Welcome changes to the accredited investor rules. Of course, would love to see them go even further and let just anyone invest — but this is already a step in the right direction.
In all my dealings with the SEC (from working at multiple regulated investment platforms, AngelList and Republic, and now as a VC), it's become clear to me that they're extremely pragmatic and want to support innovation and create a level playing field for everyone. They have great intentions, but are obviously quite careful and conservative about their approach.
I think it's important to note two things:
1/ The stated mission of the SEC is "to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation." — the last part is important, and these changes go towards furthering that goal.
2/ The SEC is a civilian enforcement agency. They do not write the rules, they are here to interpret them and enforce them. They issue guidance, monitor, and sue entities that break the rules. The rules are written by congress. Even if the SEC wanted to change a rule, they could not do it without following the laws written by congress. At best, they can slightly tweak their interpretations of the rules (as we're seeing here).
> Of course, would love to see them go even further and let just anyone invest
Are you aware of the history of the accredited investor rules? When just anyone could invest there was too much opportunity for swindlers .. a problem that goes back the Mississippi company back in 1719.
Televangelists defrauding poor people is bad enough; we don’t need wall atreet bucket shops doing the same.
Fraud is already illegal, and if it's happening then the defrauded parties should take the swindlers to court and prove it, and the justice system should punish them.
The fact that some people might get swindled is not an argument for why I shouldn't be allowed to invest my money how I see fit. Just like the the fact that somebody might sell a defective toothbrush doesn't justify forcing me to get the approval of some bureaucrat in order to buy one.
> Fraud is already illegal, and if it's happening then the defrauded parties should take the swindlers to court and prove it, and the justice system should punish them.
Non-accredited investors, by definition, don’t have a lot of money.
If that money is stolen from them via fraud, where does the money to fund the lawsuit come from?
What if the total potential judgement is less than the cost of the court case?
Regulations exist, in part, because legal remedies are incredibly inefficient.
> I shouldn't be allowed to invest my money how I see fit.
To my knowledge, the investees only need to ask you if you're an accredited investor, and tell you what that means. They don't need to actually verify that you meet the requirements. If you'ld like to invest in shady things, go right ahead.
Verification is necessary. Have you managed to invest in an endeavor which requires accredited investors while not actually meeting requirements yourself?
> The stated mission of the SEC is "to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation."
The problem with small investors is that it is really damn hard to bring a CEO doing obviously fraudulent things to heel. It takes a significant fraction of a million dollars to bring a successful lawsuit--and what you get in the end isn't worth much.
The SEC needs to be much more vigilant on this front if they want to increase the investor pool significantly.
The lawsuit isn't worth it for large investors either. It's much easier to write off your investment than to try to spend a ton of money and energy fighting for scraps, nuking your reputation as a founder-friendly investor in the process. That's why VCs suing portfolio companies is so rare. Only major case of recent memory is Benchmark and Uber, when a $10B+ position was at stake.
They could. But the FBI, SEC and IRS probably won't move unless you present them with an absolute slam dunk worth $5 million or more in direct penalties. If you're below that range, you're probably going to have to file a civil lawsuit. And, after your win that, one of the TLA's might pay attention.
This is a problem if you genuinely want more small companies funded by more small investors.
If the SEC doesn't figure out how to police the $1-$5 million range of companies, all they are doing is creating a nice fertile ground for conmen.
As someone who has raised angel and VC money in the past, I find the accredited investor rules useful for the company as well as for protecting individuals.
Having a clear standard that I can point to to say “these investors are grown-ups that knew what they were investing in” helps minimize things like superfluous lawsuits from people that really shouldn’t have been risking their only savings in an angel investment.
I don’t want to dig deep into an angel’s personal finances to determine if they can really afford to invest or not based on savings and risk profile and having a legal bar an investor has to meet makes the process of raising money slightly less onerous.
