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).
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.
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.
Funny how these rules don't apply to gambling and lottery tickets.
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.
If it’s “obviously” fraudulent, why isn’t law enforcement involved? No lawsuit required since fraud is a crime.
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.
(I am not recommending breaking the law.)
And if you lie, you (righly) don’t get the default protections available to small investors.
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.
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.
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.
USA has by far world's most byzantine and bizarre securities laws.
To me, this doesn't seem to be going well along that statement.
> 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.
My understanding is that it's supposed to protect investor from fraud (eg. along the lines of ICOs), not necessarily from risky/volatile investments.
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.
(Note that in the UK private individuals can trade things like contracts for difference and spread bets which I actually think is slightly mad)
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.”
[1]: https://www.bloomberg.com/opinion/articles/2018-09-24/earnin... [2]: https://www.bloomberg.com/opinion/articles/2019-06-19/privat...
There really should be another crack at trading places. I hope those accredited producers out there in Holywoot can make it happen.
[1] https://www.cnbc.com/2019/11/05/some-robinhood-users-were-ab...
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.
This actually isn't true (and that's a big problem).
Leveraged ETFs (such as TVIX) typically are very leaky. [0]
[0] - https://seekingalpha.com/article/1864191-what-you-need-to-kn...
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).
How do you lose more than the purchase price of the options when buying options?
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’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.
Hang on to your hats!
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.
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.
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.
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.
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?
https://www.congress.gov/bill/115th-congress/house-bill/1585...
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".
This is the right answer
Gatekeeping
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.
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.
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.
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.
A new unsponsored FINRA test for this specific purpose should be created as well (doesnt need to be in a federal proposal, just what can happen)
Finance and econ degree holders eligible too
I think this still sets the bar too high. There needs to be some way to opt out of the paternalism and take a chance in the securities market.
People are going to lose their shirts, just add a little disclaimer just like in public markets and on gambling posters.
Sometimes this will be an efficient allocation of capital for issuers that VCs dont share affinity for.
It seems that being an accredited investor isn't protecting anyone from fraud.
