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SEC Modernizes the Accredited Investor Definition

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Re: SEC Modernizes the Accredited Investor Definition

#51

Post by georgeecollins »

gojomo wrote: post #36

These are good steps, but abolishing all wealth-tests entirely would still be better. There's no wealth-test that prevents a person from losing all their money in highly-leveraged investments - from real-estate to fancy public-market securities. (Over-leveraging into real estate is practically encouraged by public policy.) There's no wealth test against putting all one's cash into gambling, which can be arbitrarily w…

>> There's no wealth-test that prevents a person from losing all their money in highly-leveraged investments - from real-estate to fancy public-market securities.

That is an exageration for publicly traded securities. It used to be possible (in the roaring '20s) to be 10:1 leveraged in public stocks. The SEC forbid that because so many people were wiped out. Nowadays retail stock accounts can under-perform, but it's a big deal when a lot of people see their portfolio decline by 30% -- think 2009.

People have gotten wiped out in large numbers on real estate. I just think it is an exaggeration to say people are taking huge risks with a normal stock account

Re: SEC Modernizes the Accredited Investor Definition

#52

Post by vmception »

LatteLazy wrote: post #5

Did they really not have anything except a wealth test previously? Nothing for people working in the industry etc?

It was a "self-certified" wealth test

People working in the industry know that self-certified means lie through your teeth all day every day with a straight face.

People working in the industry know that you can create illiquid investments, trade one unit of it and say you own the rest at the same price, and viola you are a multimillionaire. I did it with crypto assets 6 years ago using Counterparty.

People working in the industry know that you just need a lawyer or CPA to sign off on that.

The prohibition is on the companies selling securities, not on the investor, so the company just needs a way to cover their ass (CYA) and there is no consequence for the investor. "Self-certification" is a code word for lying, or stretching the truth, just checking the box.

Re: SEC Modernizes the Accredited Investor Definition

#53

Post by vmception »

bobthepanda wrote: post #49
gojomo wrote: post #36

These are good steps, but abolishing all wealth-tests entirely would still be better. There's no wealth-test that prevents a person from losing all their money in highly-leveraged investments - from real-estate to fancy public-market securities. (Over-leveraging into real estate is practically encouraged by public policy.) There's no wealth test against putting all one's cash into gambling, which can be arbitrarily w…

How many of those are capable of creating systemic financial risk, though? People in the '20s were literally mortgaging their house and car to buy stocks on margin en masse because they took in advertising and word of mouth that told them it was a good idea. You could theoretically also do that at a casino, but practically speaking that's not a big problem. Look at the crypto hype-train that got latched onto by peopl…

Which is why there shouldn't be any prohibition exclusively in the securities market. There are even higher wealth tests in some aspects of the commodities market.

These things just haven't been challenged in the courts because those wealthy enough don't know or consider this is an issue, and people less wealthy aren't even exposed to these kinds of opportunities and probably also can't afford the court challenge.

I think there is room for a challenge and invalidation of the entire concept because the wealth test actually used to be different kinds of tests as recently as the 70s. Those were no good because it led to arbitrary discrimination by the brokers and companies. And now we are back to that because FINRA licenses are more standardized.

Can likely invalidate the entire concept with more recent case law such as spending is speech via 1st amendment, 5th amendment and 14th amendment equal application of laws in comparison to the wealth/access dichotomy as well as ability to speculate and gamble in other markets.

Re: SEC Modernizes the Accredited Investor Definition

#54

Post by gojomo »

michaelbuckbee wrote: post #32
tboyd47 wrote: post #22

The accredited investor restriction on private equity seems like the most anti-free-market law I've ever heard of. You're not allowed to put your own money into a business unless the government deems you Smart Enough (c) (tm) to do so. If the vast majority of citizens here are not smart enough to invest our own money, then what is all the higher education for? This change sounds like a good one but there's not enough…

This is a pretty clear Chesterton's Fence [1] example. The scams that occurred prior to enacting these standards were massive. If you want to look at a modern example of such things, consider the cryptocurrency ecosystem and the many scams that occurred [2] 1 - https://en.wikipedia.org/wiki/Wikipedia:Chesterton%27s_fence 2 - https://twitter.com/patio11/status/1032024732214812673

Modern scams don't show the 'accredited investor' rules are helpful.

These "are you rich enough?" limits, on just a few classes of potential investments, did not and can not provide any protection against rampant risks like:

* Enron (an audited public company approved for widow-and-orphan investing)

* Madoff

* Fake-documentation or risk-oblivious home lending

* At-home Forex or securities trading in arbitrarily exotic or leveraged ways (Robinhood! Futures! Expiring options!)

* State lotteries with awful odds & deceptive advertising preying on the decision-biases of the poorly-educated

* Prosperity gospel solicitations

So rather than proving the value of Accredited Investor restrictions, your example scams (some crypto), and others, just show them to be an ineffectual symbolic Maginot Line, not a wise Chesterton's Fence.

Re: SEC Modernizes the Accredited Investor Definition

#55

Post by xt00 »

Putting up a basic barrier to entry to people with low net-worth people causes some people to say "if the market is sky-rocketing, why can't I get in on that".. but the problem is whether or not you can "afford" to lose the money.. like if you have 50k to your name that you saved up over 20 years, then you blow it all in one bad investment, then you see people doing rash things like trying to take out their revenge on people or other super destructive behaviors. If your annual income is high, then losing 50% of your annual income might hurt, but you can earn it back in a reasonable amount of time.. losing say 10 years of annual income would hurt basically anybody..