Anyone already can invest through the simple expedient of lying about their assets and income. I know people who did this in order to invest in pre-IPO stock. Some financial services companies do minimal verification, and even if an unaccredited investor gets caught there's no real punishment.
> Would love to see them go even further and let just anyone invest
Very broad statement. 'Anyone' in 'any' amount? Surely you are not advocating that. Are you?
In what way do you think the average person 'anyone' knows enough to essentially bet on a typical startup (called it 'gambling')? So you have a typical person living paycheck to paycheck but yes let them put whatever savings they might have into a startup?
I don't believe that restrictions on private investments make sense. If anything, they perpetuate the "rich get richer, poor get poorer" problem. Unaccredited investors are kept out of great potential wealth creation. The problem is not bad investments, it's fraudulent ones. Fraud is still illegal even if you kill the accredited investors restrictions.
I do generally agree with you that the accredited investor definition should just be scrapped entirely, but the problem with fraud is that you usually don't find out about it until your investment is gone, and prosecutions often aren't able to recover anywhere near enough to make the investors whole again. And even when they do, it can take months or years.
Someone with a $20M net worth can deal with losing $1M. It sucks, but it's not going to put them on the streets. Someone who puts all of their savings into a fraudulent investment then becomes one car break-down away from not paying their bills. Consider also if that person is retired and is living on a fixed income.
The kind of people in the latter group are probably more likely to fall for a scam or fraud. I would love to lift investment restrictions -- I absolutely agree that this is a "richer get richer, poor get poorer" issue -- but not without a way to better protect more vulnerable investors.
The first thing that comes to mind is some sort of government-provided investment fraud insurance. But then I worry about perverse incentives: every time someone's investment tanks, they're incentivized to try to prove that the investment was a fraud.
It sounds then, instead of accredited investors, we need an accredited capital investment designation. Allow anyone to invest, but require those who would seek investment from anyone to be under more scrutiny. Of course, this is only if the one seeking investment choose to do so.
Isn't this just called a "public company"? (Not sure if your comment was tongue-in-cheek. If not, I'm genuinely unclear how this is different from the current situation.)
I think there's an argument to be made that the current rules create obstacles for Ponzi schemes and other conmen, but I'm genuinely in agreement that restricting action based on personal wealth is a great way to keep the poor from moving up. I think day trading is the worst example, especially when you compare its risks to options which have no such restrictions
For the most part, the government shouldn't get to tell people what they can or can not do with their money. We don't currently stop people from going to vegas, buying lotto tickets, buying expensive cars, clothes, buying education, etc.
Said another way, 'anyone' can invest 'any' amount in a public stock today and lose it all tomorrow. Heck people were even suckered into mortgages they couldn't afford by our trusty banks.
So you have a typical person living paycheck to paycheck but yes let them put whatever savings they might have into a startup?
While I think there is some merit in restricting what purchases people can make beyond their means, only applying it to certain types of speculative investment (which doesn't even include things like real estate) seems arbitrary to me when it's not applied to something with even more risk like gambling, say.
If the average person could bet their life savings on red at the Roulette table, what’s different about allowing them the freedom to bet on risky investments? At some point adults should be adults and be responsible for themselves. Of course fraud should remain illegal, but assuming fraud isn’t involved, why not let anyone invest in anything?
> They do though; they have incredibly wide discretion and things like insider trading effectively exist only via SEC regulation.
No, insider trading is the subject of laws passed by Congress; at a minimum, the Insider Trading Sanctions Act of 1984 and Insider Trading and Securities Exchange Act of 1988. And those laws are where the SEC enforcement powers over insider trading come from.
That's true to a point, but neither of those pieces of legislation actually define "insider trading" (although they do establish penalties for it). The power is more or less delegated to the SEC. There have been recent attempts to codify their present interpretation in statutory law.
Congress in general gives extremely wide power to particular administrative bodies that does result in conduct being treated as legal or illegal purely as a result of shifting regulations. You can argue that it "derives from" legislation at some level of removal so they're not "making law"; that's a distinction without a difference.
