A Letter from the "Stash" CEO

How True the Statement "It's Not Wallstreet's World Anymore" is.

YOU, YOUR MOM, DAD, MONKEYS UNCLE... OK... NOT the MONKEYS UNCLE, but that random guy down your block are now able to join the ranks of startup investors.

The Securities and Exchange Commission (SEC) voted a few months ago to approve the so-called "equity crowdfunding rules for investors", an effort spawned by the passage of the JOBS Act way back in 2012. What does that mean? It means that startups or small businesses looking for investors can go through brokers or online platforms to find them—and those investors can now be, well, anyone.

This is a HUGE freaking deal. It marks a shift in the kinds of money or "capital" that startups and small businesses can raise. Startups used to often turn to venture capitalists, angel investors, bankers, and other accredited investors, getting access can require the right connections, and are very difficult to come by outside of major financial hubs like New York, San Francisco, and Boston to name a few.

Now, entrepreneurs can turn to the crowd. And if you’ve part of the crowd that’s always wanted to invest in a startup, you are now able to in ways that you couldn’t before. But there are some things you need to know. Since the passage of the JOBS Act, experts have worried about putting safeguards in place to protect unsophisticated investors, as well as protections for startups to minimize fraud. The SEC is hoping that its new rules will address those concerns. Here’s my list of 5 things you need to know.

Now You Too Can Invest

In the past, only so-called accredited investors have been able to invest in startups. Here’s what that meant in a nutshell: If you made less than $200,000 a year, and you didn’t have a million bucks in assets, you couldn’t invest. Now, even if you aren’t that well off, you’ll be able to buy into companies you like.

However, in order to protect you from, say, putting all your retirement savings in what you think is the next Facebook but turns out to be the next Myspace, the SEC approved very specific rules to limit how much a nonaccredited investor can invest. People with an annual income or net worth below $100,000 can invest no more than $2,000, or up to 5 percent of the lesser of their annual income or net worth. For those who make at least $100,000, the SEC says they can invest 10 percent of either their annual income or net worth (whichever is less).

Pretty cool huh? This makes it a "stop gap" if you will, and prevents some fraud, but protects the new investor from betting the farm!

Leaning Towards the Crowd

For startup founders or small business owners, the new rules approved will allow them to raise up to $1 million per year through crowdfunding. And it's happening now at an expeditiously alarming rate

The SEC is also requiring that all startups disclose basic financial details, but only some will need to submit to a full audit. Some experts have argued that it would be too costly for every early stage startup to pay for an independent audit, especially if the maximum funds they could raise were $1 million. So the SEC has created different tiers requiring startups to submit different degrees of information depending on how much money they’re hoping to raise. Startups raising less than $100,000, for example, won’t need to have an audited review at all but will submit financial documents put together by their in-house financial officer.

Where’s My Money

With the new rules in place, investors looking for startups and startups looking for investors will be able to go to brokers that already exist, or they can turn to new online “funding portals.” These platforms—think Kickstarter, but for equity—will be able to collect financial information and provide disclosures based on the SEC’s rules. (These already exist for accredited investors.)

The platforms themselves will play a crucial role not only in establishing fair marketplace, but also in helping potential investors where to invest. The SEC says that platforms will be able to curate their startups to help investors determine what might be the best picks, they will also be able to take a stake in startups so that their incentives will be aligned. The SEC seem to think, or believe that if the platforms want the startups to succeed, then it’s more likely they will.

The Good, bad, and the Ugly

These three things; Risks, Rewards, Returns are all of which is pretty exciting. Startups like Pebble and Oculus Rift have been able to succeed with the help of crowdfunding from sites like Kickstarter. But imagine what it would be like to get equity instead of just the promise of a product. For new startup investors, however, the best plan is to take it slow. Oculus and Pebble are the freaks that arise from time to time, it happens, is you next? Believe me, it is not the norm.

“Even if you’re truly invested in investing in a startup, the odds are against you, It’s the law of startups—mathematically the most likely exit for a startup is failure.”

Richard Swart

Richard Swart is a former longtime crowdfunding and alternative finance researcher at the University of California, Berkeley. And that quote I have seen many times too often.

While individual angel investors and venture capitalists have been able to reap millions of dollars from smart investments, they don’t only invest in one or two startups—they invest in many, knowing most will fail and hoping that one hits it big. They also have experience, industry expertise, research, and money—all things that a regular person might not have when looking at a new equity crowdfunding platform. Education about what investing in early stage startups really means is crucial.

“It’s like the new lottery,” says Southwestern Law School professor Michael Dorff. “There are very few Peter Thiels in the world. It’s like asking, ‘Why can’t I be Warren Buffett?’ There are a lot of smart people trying to be Warren Buffet or Peter Thiel. Your odds are slim even with the experience, expertise, and education. Without it, you are taking a knife to your gut.”

And finally there is...

Places where Angels Fear

And yet VCs and angels are often only looking for startups that will reap enormous returns, meaning they may eschew potentially successful businesses if they don’t seem like potential unicorns. They’re also focused on startups largely in big coastal cities like San Francisco, New York, and Boston.

By allowing anyone to invest in a startup, the SEC is giving investors more freedom with their money and supporting small businesses that might not otherwise get funding.

So the new rules around investing won’t just benefit potential tech startups. Any small businesses, like your local pizza restaurant or a new real-estate group, may be ripe for the kinds of small investments made possible by this new kind of equity crowdfunding.

