Social media-hyped stocks took a beating on 18th February, with shares of game retailer GameStop (NYSE:GME) closing at around $40. The share price dove from an all-time high of $483 earlier this month, ending a wild ride for amateur investors still holding their position.
The same week also brought on slumps in many “meme stocks,” oftentimes leaving small investors in the wind.
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.
The fight dubbed “the little guys” of Reddit vs. Wall Street has yielded incredible wins for some. Unfortunately, it has also brought several small investors to their knees, with many losing 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.
“I got to say I LOVE LOVE what is going on with #wallstreetbets. All of those years of High-Frequency Traders front running retail traders, now speed and density of information and retail trading is giving the little guy an edge. Even my 11 yr old traded w them and made $,” Cuban tweeted.
Currently, it looks like there’s no stopping prominent figures from making statements that could be construed as unregulated financial advice online.
However, for anyone in the UK, the reality is quite different.
The Financial Conduct Authority (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.
Biggest Winners and Biggest Losers
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.
“Maybe it’s not as much of just the little guy versus the big guy,” JMP Securities analyst Devin Ryan told CNBC. “I think that it’s reasonable to say that institutional investors were also very active in those stocks last week because there are institutional investors that participate in names that have elevated volume. I think most likely that was also expressed in some of the options activity last week as well.”
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.
Others, like the Tyndall North American fund, were up by 14.36 percent in February after keeping a position in Gamestop for just three months.
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.
Whether they were amateur investors who got carried away or first-timers who took advice from celebrities, many in the UK have seen their savings take a dip as a result of unregulated financial advice over GameStop stock, the Financial Times reports.
The journal interviewed many small investors, like Tori Barry of Wales.
“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 took 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 Investment Networks Can Learn From GameStop
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 individuals buying shares in a company, without regulatory cover.
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. Envestors provides investment networks with regulatory cover throughout our white-label platform for early-stage investment. Through our customised, FCA-compliant platform, your network can be up and running in days. 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. Twitter: @EnvestorsLondon