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
Subscribe to our newsletter
If you would like to receive our startup themed newsletter, full of the latest startup opportunities, events, news, stories, tips and advice, then sign up here.
Sid Madge, founder of Meee shares his tips on starting as you mean to go on, by getting the very best from your staff in 60 seconds
Transforming how we consume fashion - By Rotation is a peer-to-peer fashion rental app that will empower you to do good for your wardrobe, your wallet and planet
Bwalya Kasase, Business Process Consultant at Rebel Energy shares insights on how the renewable energy supplier uses digital workers to improve the customer experience
Peppy secures major investment to help scale its existing menopause, fertility, pregnancy and early parenthood support, and support the introduction of a range of new services.
One Year No Beer, the alcohol-free support service fundraises to scale its business following reports indicating huge surge in alcohol-related deaths since Covid.
The lowdown on Junk Kouture, the Irish-based global platform that's on a mission to unleash the creative brilliance of young people
Considering selling your startup's tech innovation to the healthcare industry? These tips from Evelyne Priestman, Health Economist, Health Enterprise East should help...
Wilton London exceeds crowdfunding target to support its aim of becoming the UK’s number one eco household cleaning brand
TestGorilla is a startup that's on a mission to help you identify the best candidates and make your hiring decisions faster, easier, and bias-free
Major investment for her1, the digital health impact company that's dedicated entirely to female wellbeing...
Published on: 19th March 2021
If you would like to enable commenting via your Startacus account, please enable Disqus functionality in your Account Settings.
- Peppy Raises £6.6M for its digital health platform 27th Jul 2021 Peppy secures major investment to help scale its existing menopause, fertility, pregnancy and early parenthood support, and support the introduction of a range of new services.
- One Year No Beer launches new £500K crowdfunding campaign 26th Jul 2021 One Year No Beer, the alcohol-free support service fundraises to scale its business following reports indicating huge surge in alcohol-related deaths since Covid.
- Smart Nano NI awarded £42.4m funding from UKRI 22nd Jul 2021 Major boost for the NI economy as nanotechnology consortium, Smart Nano NI awarded £42.4m by the Strength in Places Fund to support development of new technology for medical devices, communication and data storage.
- Ntropy Raises $3.2M for its innovative data platform 20th Jul 2021 Ntropy secures major investment to help with expansion of its team, support market growth and future product development.