The platforms themselves may also offer interesting new opportunities. Early stage startups may be able to test out products or ideas on potential future customers before going to, say, VCs for a bigger stake.

What do I do?

Since hearing and investigating this, I took it upon myself to be cautious and start investing... a bit smaller though. I joined two investment companies online. The one in particular I like is STASH.

They help build an investment portfolio that reflects who you are, by investing in things you like, love, and believe in.

But the best part... You can choose from a selection of over 30 ETFs (Exchange Traded Funds) curated by the STASH investment team. Every investment is chosen based on a model driven by factors including historical performance, expense (fee) ratio, risk profile, and asset distribution.

So I built my own portfolio by choosing investments that reflect my interests, beliefs, and goals. And if you know nothing at all about investments, the lingo or where to begin, STASH will help you learn the basics along the way so you can invest with confidence.

What prompted me in researching and writing this article is the letter I received from Brandon Krieg, the CEO of STASH. I thought to myself, "who does that anymore besides me"?

Anyway, he had made some pretty interesting statements that I thought I would share with you all.

Here is the letter (e-mail):

Dear Raymond Brogan,

I hope that everything is going great for you. I am writing because I wanted to share somethings with you.

Presidential elections can cause a lot of market noise. Particularly this one. It’s hard to tune it all out – whether you’ve been investing for 30 years or you signed up for Stash yesterday. Let’s take a moment to discuss this noise so that you’ll be prepared for whatever happens to the stock market as the election results come rolling in, and in the weeks that follow.

You might be thinking, “Why is he writing this before the election results are in?” The answer is simple:

My advice will be the same either way.

I’ve been an investor for almost two decades. Let me share a dirty little secret with you… ready for it? Nobody knows what’s going to happen tomorrow or in the weeks to come.

The political media frenzy has been driving the markets wild for the past week. The US equity market traded down for nine consecutive days, but at the time of this writing, today’s gains have almost fully erased last week’s losses. And even after the election, the market will still need time to figure out how each candidate’s policies will affect the economy.

Despite periods of volatility, the US equity market has averaged +10% a year over the last 70 years. Markets certainly don’t grow every year, but over the long term, the American economy has grown even in the face of depressions, recessions, and wars. This is exactly why successful investors follow a set of core principles, and why they root themselves in these core principles for the long term.

The Stash Way is a term we have coined for these principles, but we certainly didn’t invent them. All we did was take the core components of a successful long-term investing strategy, and make them easier for you to implement:

• Don’t put all your eggs in one basket – diversify, diversify, diversify.
• Buy and hold your investments, don’t sweat the daily ups and downs.
• Invest on a regular basis with Auto-Stash.
• Focus on the long term.

If you’re tempted to change your investing strategy, think again.

Will the market will go up or down?

Yes. It may go up, it may stay flat, or it may go down. It may even do all three, all month long. The key for you is to continue doing the same thing you always do and focus on the long term. Keep it simple and remember The Stash Way.

Don’t do anything special on Tuesday or Wednesday.

Continue to invest on a regular basis, whether the market goes up or down. With Stash, you don’t need to have a lot of money to continue building your portfolio. Set up Auto-Stash to invest what you can afford on a regular basis.

You will probably hear the word volatility in the news.

Volatility is the movement of an asset, or the entire market, made worse by large buying or selling in a very short period of time. Think about it, people may be thrilled or devastated by election results and react at the same time. This creates volatility. Long-term investors should be focused on three, four, or even eleven presidential cycles.

You're probably asking … Brandon, what are you going to do?

Stay the course. That’s my answer. I have a weekly Auto-Stash set up into my mix, and I’m going to continue building my Stash for the long term.

This is the exact reason that I quit my previous job to start Stash with my team — so a quarter of a million customers could get access to the markets and start investing toward their long-term goals.

This may be a big week for politics, but it should not be a big week for you as a long-term investor. Take a long view, no matter what happens. It’s less stressful that way, and it benefits you.

Your long-term investing goals should outlast even a two-term president.

Keep Stashing Raymond,

Brandon Krieg, CEO – Stash

###-###-###

Disclaimers

*The S&P 500 Index is used to represent the US Equity Market **Calculated Average Arithmetic Return for the S&P 500 with dividends reinvested over the period 1946 through 2016. Average return is 7.3 percent without dividend reinvestment. Returns are not inflation adjusted. Investing involves risk and investments may lose value. See our disclosures page for more information.

Pretty good advice wouldn't you think?

How do I know all this and why am I sharing? Simply put, the startups I am involved in have exhausted their personal and private funding to get this far, which is pretty far, considering. Now after a year of research, investigating and actually speaking to those who have been there, I would say I feel pretty confident in spilling a little knowledge to help out anyone else behind me.

I have a friend that I kind of consider more like a teacher... I watch and listen to what he is doing and says. I take all the good results, put them aside for use, and the pitfalls, I put those aside for "What NOT to do". His name is ... John Kilmer. Mr. Kilmer has a startup that started before mine, so he kind of inadvertently became my, I don't know how else to put it, Canary? Oh, but the dynamics that we have... Mr. Kilmer and I are able to just text/call whenever and do a Q&A, catch up with world events, hang up and off we go with new found knowledge!

I hope this little article of just getting the "Excitement to write about this because of a letter" helps. I wish you all the best of luck in your business, jobs and lives.