Stock trading is over 400 hundred years old so terms like insider trading are meaningful even without a strict definition. The SEC’s role is one of clarification not lawmaking.
Consider, the proposed law uses the word espionage does that cover say counting the number of trucks leaving a factory? That’s the kind of thing where any specific choice is reasonable as long as everyone operates under the same rules.
> That's true to a point, but neither of those pieces of legislation actually define "insider trading"
That's true in the narrow sense that they don't have a definitions section with the term “insider trading” and a definition. They both use “insider trading” in their titles and internal headings of the code sections they add, and specify the covered behavior (which differs slightly between the two) in the body, “purchasing or selling a security while in possession of material, nonpublic information” (15 USC 78t-1) and “purchasing or selling a security or security-based swap agreement while in possession of material, nonpublic information, or...communicating such information in connection with, a transaction on or through the facilities of a national securities exchange or from or through a broker or dealer, and which is not part of a public offering by an issuer of securities other than standardized options or security futures products” (15 USC 78u-1.)
While Congress did give the SEC the ability to set the rules around insider trading, it didn't give the SEC a blank check which the SEC used to pull the idea of insider trading and regulating it out of thin air.
I think a lot of weirdness in US regulation is because of Congress having lost the ability to make clear headed laws. There is so much friction in the partisan fights that they don’t have time and energy to write clear laws that make sense.
> ...Congress having lost the ability to make clear headed laws.
When do you imagine they had such ability, and does much of th Byzantine nature of the securities laws really post-date that period?
> There is so much friction in the partisan fights.
No more than usual, except in the sense that because of the partisan realignment (or two overlapping realignments, one stemming from the New Deal itself, the other from Johnson's signing on to civil rights) from the New Deal until the 1990s the bitter ideological fights were somewhat less often aligned with party boundaries.
“bitter ideological fights were somewhat less often aligned with party boundaries.”
This is what has made things worse in my view. The people in Congress don’t vote anymore for what they personally think is right but what the party tells them to do.
> The people in Congress don’t vote anymore for what they personally think is right but what the party tells them to do.
They don't vote any less for what they think is right, either. Political expediency has always been a major factor, even during the realignment when the national party may not have been as big of a factor (though it was always a big factor) in the expediency calculation.
> They don't vote any less for what they think is right, either
I’d like to avoid the use of the all-encompassing “they” when referring to US politics. It’s demonstrable that one, specific, major political party lost all semblance of a moral compass (or even an ideological compass) in the past couple of decades and it would be an error of judgement to presume they vote for and support what they actually believe is morally right - even by their own definition of what is right and good.
Oh good grief. One party didn’t “lose its moral compass.” Chuck Schumer is just as likely to support a bad law as John Cornyn. And the facts support that time and time again. “Moral compass” is such a loaded term. Banning abortion could be seen as “moral” just as easily as passing stricter banking regulation. That’s the problem — morality has become so muddled as to have become a useless measure. To me, it’s immoral to want to take money from me and give it to some favored group. To others, it’s moral to take money from me and give it to some favored group. What we need is smaller, less intrusive government, then there is less opportunity to be bothered by the morality of laws — because there would be fewer of them and they would have a smaller scope.
The whole thing should be scrapped. This is supposed to be protecting unsophisticated investors, but most of the investments prevented here are equity investments in small businesses. While at the same time anybody is allowed to buy TVIX, a 2x leveraged VIX ETF, which is basically gambling.
I think Matt Levine has a good explanation about accredited investing and what private markets really mean:
> But in fact the main thing that distinguishes public and private markets is not their legal status—private markets are mostly open to accredited investors, while public markets are open to everyone—but the fact that private companies get to choose their investors, and public companies don’t. Hedge funds, for instance, are mostly open only to accredited investors, but not all hedge funds are open to all accredited investors. The very best hedge funds mostly aren’t open to anyone: They are at capacity, won’t take new money, and mostly manage money for their own very rich employees. Other hedge funds with long track records of good performance are open to big institutional allocators who can write very large checks. If you are a dentist making $205,000 a year, and you want to invest in hedge funds … someone will definitely sell you a hedge fund! It will not be Renaissance.
