I'd argue that if your employer is still private, investing in their stock is often quite unresponsible as well. Often you don't even get real stock but options, there can be arbitrary dilution, and there is no contractual right for you to get your money back (unlike if you invested money).
Often, but not always. You work there. And you are surrounded by others evaluating the same, or a similar, investment. That creates the possibility of an edge.
That possibility doesn’t exist for non-insiders. Without those advantages you’re relying on “knowing the right guy”. Nothing more.
Wouldn't it be a better, more free, system to just make it law to issue strong warnings suggesting up to $20,000 in legal fees for the inexperienced noobies upon any share issuance.
These clauses are already commonplace. People don’t read them. They then turn their losses into a political problem that breeds feel-good laws mandating red tape for everyone. Best case. Worst case: a crisis of confidence in our markets and an ensuing depression.
Better law might be a cap on this asset class as a percent of one’s investable assets?
I have seen many very wealthy investors lose a lot of money on private investments because they haven't understood their share rights relative to other investors. These companies often need to raise further capital at pretty low valuations so they end up being significantly diluted.
However the most important thing is that wealthy investors can afford these losses, other investors much less so. Only after building up significant pension savings and owning a home would I ever advise someone to invest in a higher risk opportunity.
Someone writing a $20,000 cheque cannot spend $2,000 to $5,000 on lawyers every deal. This self selects for getting screwed. I would go so far as to say it is not possible to invest in private markets responsibly, outside one’s employer’s stock, with solely $5 to $25k cheques.
This is different in the public markets where the burden for disclosure is on the issuer. There is still risk. But you can’t buy Apple stock that loses money when Apple goes up. Options are complicated. But the complexity is standardised. It is totally possible, on the other hand, to buy common stock in a company that gets restructured to zero, or invest in an SPV that loses its shares to third-party repurchase rights. No amount of Googling will save you because the terms on each deal are bespoke.