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SEC Modernizes the Accredited Investor Definition

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Re: SEC Modernizes the Accredited Investor Definition

#61

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…

There are even leveraged ETFs for those without margin accounts:

https://www.investopedia.com/terms/l/leveraged-etf.asp

Re: SEC Modernizes the Accredited Investor Definition

#62

Post by mywittyname »

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 a strong financial incentive for the market to engage in fraudulent activities against investors. And the smaller the investor, the greater then incentive.

Public companies have regulations that help prevent such fraud by requiring things such as audits by third party accounting firms, and regulating how these audits may be performed. Such regulations came about specifically as the result of fraud committed by the owners and directors of companies.

Private markets don't have these regulations because the assumption is that past financial success is indicative of financial sophistication. It doesn't prevent fraud, but at least it helps reduce the likelihood of success.

If you start making private markets open to everyone, then there's no reason to differentiate between public and private markets anymore. Companies will go back to all being "private" because there are fewer regulations, then there will be another Enron, and a subsequent shift towards regulation to prevent another such scandal.

Re: SEC Modernizes the Accredited Investor Definition

#63

Post by nokcha »

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.

How about a knowledge/skills test instead of a wealth test? Something like the bar exam, but for investing instead of law. That would keep out people who have no idea what they're doing, without unfairly keeping out knowledgeable middle-class citizens.

Re: SEC Modernizes the Accredited Investor Definition

#64

Post by vmception »

LatteLazy wrote: post #40
sbuccini wrote: post #7

Earlier quoted context omitted.

Nope!

I'm a brit, I looked into our equivalent regime a while back and I was amazed you could be considered sophisticated based solely on income/assets.

'Murica!

Although US is not a great place when you don't have enough income or assets, it would be just as foreign to us that you wouldn't be considered sophisticated from income/assets!

"What do you mean an actual class system with a 1,000 year family history, crazy talk!"

But back to investment choice, we don't agree that "sophisticated" can only be from wealth. We want choice, the option to take risks.

Re: SEC Modernizes the Accredited Investor Definition

#65

Post by sgc »

tathougies wrote: post #25
chowells wrote: post #19

This is great for employees of private funds and other things like that. It makes no difference at all to the average person complaining about the accredited investor rules preventing them from investing in sure-fire wins. It really doesn't matter how much of a genius you are at recognizing investment wins. If you can't give them enough cash to finance their operations for a significant period of time, the company is…

The average person can now take the Series 65 exam for $60 or so and, if they pass, become an accredited investor. This is a huge change. Taking the wealth requirement from 1 million dollars to $60. EDIT: It's not $60, but $175, still a far cry from a million.

I read it as requiring 3 licenses: "Series 7, Series 65, and Series 82" [Italics mine]. But your point stands in principle and it's a great change.

Re: SEC Modernizes the Accredited Investor Definition

#66

Post by zerkten »

gojomo wrote: post #46
Lazare wrote: post #10

Earlier quoted context omitted.

In theory, the SEC could decide to count those. In practice, that's basically unthinkable.

It's been discussed, so it's definitely thinkable. And if getting an accredited-institution MBA, for tuition payments of anywhere from $22K to $200K, after about 17 years of other education (K-12, undergrad) isn't enough for someone to protect their own wealth from scams, what's the point of all that credentialing, anyway?

An MBA is not a licensure. There are overlaps between what an MBA and an accountant may have studied, but the CPA is what gives you a license. Lots of MBA students do not pursue financial courses beyond what is requires to pass. They may have interests in marketing, innovation, or other areas. They can be ill-equipped to deal with investments.

The same pattern exists for law and many other professions. There are plenty of people with law degrees who fail, or decide to not pursue the bar exam.

Re: SEC Modernizes the Accredited Investor Definition

#67

Post by elliekelly »

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…

> It's insanely paternalistic & economically destructive - a ghostly holdout from some bad experiences in another era, the 1930s, when the ranges of available information, experience, and alternative temptations were all tiny & quaint compared to the 2020s.

Over the last 90 years we have repeatedly learned very difficult lessons about the individual and societal costs of unregulated securities markets and made changes to mitigate those risks. And this same tired argument comes along, repeatedly, to justify rolling those regulations back so that a handful of people have a chance at striking it rich while we as a group learn those same difficult and expensive lessons all over again.

Our securities markets work. They are predictable, mostly fair, and most importantly, they are trusted. Are all of the rules perfect? No. Do some of the rules and regulations have compliance costs that outweigh their benefit? Of course. There is plenty of room for improvement and we should absolutely identify the areas in need of modernization but you’re advocating we tear the whole house down when you haven’t made an effort to understand why it was built this way in the first place.

Re: SEC Modernizes the Accredited Investor Definition

#68

Post by gojomo »

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.

Sure: replace all wealth tests with competence tests.

Then, no competent poor person would be legally locked out of an investment opportunity, by state enforcement power, that would be legally-encouraged for any incompetent wealthy heir.

Requiring that someone has to be able to deliver the funds, sure.

Perhaps, that they have to prove competence via some testing certification.

Perhaps, that they have to match some scaled risk threshold, when relying on systemic benefits: we only give you tax-advantaged retirement accounts, or full unemployment coverage, if you don't put more than X% of your net worth in 'risky'/non-public securities.

Those would at least be objectively-linked to a person's abilities, or the magnitude of risks they're projecting on the community.

But wealth tests in state regulation codify a class system: "You can't buy this, even if you have cash-in-hand, even if you're an expert, even if the spillover risks are infinitesimal, unless you're already rich." Such discrimination against the poor should be just as illegal as that based on race, gender, national origin, sexual preference, religion, etc.

Re: SEC Modernizes the Accredited Investor Definition

#69

Post by chrisco255 »

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

Right, but it's not the 1920s any more. We live in this highly connected, information rich, rapidly changing world, that is fundamentally different than the 1920s in many ways. The general public is far more savvy about investments, risks, and bubbles in general than they were in the past. Today, private equity tends to capture almost all of the value before a company goes public. The crazy thing is that a foreign citizen can invest in an American start up without any of these credentials, yet a US citizen cannot.

Re: SEC Modernizes the Accredited Investor Definition

#70

Post by otoburb »

mywittyname wrote: post #62
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 a strong financial incentive for the market to engage in fraudulent activities against investors. And the smaller the investor, the greater then incentive. Public companies have regulations that help prevent such fraud by requiring things such as audits by third party accounting firms, and regulating how these audits may be performed. Such regulations came about specifically as the result of fraud committed b…

>>If you start making private markets open to everyone, then there's no reason to differentiate between public and private markets anymore.

Couple this with 401Ks now giving retail investors (likely high-fee) choices to invest in private equity[1], and the picture looks much more volatile as the next generation draws closer to retirement.

[1] https://www.latimes.com/business/story/2020-06-19/private-eq...

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