These Guys Want to Help You Invest in Startups Before They IPO

Or are they?

I found a curious thing. It’s an exchange called Sandhill Exchange that claims to help you invest in hot startups before they go public. Which lately, as we all know, has become the best time to invest in them (I mean companies are raising private funding rounds of $2billion. We’ve had IPOs ten times smaller than that.)

But then, it’s not like you can’t already do this. You just have to invest at least $50,000 minimum I think, and meet some criteria laid out by the Securities and Exchange Commission for accredited investors. Like, have around $1m net worth or $300, 000 annual income (it may have been changed to $2m or $500,000 or it may still be what it is, I couldn’t be arsed to check to be honest.) If you meet those requirements, you are more than welcome to invest in any start up you please. Everyone else is SOL. The entire idea is to make sure only people who can afford to throw money at these start ups actually throw them, you know. They don’t need folks throwing their 401ks or emergency savings at these things. Which people did during the first tech bubble. And then lost their shit. And then blamed the government for not telling them that when you throw money at stuff, sometimes it just doesn’t stick. So SEC blocked everyone except the big boys and girls.

Human greed being what it is though, as soon as a new bubble came along and we started to see people cash out investments at the speed of ‘real quick’, we all wanted in. Except, SEC said no. But now, these guys, Sandhill claim they’ve come up with a way to let you trade equity in these private start ups like they were already publicly traded. And you don’t even have to be an accredited investor. You don’t even need a minimum investment.

My first reaction was “Holy fucking shit!” I thought I’d finally found the way, and dreams of me post hammering were swimming past my closed eyes. But when I snuck a little peak, I saw the catch. Right here


What they’re selling is essentially an option. On an IPO. A terribllyyyyy long option. The contract you buy entitles you to one-billionth of the value of a start up when it goes public. So if its valued at $20bn, your contract gets you $20. In the meantime, the contracts sell based on whatever the current valuation of the start up is. So Uber, at $44billion has contracts of around $44 dollars. Snapchat contracts are sitting at $17.94. And then, you can sell your contracts at any time, “allegedly.” From the trading volumes I saw on their landing page (ask of 2, bid of 1) they’re not exactly drowning in liquidity. But the possibility remains.

Now, for these contracts to be viable means there has to be a counterparty. Which means someone who has the stock already has to be willing to set some aside for Sandhill to offer to you. Or that’s the theory. With some digging around, I found out that they are using a synthetic derivatives that allows you to trade the movement of a security up or down, without actually owning it. It’s not popular here in America, it’s also potentially illegal. So they’re using some kind of bitcoin interfacing to bypass the SEC. Which, my friends is dodgy as fuck! Financial Times has a post on it, right here.

The whole thing gives me the air of something that will not end well. You’re skating pretty close to the rules in something like this. I wouldn’t touch it. No thanks.

But at least you could go there to get  a sense of the valuation of the current hottest thing in Silicon Valley. That is something.

(I have a post about some of my favorite financial apps coming soon. Watch this space.)

And follow me on twitter: @eldivyn

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