So it makes more sense to have various lower risk investment vehicles that are attached to those markets -- like if real estate is booming in your part of the world, then it should be possible to create some kind of investment group where 100 people put together their money and buy various properties.

Allowing people who don't know much about options to buy them in a leveraged position is incredibly risky for tons of reasons. Many people's understanding of options is basically like if the stock goes up, then the call option that is above the current stock price goes up -- the option price could easily could go down if the expectation was that it would go up even more than it did, or the price volatility decreases! Not easy to explain all of the horrible ways you can easily lose money in the markets... I've sometimes thought, maybe I should just do the opposite of everything I've thought I wanted to do.. maybe that'd be better than what I'm doing..

Re: SEC Modernizes the Accredited Investor Definition

#56

Post by LatteLazy »

vmception wrote: post #52
LatteLazy wrote: post #5

Did they really not have anything except a wealth test previously? Nothing for people working in the industry etc?

It was a "self-certified" wealth test People working in the industry know that self-certified means lie through your teeth all day every day with a straight face. People working in the industry know that you can create illiquid investments, trade one unit of it and say you own the rest at the same price, and viola you are a multimillionaire. I did it with crypto assets 6 years ago using Counterparty. People working i…

Thanks, that makes more sense!

Re: SEC Modernizes the Accredited Investor Definition

#57

Post by vonmoltke »

CalChris wrote: post #38
topkai22 wrote: post #24

Earlier quoted context omitted.

Yeah, the $200k/year threshold excludes something like 97% of individual income earners ( https://dqydj.com/income-percentile-by-age-calculator/ ). That's not relatively low, its a significant barrier to entry. Worse, a $200k income in SF or NYC (where an outsized portion of those income earners live) is a different beast when it comes to disposable income if compared to Johnson City, Tennessee. Matt Levine has it ri…

Yes, it is a significant barrier to entry. That is its purpose. Upper-income households (double the national median) account for 20% (side note: yeah, we have a yawning wealth gap). Those household incomes are $207,400 in 2018. So I'm not going accept your 3% number. https://www.pewsocialtrends.org/2020/01/09/trends-in-income-...

>> 97% of individual income earners

> Upper-income households (double the national median) account for 20% (side note: yeah, we have a yawning wealth gap). Those household incomes are $207,400 in 2018. So I'm not going accept your 3% number.

You are comparing two different things, so your objection is invalid.

Also, as noted elsewhere, part of this change was to expand what incomes in the household count towards the accredited investor threshold. Some number of those households didn't qualify because some portion of their household income didn't.

Re: SEC Modernizes the Accredited Investor Definition

#58

Post by tboyd47 »

airstrike wrote: post #37
tboyd47 wrote: post #22

The accredited investor restriction on private equity seems like the most anti-free-market law I've ever heard of. You're not allowed to put your own money into a business unless the government deems you Smart Enough (c) (tm) to do so. If the vast majority of citizens here are not smart enough to invest our own money, then what is all the higher education for? This change sounds like a good one but there's not enough…

> then what is all the higher education for? How exactly does a PhD in Biology help you understand investments?

Perhaps it doesn't, but that's the point. Education should prepare you to engage with society gainfully. If one makes it through 20 years of rigorous school but at no point acquired the necessary cognitive skills to discern scams from legitimate opportunities, then the education itself is the scam.

Re: SEC Modernizes the Accredited Investor Definition

#59

Post by mmm_grayons »

tptacek wrote: post #50
gojomo wrote: post #36

These are good steps, but abolishing all wealth-tests entirely would still be better. There's no wealth-test that prevents a person from losing all their money in highly-leveraged investments - from real-estate to fancy public-market securities. (Over-leveraging into real estate is practically encouraged by public policy.) There's no wealth test against putting all one's cash into gambling, which can be arbitrarily w…

Is there a variant of this framing that doesn't also argue against all securities regulation and a return to the status quo ante of the Great Depression? Because the Accredited Investor standard essentially bypasses securities disclosure laws. Without it, every company would obtain the benefits of being public company, with none of the associated obligations.

I'm of two minds about this - on one hand, we don't want shoe-shine boys losing their savings on a bad investment. On the other, if my friends and I want to pool our money to make an investment I resent being kept out of that sort of thing. Things like opening it to VC fund analysts make a ton of sense.

Re: SEC Modernizes the Accredited Investor Definition

#60

Post by nickpinkston »

georgeecollins wrote: post #51
gojomo wrote: post #36

These are good steps, but abolishing all wealth-tests entirely would still be better. There's no wealth-test that prevents a person from losing all their money in highly-leveraged investments - from real-estate to fancy public-market securities. (Over-leveraging into real estate is practically encouraged by public policy.) There's no wealth test against putting all one's cash into gambling, which can be arbitrarily w…

>> There's no wealth-test that prevents a person from losing all their money in highly-leveraged investments - from real-estate to fancy public-market securities. That is an exageration for publicly traded securities. It used to be possible (in the roaring '20s) to be 10:1 leveraged in public stocks. The SEC forbid that because so many people were wiped out. Nowadays retail stock accounts can under-perform, but it's…

No, it's still easy for any asshole to get a margin or options account and lose a ton of money.

Here's a recent news story: "20-Year-Old Robinhood Customer Dies By Suicide After Seeing A $730,000 Negative Balance"

https://www.forbes.com/sites/sergeiklebnikov/2020/06/17/20-y...

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