The SEC Owes me $28k

Happy Wednesday. It is Sunday night and I am absolutely exhausted. Watching Rory McIlory play golf for 6 hours straight and finally winning the green jacket was an emotional roller coaster. 

On the somewhat positive side, the New York Rangers have missed the playoffs, so that means I won’t adopt a heart condition over the next two months like I normally do this time of year.

I use ChatGPT every single day. So do 500 million people every single week. That’s more than the entire population of the United States. So, you have an incredible new piece of technology with 500m users every week, surely the everyday American has the ability to own a share or two of this company right? Right? Wrong. 

OpenAI, valued at $300 billion in their most recent funding round, is still a private company. I have some strongly opinionated words on this topic that would probably come out if you approached me at a bar late on a Friday night, but for this week's newsletter I’ll explain why this is BS in a diplomatic and thought-out manner. 

Looking backwards 

Back in the late 90’s and early 2000’s every company was IPO’ing. You could have $1m in revenue and you would be able to go public with your company on the New York Stock Exchange. The number of companies going public each year was staggering. This was also accelerated by the introduction of the internet in the 90’s. Everyone had a new internet company, and as soon as they made a little bit of money, they would IPO. 

Surprisingly, a bunch of late 90’s internet companies with barely any revenue listing on the stock market didn’t go well, and this led to the dot com bubble in the early 2000’s. Since then, we have never seen the same level of activity in the IPO market. Some would argue that 2020 and 2021 were incredible years for the IPO market, but I personally consider those years outliers when it comes to economic activity (something to do with a bat in China collapsing the world economy or something). Chart on: 

This chart is slightly outdated, but the numbers wouldn’t change much in recent years. The idea here is to show how insane the 90s were for IPOs and how it has slowed down in recent years.

Our Current State

So nowadays, companies are staying private for much longer. The two most valuable companies in the world, OpenAI and SpaceX are worth $300b and $382b respectively. That is an incredible amount of market capital and wealth that is not available to access by the everyday investor. Dr. Evil can’t even fathom those numbers.

Now as a quick side note, the reason everyday investors cannot access these companies is because they are considered “private”. The only way you can invest in private companies is if you are an accredited investor. In order to be an accredited investor, you either have to be pretty rich, or hold a series 7, 62, or 65 license. If you know me, you know that I don’t drive a Range Rover, and I build software products for a living. So I meet neither of the qualifications.

Since many of these companies are staying private longer, it prevents wealth creation from the everyday investor. One of the reasons these companies stay private longer is because this is where they actually accrue most of their value. Chart on: 

Again, slightly outdated chart, but point holds true. Companies are creating a ton of value while private, then just adding a little bit while they are public. Also I find it funny that Twitter is listed on here. Maybe I should start to pay for more up-to-date data.

Since the private investing landscape has matured rapidly in the recent years, this means that companies can build a lot, or even most of their value in the private markets before they IPO. If they stay private, they also don’t have to hold quarterly earnings results that can move the company by +/- 10% in a day. The advantages are clear to staying private. 

And from a government perspective, it is also pretty clear why you don’t let everyday investors invest in private companies. These younger companies are inherently more risky than public stocks, and the SEC is responsible for protecting consumers from making bad investment decisions (where were they when people were spending $250k on pictures of monkey NFTs?). 

But nowadays, these large private companies are proving to be pretty stable. Okay, maybe not all of them, but 90% of these large companies are relatively stable investments throughout the last 5 years. They also can be subject to rapid appreciation in value due to the speed at which they innovate and move.

I am not calling for these companies to be forced to IPO, I am calling for access to be expanded. 

The solution isn’t to IPO, it’s to allow access to private market investing. 

Consumers, retail traders, and everyday investors should be able to invest in large private companies through certified private market exchanges. These exchanges should offer a private-market certification that allows the client to understand that they are responsible for their investments and all the other financial disclosures needed. This certification should fall under the accredited definition. 

Now because some of these companies won’t have high levels of liquidity, you would need to put minimum investment parameters and make-your-market trades. Essentially this looks like an investor saying “I want $1,000 of OpenAI stock, and I’ll pay 5% above current valuation for it”. This, on a much much much more complex scale, is how the stock market works.

By allowing this system at certain brokerages, you allow people to have access to new areas of wealth creation. For example, In November of 2022, OpenAI released ChatGPT 3.5 and they reached 1 million users in 5 days. The valuation then was probably around $25b. Chart on:  

So with the most recent valuation of $300b, the company has appreciated 12x in value. Now, I consider myself a pretty savvy investor. When ChatGPT 3.5 came out, I immediately saw how incredible this technology was and wanted to invest in it, but I knew I couldn’t. 

Let’s play a fun exercise though and say I was able to invest in the company and ended up putting $2,500 into it. That $2,500 would be worth around $30,000 today. All I’m saying is that I shouldn’t have to pay my taxes because technically the stupid accredited investor rules kind of cost me $28k. I could have bought a house. More like a shed actually. Anyways. 

Final Note: America

I personally believe that capitalism is the greatest economic machine ever created. Somehow, America created an economy where you get rewarded for working hard and doing hard things. Amazon is a great example about how Jeff Bezos worked incredibly hard to build that company. While building that company, he has created wealth for millions of other US citizens who own Amazon stock, either individually, or through a mutual fund. Amazon stock is worth around $2 trillion (still an insane number to me). Bezos himself is worth around $200b. In other words, Jeff Bezos created $1.8 trillion worth of wealth for other people.

Since the everyday person is not an accredited investor, people (like me) are missing out on some incredible investment opportunities in multiple different private companies. And if they keep staying private longer, this will continue to be a problem. 

Just let me buy OpenAI stock. I’d also like to buy Anduril stock (worth $29b). If you haven’t heard of Anduril, they are a defense tech company that build some of the coolest f*cking weapons you haven’t even heard of. 

Song of the Week

Mama - Genesis

Alright look it’s a little weird, but trust me just give it the full 7 minutes and it’s worth it. One of Phil Collin’s best songs, obviously behind In The Air Tonight.