Just because we legally allow people to invest in whatever they want doesn't mean it will make equal footing between investors. The investments that will accept the people who are currently 'non-accreddited investors' are going to be the worst of the private investments; it will do nothing to help the little guy compete with the rich guys.
Side question: does anyone know the origin of “dentist” being shorthand for “someone who is fairly educated/wealthy and thinks they’re sophisticated, but is actually just dumb money”? I’ve heard it quite a bit, curious about where it comes from.
A self-reinforcing meme, I'd imagine. The more you hear it, the more you're likely to use it as an example. I've certainly used the phrase "dentist from Ohio" a few times myself — no offense meant to dentists and Ohioans.
>This is supposed to be protecting unsophisticated investors, but most of the investments prevented here are equity investments in small businesses. While at the same time anybody is allowed to buy TVIX, a 2x leveraged VIX ETF, which is basically gambling.
My understanding is that it's supposed to protect investor from fraud (eg. along the lines of ICOs), not necessarily from risky/volatile investments.
I too think it should be scrapped and I look at how other places do it. Often in other countries I see lower wealth requirements and copy the general US SEC framework but sometimes over countries just have no registration exemptions for a private market, which is even worse.
The wealth requirements in US are so aggravating because they pass muster by putting the consequence on the issuer, not actually barring the person from investing. Almost impossible to challenge! But how we got here is that this is a successor to a test, which had horrible guidance and resulted in rampant discrimination - a sign of the times. This proposal reintroduces the test but inherits a more established FINRA testing infrastructure. FINRA tests are still barriers of entry that will hardly make the world more egalitarian as almost all of them require sponsorship from a financial institution - even the test prep materials aren't supposed to be shared. There are ways around it like a bucketshop cant you on payroll and offer you the test but its still an unnecessary and pretentiously exclusionary hurdle, built on purpose.
> Having more money doesn't make you less susceptible to fraud
Yes it does. If you’re investing $25k in a company, you can’t pay lawyers more than a pittance to review documents and do diligence. That makes you more susceptible to fraud.
Source for that? I think the general idea is not whether someone is susceptible to fraud, but rather higher likelihood that you have experience with making investments.
How much you wanna bet a white collar worker making $200k/year has made more investment-based decisions in their life than a a blue collar worker making $20/hr?
I don't necessarily agree with the tenants of the idea of an accredited investor, but it's definitely a way to parse out a large chunk of the population unexperienced with investing.
Agreed. While I think it is sensible to have rules that prevent gullible members of the public from being bamboozled, I also think that a more sensible policy is what the UK has. Here you can self-certify as a "sophisticated investor" which is basically the same thing except that there is no obligation on anyone to check your self-certification i.e. there is no penalty to claiming to be one when you're not nor is there any penalty for allowing someone to invest who self-certifies but doesn't actually meet the criteria. That seems fair. If you're willing to confirm that then you should be able to invest in whatever damn fool thing you want.
(Note that in the UK private individuals can trade things like contracts for difference and spread bets which I actually think is slightly mad)
This is basically Matt Levine's argument [1], though he calls it a Certificate of Dumb Investment:
To get that certificate, you sign a form. The form is one page with a lot of white space. It says in very large letters: “I want to buy a dumb investment. I understand that the person selling it will almost certainly steal all my money, and that I would almost certainly be better off just buying index funds, but I want to do this dumb thing anyway. I agree that I will never, under any circumstances, complain to anyone when this investment inevitably goes wrong. I understand that violating this agreement is a felony.”
There is a lot of fraud that goes unpunished because the victims feel hopeless and embarrassed. As a result, it's a lot more attractive to defraud people.
