How to Invest in Facebook, Twitter and LinkedIn

by Darwin on April 12, 2010

The saying “It takes money to make money” seems to manifest itself at every corner.  If you want to become a landlord and exploit the leverage and interest deductions allowed while having someone else pay your rent, you need money for a sizable down payment (unless you fall for the scammy infomercials touting the guy with 1 tooth that bought 3 properties last year with no money down).  If you want to buy a profitable business and grow it further, you need money.  Today, I learned that while the general public can’t invest in private companies such as Facebook, Twitter, LinkedIN and other hot services that I know and love, I could invest in them – if only I were an “accredited investor”.
I was reading about a company Second Market which bills itself as the leading clearinghouse for the buying and selling of private and illiquid assets.  Basically, since employees and investors in these companies have “shares” but they’re not traded publicly, when they want to unload some shares, they do so on Second Market.  And I’d likely oblige in taking some shares off their hands at the market rate if I had the opportunity.
Here’s how the $70 Million in share exchanges shaped up in March:

source: TechCrunch

However, in order to become an investor with Second Market, you need to be in the club.  That would be the Accredited Investor Club.

What is an Accredited Investor?

In the US, an accredited investor is required to have a net worth in excess of $1 Million or have made over $200,000 each year for the last 2 years (make that $300,000 if married) and have an expectation to repeat for this year as well.  Well, that precludes most everyone save for the very upper echelon of earners in the country.  The thinking is that these are “sophisticated investors” that are able to navigate the complexity of exotic instruments and could more reasonably recover from a sizable loss (like the 50% retail investors lost in 2008-2009?).  Anyway, the Securities and Exchange Act of 1933 is protecting us from ourselves.

What I find frustrating is that if I had the opportunity to invest in the likes of Facebook, Twitter or LinkedIn years ago when I first started using them, I’d be looking at a substantial return on my investment – much better even, than how I’ve fared recently in stocks.  But alas, I’m not an Accredited Investor.

And of course, there are ways to make money if you’re not rich – like blogging!  Or starting a small business from the ground up.  But that’s a long, arduous process, as opposed to buying a stake in an existing profitable enterprise or other passive income options people routinely explore.

Would You Invest in Facebook, Twitter and LinkedIn if You Could?

Share

You're Not Following Darwin's RSS? Check out Why You Have to Subscribe to Darwin's Finance!

If you enjoyed this post, you can get free updates through RSS Feed or via Email whenever a new post is published. Rest assured that you can unsubscribe at any time via the automated system and your information will not be sold, archived or utilized for any other "nefarious" purposes.

{ 1 trackback }

Financial Planning and Personal Investment Articles from Personal Finance Blogs | Personal Investment Management and Financial Planning Blog Directory
April 27, 2010 at 6:55 pm

{ 6 comments… read them below or add one }

1 Investor Junkie April 12, 2010 at 8:26 am

Interesting site, I signed up at least to find more about it. Not sure if you can buy only a portion of someone’s stock option. Also the concern about this is SEC legality.

[Reply]

2 Evan April 12, 2010 at 10:58 am

I wouldn’t invest without real research, because to be honest I don’t get the business numbers. The business models are obviously ad based but what percentage of people click those ads? How much do they charge? are they CPM or CPC?

A couple years ago, you wouldn’t have invested in Facebook, you would have invested in friendster or MySpace and now they are less desireable in terms of traffic.

[Reply]

Investor Junkie Reply:

@Evan,

The transparency for a private company is a big issue. It’s bad enough some of the accounting tricks public companies can do. Any investment in these companies is purely speculative and should be less than 5% of your portfolio.

[Reply]

Darwin Reply:

@Investor Junkie, I’d view an investment in one of these outfits as a purely speculative maneuver, but with huge potential. Recall before Google went public they weren’t making a ton of dough in the early days, and eBay was selling junk online.

