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SEC Modernizes the Accredited Investor Definition

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Re: SEC Modernizes the Accredited Investor Definition

#81

Post by jcranmer »

chrisco255 wrote: post #69
michaelbuckbee wrote: post #32

Earlier quoted context omitted.

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 ci…

The 90's heralded a lot of optimism about the Internet's role in making information ever easier to access. What we've discovered in the 21st century is that it also makes disinformation easier to access. And perhaps more so, since democratization of content generation means there's fewer chances for curators to pull disinformation.

I don't think it's easier for an average person in the 2020's to differentiate between investments, risky investments, and outright scams than the 1920's, were all the regulations to be waived away.

Re: SEC Modernizes the Accredited Investor Definition

#82

Post by TACIXAT »

charliemil4 wrote: post #45
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…

No the real injustice is $25,000 for FINRA day trading / margin accounts. Recent insane volatility could allow you trade from a couple thousand up to 25k in a few weeks - BUT you will most likely run out of day trades before that happens. It's highly annoying.

What would you trade on in this environment?

Re: SEC Modernizes the Accredited Investor Definition

#83

Post by nkohari »

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.

The series 65 is intended for people who want to manage other people's money. You should still be able to invest your own money as you wish.

Re: SEC Modernizes the Accredited Investor Definition

#84

Post by airstrike »

throwaway713 wrote: post #41
airstrike wrote: post #37

Earlier quoted context omitted.

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

Because intelligence is general and correlates well across fields, and intelligence has a loose causal link with a PhD in biology. So I wouldn’t say it "helps" with investment per se but there is a connection there.

A very small connection. Investments aren't exactly just intuitive knowledge one can grasp just by being "smart". It takes specialized training to know what you're doing – and even among those who study finance, you won't find consensus on any single investment.

Re: SEC Modernizes the Accredited Investor Definition

#85

Post by gruez »

zacherates wrote: post #4

Too bad they didn't adopt the "Dumb investment certificate" [1] instead. [1] https://www.bloomberg.com/opinion/articles/2018-09-24/earnin...

Is there a reason why the idea suggested just before the "Dumb investment certificate"[1] can't be implemented? It can be implemented like a Roth IRA (ie. a special account type). IRS would be in charge of keeping track of how much "dumb money" was "spent" in total, and all the issuer has to do is ensure the money came from a "dumb money" account.

[1] the paragraph starting with "A better approach might be to lower (or eliminate) the wealth bar for investing in private placements"

Re: SEC Modernizes the Accredited Investor Definition

#86

Post by bjt »

nickpinkston wrote: post #60
georgeecollins wrote: post #51

Earlier quoted context omitted.

>> 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...

Worth noting that he didn't actually lose a ton of money. Bad UI just made it appear so.

Re: SEC Modernizes the Accredited Investor Definition

#87

Post by gojomo »

nokcha wrote: post #63
tptacek wrote: post #50

Earlier quoted context omitted.

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.

Yes, that's exactly in line with how I'd like the SEC to go further than these initial promising steps.

More competence-evaluation – ideally constantly recalibrated according to the performance & satisfaction of those approved. Do some certifications/skills-tests strongly predict later competent investing? Increase their weights. Do others seem to be easy backdoors that lead to lots of burned investors? Decrease their weights.

Manage for the goal - wealth expansion & a vibrant private investing ecosystem – without the archaic oversimplifications "rich are competent to do whatever they want, and young/poor are incompetent so must be kept on a short regulatory leash".

Re: SEC Modernizes the Accredited Investor Definition

#88

Post by scott00 »

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.

This is likely not true. You can't just sign up for FINRA exams as an individual; an eligible entity (broker-dealer or investment advisor) has to sign you up. And even if you have passed the relevant exam recently enough, you're not considered licensed unless you're working for an eligible entity who has submitted the appropriate paperwork to claim you as a registered representative.

The easiest path this opens for someone not in the securities industry is to become a state registered investment advisor. In my home state of Illinois, that would require paying $400 a year to the state and $150 a year to FINRA, as well as subject you to a number of non-trivial regulatory requirements.

Re: SEC Modernizes the Accredited Investor Definition

#89

Post by gojomo »

zerkten wrote: post #66
gojomo wrote: post #46

Earlier quoted context omitted.

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 plen…

But an MBA who's a millionaire is competent to do any amount of private-investing?

And an MBA who's not a millionaire isn't competent to do any private investing, even with just a small amount of their own money?

Why should their net-worth be legally dispositive?

Re: SEC Modernizes the Accredited Investor Definition

#90

Post by gvhst »

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…

I don't think the direction we are going towards will erode the differentiation between private and public markets. A skill based assessment (required to have series 7/65/82, other designations like CFA will eventually be included) will be a strong barrier to entry. While those exams may be more or less trivial to many hackernews readers, for the general public they represent a significant investment in time and education.

There will also be liquidity differences--even with a broader set of investors--between private and public markets. Thus if a company wants to have liquid equity (which benefits employees) they will need to be public. Additionally, many large institutions have caps on private market investments which are generally smaller than public equity caps. I don't see this changing given liquidity concerns, going public will still be the road to access more institutional capital.

Lastly, your Enron example exemplifies the point that fraud will occur, regardless of private or public markets (and regardless if it is audited by an established third party accounting firm. Arthur Anderson signed off on Enron for years, at it took years for a big 4 accounting firm to recognize the fraud committed by Wirecard). On the flipside, public markets have regulatory requirements which make it easier to research, but just because private markets don't require disclosures doesn't mean there is no information to go off of. Investors can still get enough info to make reasonable investment decisions without disclosures following public company requirements. This gives investors the ability to make their own decisions regarding which disclosure standards are sufficient instead of differing to the SEC. In fact, I believe that Private Markets would experience less fraud if the only requirements were education based and not net-worth based,

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