A dumb investment might be dumb, it might be likely to be fraud. But if it turns out to actually be fraud, the victims should still be able to seek restitution or otherwise you are giving a free pass to commit fraud and creating a huge economic advantage for people willing to do it over people who aren't.
Maybe the other side of the coin is that allowing all these dumb investments to take place would have the effect of overwhelming regulatory bodies and prosecutors with less-than-clear-cut missteps. I don't know, perhaps it is easier to regulate entities that have to file a 10K than it is to understand anything at all about private entities that have no similar filing requirement?
Doesn't accreditation largely influence how securities are marketed? Isn't the liability issue with accreditation on the security seller, and not on the buyer? Why would we want more shady investments marketed to people, even if some what's marketed today turns out to be shady?
As someone noted above, opening up accreditation to the whole population will do nothing to give those people access to the top performing investment vehicles, because the top performing investment vehicles are already getting their money from investors that they choose. So, all this will do is create more shady investment vehicles and those that can't afford to play with the bigger investments will continue to be sold on worse performing investment vehicles.
Bingo. Look at the fallout from the mortgage crisis/scandals. Buying a house is a straight forward investment. People were getting into mortgages without even understanding basic borrowing rates. In the end we (rightfully in most cases) blamed the brokers for pushing crap on people unknowingly. How is this going to work?
This makes a lot of sense, but I don't support it because in this case the price of having less shady investment marketed to people is cutting off access to a large number of legit (though risky) investments.
Lots of investments that have no business being marketed to retail investors are both (1) not reasonable or safe enough to be marketed and (2) believed in good faith by their marketers to be "legit".
So, two responses here:
First, when you think about the products that could be marketed without accreditation, you can't just think about the marginal cases where there is some plausible value; you have to think about all of them, bearing in mind that there is virtually no correspondence between how well something is marketed and how plausible it is an investment. See, for instance, the unregulated nutritional supplement market, which is is a hive of scum and villainy that kind of perfectly encapsulates this problem while being self-limited (in the non-pyramid-scheme case) to the amount of colloidal silver solution any person could reasonably purchase --- unlike an investment, which begs its purchaser to plow their life's savings into.
Second, contrary to the perspective you get on this issue by just looking at tiny startups, you have to consider that the entire securities industry is in a sense gated on accreditation, because the difference between a security that requires accreditation and one that doesn't is "keeping timely audited findings with the SEC". So for example: if you did away with accreditation, why would companies need to produce audited financials?
If your belief is that the edifice of securities regulation is entirely pointless and people should be able to buy any investment product they want and companies should be able to sell any investment product they want, that's a coherent take, but not one ("let's do away with companies having to file official statements") that most mainstream people would find persuasive.
Totally agree. If we want to protect people there should be some kind of test like a drivers license, and rich people should have to take it too. As it is now people can get into options trading on small caps but are barred from buying things like commercial real estate.
TVIX isn't soliciting unsophisticated investors for large percentages of their net worth, and if you want to sell TVIX because it's performing terribly, you can.
A walk down r/WallStreetBets shows you that if there is an argument about a gov agency protecting unsophisticated investors, its failing spectacularly.
I think you're misunderstanding the threat model. It's designed to protect unsophisticated investors from fraudsters, not from the investors themselves.
I don't think this is true. A clear example is startup stock-options. It is legal for the company to give you that as compensation, you historically get taxed for that compensation, it is legally mandated to get appraisal by a third-party company, but it is generally illegal to offer them for sale in the public.
At least the risk profile of a leveraged ETF is fairly unambiguous and easily discovered. Its very real potential for downside is also matched by a real potential for upside and the available pricing is fair-- even if its risk profile not necessarily matched to your (or anyone elses) financial needs.
I think a bigger risk to investors is dishonest/deceptive marketing and extremely risky and often illiquid investments being peddled as sure deals, including ones where the chance of upside is essentially nil and you're lucky if you break even.
I originally wrote very real potential for upside and weakened it by dropping the "very", specifically thinking about the drag on leveraged ETFs... :) Guess I didn't go far enough.