While there may be an absence of near-term earnings to show for themselves, they don’t really care at the moment. They have all the funding and capital they want because VC/others see the potential. Additionally, if some firm ever bought them out, your stake would be worth 50% overnight. It’s not totally out of the question that a Twitter just says, “OK, I’ll sell out” and lets a desperate Microsoft acquire them or a trendy Google or Apple snatch them up. Depending on valuation, I’d gladly snatch a few shares.

[Reply]

Investor Junkie Reply:

@Darwin,

I’m not completely against it, just the fact it’s speculative and you are investing in a black box.
As long as you understand this you’ll do fine.

Investing like this is similar to late VC funding, except you don’t have access to the same info a VC would.

3 Money hints April 12, 2010 at 2:55 pm

I would not buy facebook right now, if you determine the intrinsic value of the company it is over priced by more than $13 right now. Twitter is however underpriced. just to let everyone know, there are companies out there that buy second market shares and you invest you money like a mutual fund. that is one way to get your hands near these co.

[Reply]

Darwin Reply:

@Money hints, Hmm, even for non-accredited investors? Do tell.

[Reply]

4 Jackie April 12, 2010 at 7:39 pm

I’d have to look at their numbers first :)

But dang, another reason to have a net worth of $1 million. Is that per household or on an individual basis?

[Reply]

5 Financial Samurai April 12, 2010 at 10:04 pm

Being an accredited investor is VERY important imo. It protects the individual completely, b/c there are so many sub 200k a year donkeys who think they know about the stock market, or investing in whatever when they really have NO IDEA! Trust me on this one.

Everybody thinks they are a genius when the markets are going up. When the markets go down, they blame some exogenous variable.

Being a accredited investor also protects the company from donkey investors as well. It’s a win win, and good for the economy.

As for what I’m doing with my money, it’s my home base right here in SF… absolutely I’m invested in them.

Sam

Sam

[Reply]

Investor Junkie Reply:

@Financial Samurai,

Sam,

You know as well as I do you can still shoot yourself in the foot even if you are not accredited. So how does this protect the investor?

[Reply]

Darwin Reply:

@Investor Junkie, I partially agree in that it’s probably not a stretch to say that people that are worth millions and have been around the block, have advisers looking out for them etc. may have more experience and understanding of exotic instruments, but look at all the stuff routine retail investors got killed on (worse than hedge funds)! A simple S&P500 index lost 50% peak to trough, middle-class folks losing 6 figures on underwater mortgages (that many of them shouldn’t have been in in the first place) and Stanford CDs and other scams…

Conversely, I have plenty of friends who would fit into the accredited bucket that literally have no clue about investing and finance (no offense if you’re reading), but it’s just not something they’ve taken the time to understand. So, they come to me – and then I just give basic advice but don’t want to be responsible for giving them advice on something that didn’t work out…

All in all, if everyone had access to non-publicly traded shares, they’d be more expensive and more people would get burned while early investors sold shares (likely the “accredited”).

[Reply]

Financial Samurai Reply:

@Investor Junkie,
It’s easy. If I’m worth $2 million, and I make some idiot investment and lose 50%, I’m still worth $1 million, and am making over $200,000/yr so I can make it up.

If i’m some knucklehead who is delusional and is not accredited and lose 50%, well… I’m sh&t out of luck, and am gonna go become a liability to society.

[Reply]

Investor Junkie Reply:

@Financial Samurai,

We must tell Lotto winners this then. After all most who win wind up poor again anyways. They meet the criteria of accredited. I think a better method to become accredited would be via some written finance test, than purely via a salary or NW.

Bad Money Advice has a good point on the subject of high NW individuals:

http://badmoneyadvice.com/2009/05/millionaires-as-role-models.html

6 Tammy February 11, 2011 at 2:34 pm

By law are you supposed to prove your worth to invest in a company that requires accredited investors?

[Reply]

Leave a Comment

You can use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>