SEC Modernizes the Accredited Investor Definition • Hacker News Board

Re: SEC Modernizes the Accredited Investor Definition

#141

Post by otoburb » Wed, Aug 26, 2020, 7:32 PM UTC

bpt3 wrote: post #118

ibeckermayer wrote: post #109

Earlier quoted context omitted.

> Our securities markets work According to what standard? Is the fact that I can’t invest $5000 in my friend’s startup an example of our securities markets “working”? Not according to any rationally justifiable standard. Certainly the impulse to protect grandma’s life savings from predatory fraud is a good one. But the proper way to better society is through empowering individuals to make better decisions. An example…

What exactly is stopping you from investing $5000 in your friend's startup?

To cross all the t's and dot all the i's, you might be able to join a friends-and-family round under Rule 504, but your founder friend should still do the due diligence to ensure the participating friends and family investors reside in states where such an offering is exempt from registration/qualification under state blue-sky laws[1].

IANAL. Hopefully your founder friend will have had a startup attorney to ask about all of this.

[1] https://www.law.cornell.edu/wex/blue_sky_law

Re: SEC Modernizes the Accredited Investor Definition

#142

Post by mywittyname » Wed, Aug 26, 2020, 7:39 PM UTC

Ericson2314 wrote: post #127

alasdair_ wrote: post #103

Earlier quoted context omitted.

>What other examples of laws outside of finance can you cite where individuals are restricted in order to protect them from other bad actors? Pretty much any consumer safety or mandatory licensing law. Even something as simple as buying a beer - we insist that legal adults are not allowed to buy a beer until they are older. We insist that adults must be over 21 to buy a handgun in many states, or that (in other state…

I'm OK with these sorts of "in defense of us all" regulation, but I think the wealth test in particular is a bit perverse. I think this "anti-classism" critique is better than the libertarian critique.

Regulations are written in blood.

We didn't have rules, then something extremely bad happened to make people say, "that should be illegal." So it's made illegal. A generation passes and young people look at said regulations, think, "that's a stupid rule," and they revoke it. Goto 10.

Investments that require you to be accredited are often pretty bad ones. All the great opportunities get cherry-picked by those with the right networks. What most people will be investing in are the scraps that all the smart investors passed on. That's how accredited investors get burned and go back to boring old index funds.

If you open these markets up to average Joes, it's going to be a bloodbath. Fox News will switch from running ads to invest in gold to ones for scam companies with fraudulent books. Elderly women will get hounded by phone salesman. We'll go back to the way it was in the 80s.

The problem with caveat emptor is society as a whole gets screwed as well. We all get to live with the economic collapse brought on by the situation.

Re: SEC Modernizes the Accredited Investor Definition

#143

Post by m0zg » Wed, Aug 26, 2020, 7:40 PM UTC

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 not really a "wealth test". It's more of a "is this person likely to have proper legal counsel" test. Or at least that's how I understand its intent.

Re: SEC Modernizes the Accredited Investor Definition

#144

Post by vmception » Wed, Aug 26, 2020, 7:41 PM UTC

ninetax wrote: post #129

vmception wrote: post #52

Earlier quoted context omitted.

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…

> People working in the industry know that you just need a lawyer or CPA to sign off on that. In your experience how willing are CPAs or lawyers to do that for you? In theory they're putting their credentials on the line for you, so I imagine it's either hard to find ones that will do that or very expensive to the point where it eats into the investment return with the amounts of capital being invested below the accr…

lol maybe 10 years ago and briefly.

There have been a SaaS services for this the whole decade, and that’s only because the issuer exemptions were expanded to even need a lawyer because an investor saying “yeah Im accredited” wasn't good enough for some securities issuance exemptions.

You don't lie to the lawyer (or most lawyers), you show assets. Assets which so happen to have a value and are totally illiquid. You trade a single unit of something you create for $1 and you happen to have 2,000,000 more units. You’re accredited by any standard. No different than your portfolio of houses in a place nobody wants to live in, which still happen to have appraisals totaling over $1mm.

If that doesnt feel “right” to you then you might be confusing who actually has the consequence here and might have been unproductively conditioned to “follow the letter of the law” compared to the consequences and implementation of the law. Again its a prohibition on the securities issuer which they pass on to the investor. Its not a prohibition from the government on the investor or the lawyer. And the securities issuer simply has to go through the motions. Check, check and check. And the investor has to pony up the cash. If they don’t have the $25K or $100K minimum anyway then get out. The government’s role in this is just a redundant deterrent.