I feel like this is in the weeds though: some bad investments people get suckered into have extremely high and diversified risk of total loss, but at _best_ can only return a few percent in a year.
Not only are they negative EV, but even if you get lucky and it pays off you only end up with money market fund like income. Deals that no one who was informed and knew how to do the relevant math would ever take.
One major difference is liquidity. Small business investments have almost none. You're going to be tied up for years, and may actually never be able to get out. If I screw up with TVIX, it's a couple of clicks.
In many cases small businesses can take on non accredited investors. Like a rule 504 offering if less than $1m is being raised. And if you are raising more than $1m, a 506 offering allows for up to 35 non accredited investors. If you are raising more than $1m and have more than 35 non accredited investors a public offering is compelling.
> While at the same time anybody is allowed to buy TVIX, a 2x leveraged VIX ETF, which is basically gambling.
Nobody is hyping that and most 'anybodies' don't even know that exists. (I never heard of it but everyday I read about all the wins with startups but typically almost none of the losses).
There have been considerations to up the requirements of purchasing leveraged ETFs, which go up to 3x. But also keep in mind most people can easily be approved to buy options, and easily lose 100% or more of their net work in hours.
Most people who take unlimited-downside positions (like selling option contracts or short selling) on a broker will be limited to losing however much cash on hand they have in liquid markets. Their broker will issue a margin call (ask for further capital to be deposited to cover any further losses), and if no further deposit is made, will automatically liquidate their position if necessary. So you're unlikely to see your net worth wiped out, you'll simply lose the amount you put in to the account to trade with.
I wouldn't count on that. The market might move so fast that the broker can't liquidate the account before the balance goes negative. In that case the broker has an incentive to try to extract the amount from the customer (if they can), instead of eating the loss on the negative balance.
Accredited investors are not better informed, more intelligent, nor disciplined. They just have more income. People make mistakes by assuming that one's status implies superior capabilities.
Or any of the weird coin offerings. Which - if you believe in the thing not being a scam - is essentially a way of financing a company. Just like buying an investment in a small business.
Woah watch out there. I have never seen a 'coin offering' that was remotely like buying an investment in a business, certainly not "just like".
Instead, they have mountains of fine print that with extraordinary care make sure the recipient has absolutely no property right in the business, no claim to any title, no voting rights, usually no rights to share in profits, etc.
If you wanted to liken them to something offline, they're structured more like making a donation and getting a limited edition t-shirt in return. Maybe with some vague suggestion, but no guarantee, that the t-shirt may entitle you to discounted services in the future should the business actually begin operations.
And this is before getting into the fact that a great many of them are essentially outright scams.
The fact that many people are thinking that ICOs are "just like buying an investment in a small business"-- is a great example of how the SEC is pretty much flat out failing at this part of their job.
It has shut down some but it mostly seems to issue nominal penalties.
For example, the EOS ICO unlawfully raised over $4 billion dollars. The SEC settled with them where they paid the SEC $24 million and the SEC agreed to take no further action.
The only lesson here is that if you're going to ignore the law and sell sketchy assets with over-hyped claims to unsophisticated investors in the US... make sure you raise enough that the cost for good attorneys few million to the SEC is just a rounding error.
Or the value is being transferred out of the US and toward other countries, because you can't even start an ICO in the US unless you have the right connections.
The only reason accredited investor exists is to reduce free market competition. If everyone could invest in UBER when it was $1 a share it would not make billions for the "accredited investors" when it went public.
Kinda interesting they limit who can invest in things, yet you can go to the casino or blow all your money on lottery tickets. Seems like just another way for the rich to keep getting richer. Also always found it odd, the age for lottery and casino were different too, at least in the US. 18 for lotto, 21 for casino.
This regulation isn’t designed to protect you from yourself (eg addictive behaviors) or “investments” that are obviously bad for even those without a high school education.
