment adviser) with the Securities and Exchange Commission (the “SEC”), the Financial Industry Regulatory Authority (“FINRA”), or the securities division of a state or an equivalent state division;
- (ii) persons whom the SEC determines by regulation to have demonstrable education or job experience to qualify such persons as having professional knowledge of a subject related to a particular investment, and whose education or job experience is verified by FINRA or an equivalent self-regulatory authority.
Basically, if you can prove you understand what you’re buying, you can buy it, regardless of your net worth. All of this background is key to understanding why my jaw dropped when I received this email from the company I mentioned above (name redacted):
As someone who has shown interest in [REDACTED], I wanted to let you know that we are currently raising a round of funding to accelerate our growth. We had a record year in 2016 and with more than 19,000 [REDACTED] on the road around the world, we believe we are well-positioned for continued momentum and success. Recently, Congress enabled companies like [REDACTED] to offer shares of stock to folks like you, so this is your chance to own a piece of our company and benefit from our success.
If you would like to learn more about investing in [REDACTED], please let me know by replying to this email. We expect this process to move fairly quickly, so if you are interested please contact me no later than January 17th.
Thanks very much for your support and I’ll look forward to hearing from you soon.
That was the entire email. There was no brief disclaimer about what you should know before considering buying into them, there was no indication of what stock was available, and there was no information about cost, whether you would be restricted from selling, or any indication of the risk this carries. Now, it’s possible the company will provide all that if you reply to the email (and I do plan to reply to see what they say), but it is still incredibly misleading. Yes, if you buy stock, you will own a piece of that company, but you have no guarantee you will enjoy any success from it. You could just as easily lose your investment. Any investment carries the risk of loss, and this email is quite glib and slick in trying to pretend that risk doesn’t exist.
So the next time a private company comes knocking and wants you to pry open your wallet, be sure to ask plenty of questions. And definitely, don’t invest based on a brief three paragraph marketing email!