Re: SEC Modernizes the Accredited Investor Definition

#145

Post by elihu » Wed, Aug 26, 2020, 7:44 PM UTC

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

The thing about Chesterton's Fence in this case is that the fence might exist for more than one reason. A law that prevents poor people from being scammed can also enable rich people to cherry-pick all the most lucrative investments.

Re: SEC Modernizes the Accredited Investor Definition

#146

Post by thekyle » Wed, Aug 26, 2020, 7:50 PM UTC

nickpinkston wrote: post #61

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…

There are even leveraged ETFs for those without margin accounts: https://www.investopedia.com/terms/l/leveraged-etf.asp

At least with a leveraged ETF you'll never lose more than you invested.

Re: SEC Modernizes the Accredited Investor Definition

#147

Post by johnrgrace » Wed, Aug 26, 2020, 7:51 PM UTC

I'm an accredited investor. I've had a series 7 license and was in a finance PHD program.

I've had the chance to see a lot of investments that require you being an accredited investor. Almost all of them have had some highly problematic issues. Most of them have a outcomes where you can lose all of your money and there is NO WAY to get out of the investments.

What I tell other people is run away from investments that require you to be accredited.

Seed round investments are probably the "best" opportunity BUT you have the risks of being screwed by cap table games. A "regular" person could put money into a startup and get really screwed.

Re: SEC Modernizes the Accredited Investor Definition

#148

Post by baryphonic » Wed, Aug 26, 2020, 7:51 PM UTC

bpt3 wrote: post #120

tboyd47 wrote: post #117

Earlier quoted context omitted.

How many people lost money in cryptocurrency scams compared to the entirely legal and rule-following housing market crash of 2008?

Much of the losses in 2008 were caused by illegal and non-rule-following activity.

Since there was so much illegal activity, who went to jail?

Re: SEC Modernizes the Accredited Investor Definition

#149

Post by elamje » Wed, Aug 26, 2020, 7:52 PM UTC

My biggest problem with this is that I have had multiple opportunities as a young professional to invest in my friends’ small funds, only to be turned away at the last minute when they decided to only accept accredited investors.

On the other hand, I could participate in sh*tcoin ICO’s, get rich quick “courses”, and become a real estate “investor” by attending presentations at a Holiday Inn conference room.

The law as it currently stands, does not work, period.

I’ve been prevented from investing in the funds and businesses of my high integrity friends, while being allowed to participate in lotteries, gambling, MLMs, ICOs, the list goes on...

I was really hoping this would be a huge announcement, but unfortunately its a couple tiny steps towards the ultimate end goal of opening up private markets to individuals.

Many people like to reference scams that this law helps avoid, but I call BS.

Has it limited some cons from raising money from middle class people, yes. Has it limited a lot of middle class people from participating in areas with the highest returns, yes.

I’ve read about several people that weren’t accredited checking the box anyways, and no enforcement actually happens, which makes me think it’s a BS regulation to begin with.

Re: SEC Modernizes the Accredited Investor Definition

#150

Post by mindcrime » Wed, Aug 26, 2020, 7:52 PM UTC

madamelic wrote: post #124

thursday0987 wrote: post #75

Earlier quoted context omitted.

did you even read the SEC announcement? it is literally the first bullet point: * add a new category to the definition that permits natural persons to qualify as accredited investors based on certain professional certifications, designations or credentials or other credentials issued by an accredited educational institution, which the Commission may designate from time to time by order. In conjunction with the adopti…

Cool, I was bummed when I googled Series 7 and saw I needed to be sponsored. Looks like series 65 is the way to go since series 82 also requires sponsorship.

Looks like series 65 is the way to go since series 82 also requires sponsorship.

Depends. If simply passing the exam was enough, that does seem semi-reasonable. But if it requires you actually be licensed by your respective state, then the rabbit-hole goes much deeper. I looked at the requirements here in NC, although I don't know how representative they are of other states, but basically you'd have to register with the State as an investment management company (which would probably entail registering an LLC or something), and then pay them $300 / year to keep up your registration. Add the $200/ year or so for the LLC filing fees, as well as the paperwork requirements (annual report, etc), tax filings, and suchlike, and you're talking about a barrier that while not insurmountable, is still going to be fairly steep for most people.