It’s designed to provide some minimal protection against sophisticated fraudsters (eg Bernie Madoff).
SEC doesn’t govern lotto/gambling within states; that happens at a state level, just like alcohol and tobacco.
I agree that the USA tends to have an incoherent stance on age of responsibility versus freedoms, but that’s largely because the federated government system and different states have different ideas about how much freedom/responsibilities their people should have.
This outcome is ridiculous and has no place in American society. It was more tolerable when high growth companies IPO’d at $30mm market caps but that world doesn't exist, serving to put a spotlight on these regulations separating the primary economic growth engine’s opportunities to just the already wealthy.
We are entering the Euphoria stage of the business cycle: Microsoft, Apple, Google and Amazon worth over $5 trillion, while the White House is considering tax benefits so more people can buy stocks and the SEC is ditching investment regulation.
It's an interesting name they gave this concept. According to Wikipedia, "accreditation is the process in which certification of competency, authority, or credibility is presented"
But to be an accredited investor, all you need to do is have some money. There is no logical way that you can certify that a person's "competency, authority, or credibility" by merely knowing how much money is in their bank account.
No but they would have the financial ability to withstanding speculative investment losses and (theoretically) have the financial means to hire lawyers and advisers to review investments before making them. Otherwise you'd have grade school teachers and firefighters individually risking their entire retirement on a Series A for their brother-in-law's "next sure thing" rather than their pension plan manager doing the due diligence.
They let people with enough money be accredited investors on the idea that if you have enough money you won't be devastated if you are a victim of fraud.
I think the assumption is that even in the case of "trust fund babies" who inherited their wealth, they will have been exposed to enough info about finance to potentially understand the risks.
Neither the existing nor the upcoming changes will protect someone like a lottery winner. Unless they seek qualified advice in setting something like a family office up, in which case their intentions are good at least.
I have a hard time understanding who this helps. Clearly there are exceptions for family offices and the spousal exception is strangely broadened in a way that includes same sex, non married couples (and I believe that's a win) - though arguably is much broader. But, an exception for people that pass some relatively basic SEC certifications (who also don't meet some reasonable financial thresholds) or folks that are non-significant wage earners, that work for a VC and want to invest. It's really strange considering now, investment brokers / managers who don't make enough to participate under the old rules can participate AND convince their clients / the market to participate...that seems odd.
If there is a reasonable reason to create an income threshold, presumably to protect investors from risky investments who can't withstand the loss, then why create exceptions for people who don't meet the income / asset requirement?
If you believe that investment in startups should be regulated, to save us from ourselves, it's hard to imagine this helps the average potential investor.
The point of the accredited investor regulation is to protect unsophisticated investors who don't understand the risk of investing in startups and other unregistered offerings.
These exceptions will let people without a high income or net worth qualify as accredited investors by proving that they have the financial knowledge to understand these risks. For example, anyone can take the Series 65 exam.
It sounds like this could be very helpful in allowing people who are not rich to invest in startups while still protecting people who have no idea what they're doing.
A similar bill was passed unanimously in the house in 2017, which seems to have a more broad definition of a professional expert.
I am thinking out loud here but what if this is a scenario where the SEC is trying to pass a more restrictive version, so that the more relaxed house bill never gets passed into law?
That's because its less about that and more about allowing a certain income class to have exclusive access to certain kinds of investments.
A VC firm that offers nothing more than money (larger % of them than you'd think) doesn't want to compete with tons of syndicates consisting of average retail investors.
The "accredited investor" gatekeeping allows them to provide very little value and say "doesn't matter, you need us because we're the very few that are allowed to invest in your company".
If retail investor syndicates can successfully compete with VCs, why aren't squads of senior FAANG engineers doing it today? They're comfortably over the accredited investor threshold.
Probably because they make enough extra money investing in public markets with less hassle and much more liquidity. Why even bother with private investments? 90% of them are going to zero.
