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Mad Money: Rethinking Private Placements

68 Pages Posted: 11 Dec 2014 Last revised: 27 Feb 2015

Abraham J. B. Cable

University of California Hastings College of the Law

Date Written: December 9, 2014

Abstract

Currently, regulations try to limit unregistered sales of stock (private placements) to the “smart money,” either by informing investors through disclosure or excluding unsophisticated investors from the market. In theory, these smart-money approaches promote the dual goals of capital formation and investor protection. But in practice, regulators have struggled to craft effective disclosure or screening mechanisms. In light of these failures, this Article advocates for a new approach — investment caps that allow every investor a limited amount of “mad money” to invest in risky private placements. This mad-money approach can protect investors by encouraging basic diversification and liquidity, while advancing capital formation at least as well as alternatives.

Keywords: Private placements, securities regulation

JEL Classification: G38, K22

Suggested Citation

Cable, Abraham J. B., Mad Money: Rethinking Private Placements (December 9, 2014). Washington and Lee Law Review, Vol. 71, 2014, Forthcoming; UC Hastings Research Paper No. 130. Available at SSRN: https://ssrn.com/abstract=2535981 or http://dx.doi.org/10.2139/ssrn.2535981

Abraham Cable (Contact Author)

University of California Hastings College of the Law ( email )

200 McAllister Street
San Francisco, CA 94102
United States

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