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Is the JOBS Act Laying the Groundwork for the Next Tulip Craze?

By Alicia Purdy, Contributing Editor

As a wise man once said, “[I]t is better to stop and smell the flowers than to stake your future upon one.”

If you are reading this article you are likely an accredited investor (meaning, roughly, that you earn $200,000 ($300,000 for a couple) or are worth at least $1 million, not including the equity in your house).  Click here for more detailed information about the requirements to be an AI.

Congratulations, sort of.  On the one hand, there are a multitude of investment opportunities available to AIs which are not available to other people.  Click here for more information about that.  On the other hand, you are also a highly coveted target about to be courted (or,depending on who is doing the courting, pursued, targeted, or hunted) by capital hungry firms across the fruited plains.

According to a recent Bloomberg article, Carlyle Group, a Washington-based private equity group, estimates there is $10 trillion worth of accredited investor wealth available in the U.S. that private equity firms want to grab hold of.  TPE firms, VC funds, and others will soon be able to advertise investment opportunities thanks to the JOBS Act of 2012.

tulips-in-the-netherlandsBeing courted to invest your money in alternative investments may be flattering and sound exciting, but not every firm, platform, or investment opportunity will be well suited for the smaller accredited investor.  Moreover, as many commentators have already noted, allowing mass advertising will surely attract some unscrupulous behavior; it is certainly easy to see how a traditional boiler room operation may evolve to try to move into the AI space.

Accredited investors, especially those new to the game, need to get educated on the money managers, firms, and/or companies doing the courting; they need to take the time to understand the market they are thinking about investing in; and the fine print will also matter- a lot.  Just because an investment performs well doesn’t mean that it will be immediately liquid.  And you must understand the fees associated with these investments, as they are very different than fees associated with traditional investments, like stocks, bonds, and mutual funds.

Venture capital deals can be especially exciting because they have high potential, novelty, and growth startup on their side. They also have high risk because of the nature of their early-stage, haven’t-proven-themselves-yet existence. However, what most investors actually hear is simply ‘high potential’ and that’s exactly the way some firms will want it.

In the early 1620′s, Amsterdam was ablaze with a tulip craze. Brought over from Turkey in the late 1500′s, the tulip created an instant sensation and was coveted so highly, people were willing to liquidate assets, spend their life savings, put up their homes and lands and anything else they could turn into cash to get their hands on tulip bulbs. As professional tulip traders hoarded the bulbs, demand rose sharply and traders raked in profits hand over fist and people believed the market would hold strong as they turned their own tulips into profit by selling them to foreigners. However, once the tulips started saturating the market as people began to sell, demand plummeted, value bottomed out and people were left holding tulip bulbs instead of the deed to their home.

The dot com bubble a decade ago bore a real resemblance to the Tulip Craze – the craze for something “new,” the flood of capital investments by everyone eligible to get in, the inevitable collapse, and resulting fallout.

We, at AIMkts, do not think that all that will come from the JOBS Act will be akin to the Tulip Craze, or the dot com bubble.  This would be akin to “throwing the baby out with the bath water.”  We’re just saying that there will be good investments and bad; good investment professionals and bad.  Do your homework and don’t get caught up in a craze. But, at the same time, consider appropriate exposure to the alternative investment class if you are an AI.  We think that having such exposure will increasingly become part of a responsible, diversified portfolio among people who are fortunate enough to be AIs.



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