One thing I didn't understand about hedge funds is why they limit themselves to only accepting large sums of money from individuals. That concept appeared a lot in the movie about Bernie Madoff. Is it harder to manage a hedge fund with more investors? Once you get the money from them shouldn't the hedge fund be able to use the money just the same as if it came from few rich people?
The SEC has no way of knowing whether someone understands the risks of investing or not.
If the reasoning is to protect ignorant investors and prevent fraud, it would be more effective and equatable to have a test/certification to be a qualified/investor, rather than banning large swaths of the population from investing.
The current SEC rules are inherently discriminatory whereas the law should treat people equally.
From my experience working for a company in the real estate investment industry, the biggest gap in investor understanding is in risk vs projected return rate. Almost everyone including accredited investors gravitate towards anything with the highest potential return rate, even when there's great big up-front warnings about a given investment having X, Y, and Z risk factors.
With that in mind, even just forcing investors to pass a simple test about risk in different areas of investment (bonds, index funds, major real estate types, etc) would go a long way.
Does anyone here know if entities are required to actually verify their customers are accredited investors (eg with brokerage statements, bank statements, paystubs, etc.) or can they just take the person's word on it?
When you do the investment deal, you have to certify that you are an accredited investor (e.g. you'll get a SAFE and an "Accredited Investor Questionnaire" or similar document). They won't require proof beyond that (e.g. bank account statements, W-2), but if you lied about it you'll likely have zero recourse if shit hits the fan (which is the only time you would need it). I would also say that most of the time the parties involved know each other trust each other enough to where in practice this shouldn't be a big deal (if you have questions about the money or if someone shouldn't be able to do this, don't take their money).
It's the same logic used when cashiers ask you what your age is when purchasing alcohol: if you give them a fake ID and they accept it, that's on them, but if they ask you and you lie, that's on you.
I signed up for a few sites, to check out various opportunities, before I was actually an accredited investor. It's all "self certified." I am actually one now, FYI.
It depends on whether they're doing a 506(b) or a 506(c) offering. The difference being that the latter can be publicly advertised, whereas the former doesn't allow any public solicitation of investments.
In the former case, you can take people at their words (they just declare that they are, and how they are an accredited investor in a statement).
In the latter case, you must verify via a statement from a licensed professional (e.g. their CPA) or via their bank.
I may be in the minority here, but I don't think the changes we needed were to make it easier for higher-ups to cash out of a company before rank-and-file get a chance to.
Guess you don't understand the changes at all then because this has nothing to do with cashing out of companies. There is nothing here that makes that easier (not that it wasn't easy before).
I'm convinced that hedge funds and venture capitalists are against this because it will require their own investors to have a certain level of knowledge about their investments that makes the managers uneasy.
The people who invested in Bernie Madoff funds were accredited. They believed they ought not ask questions and rock the boat. Trump University also had accredited investors. Softbank has accredited investors.
It seems that being an accredited investor isn't protecting anyone from fraud.
Careful not to equate the presence of false negatives with the absence of true positives. Just because there are accredited investors who were tricked doesn’t mean that there wouldn’t be even more unaccredited investors who could have been tricked.
Of course there will be more tricked unaccredited investors because there will be more of them and government can't guide the hand. My point is that the accreditation rule is moot, regardless of income level.
In all my dealings with the SEC (from working at multiple regulated investment platforms, AngelList and Republic, and now as a VC), it's become clear to me that they're extremely pragmatic and want to support innovation and create a level playing field for everyone. They have great intentions, but are obviously quite careful and conservative about their approach.
I think it's important to note two things:
1/ The stated mission of the SEC is "to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation." — the last part is important, and these changes go towards furthering that goal.
2/ The SEC is a civilian enforcement agency. They do not write the rules, they are here to interpret them and enforce them. They issue guidance, monitor, and sue entities that break the rules. The rules are written by congress. Even if the SEC wanted to change a rule, they could not do it without following the laws written by congress. At best, they can slightly tweak their interpretations of the rules (as we're seeing here).