Why you should never take financial advice from social media – what Gamestop taught us

by Startacus Admin

Oliver Woolley, CEO and co-founder of Envestors shares his thoughts on what the social media hype around Gamestop taught us all about investment

Social media hype saw the share price of Gamestop, the game retailer, rise to a high of $483 then plummet and close at $60 on 8th February 2021.  This left many amateur investors in something of a spin.

Other social media darlings like AMC Entertainment Holdings Inc. and headphone maker Koss have also seen their shares drop, following increased interest in past weeks on Reddit’s WallStreetBets.

Billed as “the little guys” of Reddit vs. Wall Street the fight yielded incredible wins for some. However, many small investors have lost their life savings and college funds. 

As Gamestop grew as a movement on Reddit, social media led more people to trade shares, with users posting screenshots and memes and sharing trading advice on Facebook, Twitter and TikTok.

Giants like Elon Musk and billionaire entrepreneur Mark Cuban jumped on the wagon, posting financial advice on Twitter without any legal consequences. Algorithm amplification on social platforms and no-commission trading apps like Robinhood did the rest.

Currently, it looks like there’s no stopping prominent figures making statements which could be construed as unregulated financial advice online.

However, for anyone in the UK, the reality is quite different. The FCA has a set of regulations to address this very issue, and that’s because financial promotions can have devastating real-life consequences for investors. 

Who won the most or lost the most?

The first big winner in the GameStop bubble? Reddit itself.

Due to the hype, the company has been able to bag $250M in a Series E fundraising round - announced on February 8. Reddit forums have initially been responsible for the surge in GameStop’s share price and other securities.

The other big winners? Institutions and, ironically, hedge funds.

While the GameStop saga may have started off as a democratized ‘hedge fund’ on Reddit fighting short-selling professional hedge funds, data shows it was institutional investors and hedge funds that drove the price of the stock even higher.

For example, Hedge funds like Senvest Management in New York were amongst the biggest winners in GameStop. After investing at $10 a share, the fund made almost $700 million. 

The biggest winners in this story may have been funds, but the biggest losers were, undoubtedly, small investors who held their positions for too long as the Financial Times reports.

The journal interviewed a number of small investors, including Tori Barry from Wales who explained:

“We are not big players. We haven’t lost millions, but for us that is rent for the month, it is bills. I don’t know how we’ll recover,” she said.

Like many others, she had taken Musk’s advice to heart.

“I rate Elon Musk quite highly and trusted him . . . his tweet was a big influence. With his support it appeared that the retail traders would win,” she added.

Musk’s contribution to the movement consisted of one word, using the funny version of ‘stock’ that caught on Reddit: “Gamestonk!!” 

What is the biggest takeaway for investor networks?

The biggest takeaway for investor networks from the Gamestop saga is to be careful who you make a financial promotion to.

Networks often invite  ‘investors’’ to pitching events, but don’t ensure they are the right class of investor. Not all investors are alike and the Financial Conduct Authority has regulations in place around how different classes of investors should be treated. 

The professional investors class includes VC or private equity firms. It’s important to collect statements from investors confirming their status and check what type of investor you’re dealing with:

HNWIs have an annual income of £100,000 or more and/or net assets worth at least £250,000 or more. Self-certified Sophisticated Investors (SI) are either members of a network or have invested in unlisted businesses in the two years prior to the event. Restricted investors, the class into which most of us fall, are advised not to invest more than 10% of their net assets in non-readily realisable securities.

Savvy networks know they need to have their investors self-certify their status every twelve months. This ensures the network is treating each individual according to the rules of regulation and that investors understand the risks associated with investing. 

Networks using social media to promote investment opportunities should have regulatory cover to do so. Contacting investors through email, social media or announcements on your own website all fall under section 21 of the Financial Services and Markets Act 2000 (“FSMA”).

The regulation outlaws any promotional activity that leads to an individual buying shares in a company, without regulatory cover. 

In order to get financial advice on how to legally connect investors and companies consider working with companies like Envestors in order to obtain Introducer or Appointed Representative status.

ABOUT THE AUTHOR

Oliver Woolley is CEO and co-founder of Envestors. Envestors’ digital investment platform brings together entrepreneurs and investors across geographies, communities and sectors – creating the single marketplace for early stage investment in the UK. Envestors partners with accelerators, incubators and angel networks to provide a white-label platform empowering them to promote deals, engage investors and connect to other networks. Founded in 2004, Envestors has helped more than 200 high growth businesses raise more than £100m through its own private investment club. Envestors is authorised and regulated by the Financial Conduct Authority.

Web: https://www.envestors.co.uk/ 

LinkedIn: https://www.linkedin.com/company/envestors-llp/ 

Twitter: @EnvestorsLondon

 

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Published on: 19th March 2021